NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA+' rating to the following Orange County, Florida (the county) bonds:
--$41.4 million public service tax (PST) refunding revenue bonds, series 2013;
The bonds are expected to sell on June 4 via competition. Bond proceeds will refund outstanding series 2003A PST revenue bonds.
In addition, Fitch affirms the following ratings:
--$55.6 million outstanding PST revenue bonds at 'AA+';
--Implied unlimited tax general obligations (ULTGOs) at 'AAA'.
The Rating Outlook is Stable
SECURITY
The public service tax bonds are secured by a pledge of the public service tax levied and collected by the county on the purchase of electricity, gas, water and fuel oil within the unincorporated areas of the county.
KEY RATING DRIVERS
VERY WIDE COVERAGE FOR PST BONDS: Debt service coverage of PST bonds is ample at over 7x maximum annual debt service (MADS). Coverage levels are expected to expand over the term of the bonds due to debt service savings as a result of the refunding, the bonds' descending debt service structure and no additional planned borrowing.
ESSENTIAL SERVICES: The bulk of PST revenues are derived from essential electricity and water purchases.
IMPLIED ULTGO RATING: The implied ULTGO rating of 'AAA' is based on the county's strong financial management, broad-based tourist-oriented economy and manageable debt load.
HIGH AND CONSISTENT RESERVES: The county maintains ample general fund and other tax-supported reserves, even after budgeted draw-downs for various operating and capital needs. A low and stable tax rate provides the county with significant revenue raising capabilities.
DIVERSE EMPLOYMENT OPPORTUNITIES: The growing health and education sector, underpinned by high-wage medical research and biotechnology, has broadened an economy that was traditionally based on tourism. The above-average growth rate of area employment is expected to lift county income indicators, which are currently below national levels.
POSITIVE DEBT PROFILE: The county has shifted a portion of its moderate debt burden from its residents, as tourism-related revenues service a substantial portion of the debt. Management has demonstrated its willingness to defer capital financing in response to periods of economic softening.
RATING SENSITIVITIES
PRECIPITOUS DECLINES IN PST: Sharp and sustained declines in PST revenues could lead to negative rating action.
ADDITIONAL PST BOND ISSUANCE: Substantial additional leveraging of the PST, although not currently planned, could pressure the rating on the PST bonds.
CREDIT PROFILE
SUPERIOR DEBT SERVICE COVERAGE
The PST is levied on the purchase of various services within the unincorporated portion of the county, including essential electricity and water services. Fiscal 2012 PST revenues provided extensive MADS coverage, at 7.0x fiscal 2012 debt service. Coverage is expected to increase to over 8.0x with the refunding, which is expected to lower MADS by nearly $1 million. In addition, MADS occurs during fiscal 2014, after which debt service requirements steadily decline through the remaining life of the bonds.
RECENT DECLINES AFTER LONG RUN-UP
PST collections have decreased in each of the past two fiscal years falling a collective 8.6%. These declines followed six consecutive years of growth during which PST revenues gained nearly 45%. Overall PST trends are primarily driven by electricity consumption; revenues derived from the PST levy on electricity purchases constitute from 80% to 85% of total PST collections. PST revenues from electricity purchases jumped 17% in fiscal 2010 reflecting an uptick in economic activity and a hot summer, spurring a 15% increase in PST revenues. Although PST revenues generated from electric sales dropped in fiscals 2011 and 2012, they still exceed fiscal 2009 levels. PST revenues for five months of fiscal 2013 are almost 4% over collections during the equivalent period in fiscal 2012.
Legal provisions are weak. The 1.20x MADS additional bonds test (ABT) requirement is somewhat low and there is no provision for a debt service reserve fund (DSRF) for the proposed bonds, a modification of the original indenture which required a DSRF. However, any concerns regarding the permissive legal provisions are offset by abundant debt service coverage and the absence of any plans to further leverage the PST.
DIVERSIFYING EMPLOYMENT BASE
The county's economy anchors the central portion of the state, as professional and business services, education, health care, and biotechnology augment the historically strong tourism sector. The opening of the Sanford-Burnham Medical Research Institute and University of Central Florida College of Medicine, both in 2009, has boosted the county's presence as a center for biomedical technology and research. Two of the leading employers in the county are health care systems, Adventist Health System and Orlando Health, which together employ 32,000 workers. The Medical City at Lake Nona embodies the recent growth in the biomedical field and will benefit from the recent opening of the Nemours Children's Hospital in 2012 and the projected opening of a new Veterans Administration medical center in 2013.
Tourism remains a considerable economic force. Walt Disney World (Disney) is the county's largest taxpayer at 7.9% of taxable assessed value (AV) and the largest employer (64,000 employees). Eight of the top ten taxpayers, representing 14.4% of AV, are in the hospitality industry. Tourism recovered in 2011 and 2012, buoyed by pent-up theme park demand and the opening of The Wizarding World of Harry Potter at Universal Studios resort. Both Disney and Universal are in the process of making substantial investments in their Florida theme parks. While Disney and Universal are firm anchors to the historically volatile tourism sector, Fitch believes the increasing diversification of the area economy enhances stability and the prospects for future economic growth.
County per capita income levels fall below state and national averages, reflecting the substantial employment in the tourism industry. Wealth indicators have steadily declined relative to state and national benchmarks between 2007 through 2011, reflective of the severity of the recession in central Florida. Fitch expects this trend to reverse as the area economy recovers. County employment trends demonstrate strong gains increasing by nearly 3% in 2012 and up a hefty year-over-year 5.4% as of February 2013. Unemployment rates have come down in tandem with the employment growth from a high of over 11% in 2010 to 7.0% in February 2013; well below 9.1% of the prior year and lower than the current state and national averages.
PROSPECTS FOR CONTINUED ECONOMIC EXPANSION
The county stands to benefit from several large-scale projects in various stages of development. These include a new performing arts center under construction and a renovation of the county convention center which will expand or enhance available entertainment venues. The planned private construction of a $200 million central commuter rail station, including retail, residential, and commercial components, will leverage the future Sunrail system. A new 23-story apartment tower is under construction in Orlando, the first downtown high rise to be built since the recession. Finally, a 68-acre digital arts community, the Creative Village Development, will replace the current Amway Arena and increase the county's position within the simulation industry.
Fitch views the county's long-term prospects for tax base growth as sound. In fiscal 2013, the tax base reversed a four-year trend of contraction by increasing a slight 0.2%, boosted by new construction coming onto the tax rolls. The 24% tax base decline between fiscals 2009 and 2012, although substantial, was not as severe as that which occurred in other parts of the state. Fitch anticipates continued near-term expansion of taxable values as the economic recovery takes hold. The county has revenue raising flexibility, with a 4.43 millage rate well-below the 10 mill cap.
AMPLE RESERVE LEVELS
Reserves are consistent and healthy, a hallmark of the county's sound financial management. The county previously had built up reserves for planned one-time uses, and, with planned draw-downs over the past few years the unrestricted general fund balance remained elevated at 17% of spending - well above the county's minimum target range of 7% of revenues. For fiscal 2012, the county reported a modest $11 million general fund surplus. The county had originally budgeted a sizable drawdown but conservative budgeting and higher than expected sales tax revenues made the drawdown unnecessary. The ending unrestricted general fund balance of $133 million equals a sizable 19% of spending. In addition, the county has substantial additional unrestricted balances in other funds that can be used for operations if needed.
The county's proposed fiscal 2013 budget calls for a further decline in unrestricted general fund reserves due in part to a 3% wage increase, the first in four years. However, budgets are typically very conservative with actual results substantially outperforming budget.
Officials are not projecting fund balance drawdowns for fiscal 2013. Since fiscal 2009, the county has reduced its authorized positions by over 500 or 5% with most cutbacks in areas outside of public safety. As a result, the county has effectively reduced its cost structure, enhancing financial flexibility.
WELL-MANAGED LONG-TERM OBLIGATIONS
Overall debt levels are moderate at 3.2% of market value and $2,938 per capita. Nearly two-thirds of the county's direct debt is secured by tourism-related taxes, partially alleviating the burden on county residents. The county does not have any variable rate debt exposure. Carrying costs are modest as fiscal 2012 debt service constitutes 4% of general government non-capital spending. Carrying costs rise to a still modest 8.9% if tourist development taxes (TDT) debt service is included. Amortization is average, with 49% of principal amortized within the next ten years.
The county's total fiscal 2013-2017 capital improvement plan totals $1.4 billion, with the largest components for public works ($424 million) and utilities ($695 million). The county has prudently deferred capital projects in response to past economic declines. One of the larger tax-supported projects is the renovation of the county convention center - estimated at $185 million. There are no near-term plans for tax-supported debt issuance, although the county intends to issue TDT-secured bonds if TDT revenues are insufficient to fund the convention center project on a pay-as-you-go basis.
The county's pension and other post-employment benefit (OPEB) obligations do not pressure the credit. County employees participate in the state administered Florida Retirement System (FRS). Contribution requirements declined in fiscal 2012 because of changes enacted by the state, including longer vesting periods and the requirement that employees contribute 3% of their salary to FRS each year. The county's fiscal 2012 contribution requirement was $36 million lower than the prior year and equalled a modest 3.5% of general government non-capital spending. The FRS plan is relatively well-funded.
The OPEB plan consists of a county subsidy to retirees for the cost of health insurance. The county typically contributes more to the plan than the annual required contribution (ARC) with the fiscal 2012 contribution approximately $2 million above the $5.7 million ARC. As a result of these funding practices, the county's OPEB plan was nearly $10 million overfunded. Fitch views overfunding of this long-term obligation as a credit positive.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=791598
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