NEW YORK--(BUSINESS WIRE)--Fitch Ratings has taken the following rating action on Nassau County, Florida's (the county) non ad valorem revenue bonds:
--$27.3 million in outstanding public improvement revenue and refunding bonds, series 2007 affirmed at 'A+'.
In addition, Fitch affirms the county's implied general obligation (GO) rating at 'AA-'.
The Rating Outlook is Stable
SECURITY
The bonds are secured by the county's covenant to budget and appropriate (CB&A), by amendment if necessary, legally available non ad valorem (NAV) revenues sufficient to pay debt service. The availability of NAV revenues to pay debt service is subject to the funding of essential government services and obligations with a specific lien on NAV revenues. Such a covenant shall be cumulative to the extent not paid, and shall continue until all required amounts payable under the indenture have been paid.
KEY RATING DRIVERS
HIGH RESERVES MITIGATE RISKS: The county's general fund balance remains a very strong $16.2 million, or 38.7% of spending, following a projected $2 million use of reserves in fiscal 2013 to support operations and fund some capital improvements. Fitch believes levels are sufficient to weather additional operational drawdowns and some unexpected capital spending while still remaining adequate.
CAPITAL NEEDS MIXED: The county has a five-year capital improvement plan, although it does not address much of its deferred critical infrastructure maintenance. Lack of timely funding could magnify the county's future capital needs.
MANAGEABLE LONG-TERM LIABILITIES: Overall county debt levels and carrying costs, including debt service and OPEB/pension contributions, are low.
IMPROVING ECONOMY: The county's employment and labor force are growing rapidly following several years of job losses. Faster growth in employment has resulted in a declining, and now below-average, unemployment rate. The county's housing market remains pressured, but is slowly rebounding.
ONE NOTCH RATING DIFFERENTIAL: The rating on the CB&A bonds is one notch below the implied GO rating due to the absence of a pledge of specific revenue and an inability to compel an increase of revenues to pay bondholders.
STRONG DEBT SERVICE COVERAGE: Total fiscal year 2012 NAV revenues covered maximum annual debt service (MADS) by 2.86 times (x). Coverage should grow as debt service peaks in fiscal 2014 and the county has no additional NAV backed debt issuance plans.
RATING SENSITIVITIES
ONGOING FUND BALANCE DRAWS FOR OPERATIONS: Continued use of fund balance to support county operations over the next two fiscal years with no solid plan to address the ongoing structural imbalance could result in negative rating action.
CREDIT PROFILE
Nassau County is the northeastern-most county in Florida. Located just north of the city of Jacksonville ('AA+'; Outlook Negative) on the Atlantic coastline, the county had a population of 74,629 as of 2012.
HIGH RESERVES OFFSET CONCERNS ABOUT FUND BALANCE DRAWS
The county has actively managed spending over the past six years in the face of revenue declines in order to maintain sizable reserve levels. During this period, tax base contraction and an unadjusted constant millage rate led to multi-year property tax revenue reductions. Property taxes, the largest source of general fund revenues, fell by about 20% from fiscal 2008 to fiscal 2013. Management responded by deferring capital spending and cutting positions, which decreased general fund expenditures by a cumulative 10% during the same period.
Despite the growing gap between revenue declines and spending cuts, the county reported four consecutive years of general fund operating surpluses, increasing total general fund balance by over 70% between fiscal 2008 and fiscal 2012. Fiscal 2012 unrestricted general fund balance was a very healthy $17.2 million, or 37% of spending. Fiscal 2012 operations benefited from a new state requirement that employees contribute annually 3% of gross pay to the Florida Retirement System and a $3.4 million one-time payment from the Jacksonville Electric Authority (JEA) to provide water and sewer services to parts of the county.
Additional property tax declines and difficulties in trimming expenditures forced the county to dip into its general fund reserves in fiscal 2013 to support operations and fund some capital spending. The county projects a $2 million use of reserves, slightly less than the $2.7 million budgeted, which would still maintain strong reserve levels.
The county budgeted a larger $5.3 million use of reserves in fiscal 2014, of which $1.0 million is for capital projects. County budget performance has varied in the past two fiscal years, and due to the continued strained operating environment and a relatively front-loaded capital improvement plan, finances could finish the fiscal year with a draw which is close to budget. Even if the county drew the full amount, reserves would still be adequate for the rating level although we would become concerned about the emergence of a pattern of structural imbalance.
While finances remain pressured, Fitch believes that tax base stabilization or growth in fiscal 2015 would allow for increased levies and begin to alleviate the strain on the county's general fund operations over the near term. However, Fitch would be concerned if the structural imbalance persisted beyond the next two fiscal years and the county did not take actions to address it.
CONCERNS OVER THE COUNTY'S CAPITAL NEEDS
Part of the county's recent strategy for controlling costs has involved deferring capital spending for maintenance of the county's infrastructure. A recent engineering study indicated that fully maintaining the county's roadways would require about $6.3 million annually; the county generally spends around $1.5 million per year on roadway-related capital maintenance.
Fitch believes this creates concerns for two main reasons. First, given the rapidly growing population of the county, additional pressure on the infrastructure seems likely and may lead to unexpected capital needs in the near term. Second, the county's proximity to the Atlantic coastline makes it susceptible to event risk in the form of hurricanes. If the county's infrastructure is not well-maintained it could be more vulnerable to storm damage, for which Fitch would not assume reimbursement would be assured.
A TALE OF TWO ECONOMIES
The county's location along the Atlantic Ocean, directly north of Jacksonville has fostered a significant tourist industry. The coastline of the county is home to Amelia Island and Fernandina Beach. The beachfront communities are host to several large resorts, two of which completed very large expansions that opened for the 2013 season. Hotel occupancy and tourist tax collections increased in 2013.
Inland, the county's economy is focused mainly on healthcare and paper manufacturing. The county's top healthcare-related employer, Baptist Medical Center, is constructing a large expansion that should bring more jobs to the region. Manufacturing and retail also continue to expand. Additionally, many of the county's residents commute to other employment opportunities throughout the Jacksonville MSA.
IMPROVING OVERALL ECONOMY
The county's tax base has declined a cumulative 26.2% over the past six fiscal years, which, while large, is not uncommon among Florida municipalities. However, as the housing market in the county slowly improves and employers continue to expand, Fitch expects that taxable values will begin to stabilize or even increase beginning in fiscal 2015.
Countywide wealth levels are comparable to state and national averages. Population, labor force, and employment are all growing swiftly. Unemployment in the county is cyclical, which is typical of a tourist-based economy, but consistently remains below the state and national averages. The county's unemployment rate was 6% as of June, 2013.
CB&A-BACKED BONDS PAYABLE FROM NAV REVENUES; STRONG COVERAGE
The bonds are secured by the county's covenant to budget and appropriate available NAV revenues for debt service. NAV revenues include non-property tax general and municipal services fund revenues. Despite declining property tax revenues, NAV revenues have grown. Coverage remains strong at 2.8x MADS by fiscal 2012 NAV revenues. Coverage is expected to improve as debt service peaks in fiscal 2014 and total NAV debt service declines linearly thereafter.
MANAGEABLE LONG-TERM LIABILITIES
County debt levels are modest at $530 per capita and .5% of market value in fiscal 2013. However, Fitch believes that the county's low debt levels are somewhat tempered by the county's unfunded deferred capital needs.
Fitch considers debt service as a percent of total governmental spending of 6.1% in fiscal 2013 to be below average. Principal amortization is average, with 56% retired within 10 years.
The county's funded five-year CIP is manageable, with funding derived largely from one cent sales surtax funds and impact fees. The majority of spending is scheduled for fiscal 2014 and fiscal 2017 and the county does not anticipate issuing debt in the near to medium term.
The County fully funds the actuarially required contribution annually to the state-run Florida Retirement System for all employees. The county funds other post-employment benefits (OPEB) on a pay-go basis and the OPEB liability is a negligible .3% of the county's market value. Total carrying costs, representing debt service, pension contributions, and OPEB pay-go, were a low 10.3% of governmental spending in fiscal 2012.
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=805465
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