NEW YORK--(BUSINESS WIRE)-- Fitch Ratings takes the following rating action on the city of Tallahassee, FL's (the city) revenue bonds:
--$51,720,000 capital refunding bonds, series 2012 rated 'AA'.
The bonds are scheduled to sell via negotiation during the week of Oct. 8. Proceeds will be used to advance refund the city's series 2004 capital bonds.
In addition, Fitch affirms the following ratings:
--Implied unlimited tax general obligation (ULTGO) at 'AA';
--$65 million outstanding capital bonds, series 2004 at 'AA'.
The Rating Outlook is Stable.
The bonds are secured by the city's share of the local government half-cent sales tax, guaranteed state entitlement revenues, and the local communications service tax. No debt service reserve is expected to support the series 2012 bonds.
KEY RATING DRIVERS
STRONG COVERAGE FROM REVENUES: The 'AA' rating on the capital improvement bonds incorporates the city's overall credit characteristics, solid debt service coverage from pledged revenues, and the city's dependence on excess pledged revenues for general government operations.
CONSERVATIVE MANAGEMENT PRACTICES: Management has demonstrated a record of conservative budgeting and strong fiscal management contributing to improved financial performance.
ADEQUATE RESERVE LEVELS: Solid financial results the past two years, combined with prudent management decisions, has led to growth in the city's reserves.
INSTITUTIONAL PRESENCE PROVIDES STABILITY: The city's economy is dominated by government and higher education employers, providing depth and stability.
LOW DEBT LEVELS: Overall debt levels are low, amortization is above average, and future tax-supported capital pressures appear limited.
The capital bonds are secured by the city's share of the local government half-cent sales tax, guaranteed state entitlement revenues, and the local communications services tax. The multiple revenue streams have historically cushioned pledged revenues from volatility, especially given the relative stability of the communications service tax and the constancy of the guaranteed entitlement revenues. Pledged revenues have declined only slightly over the past eight years, with an average annual decline of 0.5% reflecting the 3.4% and 5.5% revenue declines in fiscals 2009 and 2010, respectively. Pledged revenues were flat at $18.3 million in fiscal 2011.
COVERAGE FROM PLEDGED REVENUES IS VERY STRONG
Coverage of maximum annual debt service (MADS) on senior lien bonds has historically been strong, ranging from 2.4x to 2.6x from fiscal 2003 to fiscal 2011. Pro-forma coverage on the series 2012 bonds, the only senior bonds to be outstanding following the refunding, improves to a high 3.35x for years 2013 through 2023 based on fiscal 2011 revenues and 2.87x from 2019 through maturity in 2023. The improvement in coverage reflects debt service around $1 million lower as a result of using the previously funded debt service reserve fund to reduce the par amount of the refunding bonds. All-in coverage on MADS (in 2014), including the privately placed series 2009 subordinate lien bonds, is a solid 2.31x.
Coverage is expected to remain strong as revenues are expected to remain stable and there are no plans for future leveraging. Revenues year to date through August 2012 are up slightly due to improved performance in sales tax revenues (up 1.7% for 11 months compared to the same period in 2011) and for the communications service tax (up 4.75% same 11 months). Legal provisions are slightly weak with an additional bonds test (ABT) requiring 1.25x MADS coverage on senior lien bonds from prior fiscal year revenues and the lack of a debt service reserve fund. However, the city's dependence on pledged revenues to fund general government operations should ensure continued solid coverage, well above the ABT. The lack of debt service reserve fund is not a concern given the current strong coverage levels but could become a rating factor if coverage declines.
INSTITUTIONAL PRESENCE PROVIDES STABILITY
The state capital city, with a population of 181,376, is home to two large universities, Florida State University and Florida Agricultural and Mechanical University (Florida A&M). The presence of these institutions along with the state government offices provides a stable base for the regional economy. The local housing market has not exhibited the same level of stress as many Florida communities, experiencing minimal tax base loss and foreclosure rates only slightly above the national average. The city unemployment rate of 8.4% in July 2012 continues to remain below the state's and nation's. Income levels are below state and national averages, reflecting the high student population.
STRONG FINANCIAL PROFILE
The city's financial profile has improved after experiencing operating deficits in nearly each of the prior 10 years before fiscal 2009. Fiscal 2011 was the third consecutive year of positive financial operations. The city experienced a surplus of $3.4 million (2.6% of spending), after transfers, resulting in an unrestricted fund balance equal to $18.5 million or a solid 14.3% of spending. This is well above the low 3.8% of spending at the conclusion of fiscal 2008. Positive results stem from lower expenditures across various expenditure accounts and larger than anticipated investment earnings.
Management has a fund balance policy target of two months of operating expenses (approximately $22 million) and a few years back when fund balances were low, it was striving to reach $17 million by fiscal 2014. It has exceeded $17 million and will continue to budget conservatively and transfer any surpluses or one-time revenues to help increase reserves over time. Management reports that preliminary projections for fiscal 2012 suggest the year will end relatively flat with no notable change in fund balance.
The fiscal 2013 budget has not materially changed from the prior year. The $139 million general fund budget is up $3.8 million, or 2.8% from fiscal 2012. The property tax rate was left constant at 3.7 mills, unchanged since fiscal 2010. The 5.8% reduction in the overall assessed values in fiscal 2013 equates to an approximate $1.6 million decrease in property tax revenue with the millage held constant. Helping to partially offset this decrease is management's decision to increase its budgeted tax collection rate to 98% from 97%, since collections have averaged 99%. In addition, $1 million in excess balances is being transferred from the city's special insurance reserve to help balance the budget, since the special insurance reserve is overfunded.
All taxes, including ad valorem, make up 39% of revenues. Transfers from the utility funds represent a high 25% of total revenues. Utility fund transfers coming in are up $800,000 over fiscal 2012 levels. Debt service remains manageable at 5.9% of expenditures and reflects savings from the bond refunding.
Enhancing the city's financial profile is its revenue stability and revenue-raising capacity. The city's millage rate at 3.7 mills is among the lowest for comparably large cities in the state and leaves ample taxing capacity under the 10-mill cap. Almost half of the city's property is tax-exempt, although the city utilizes a stable stream of energy system transfers to capture revenues from this enterprise fund. The city has approved a fixed transfer amount of $23.9 million, beginning in fiscal 2013, subject to annual increases based on the Consumer Price Index (CPI). The fixed amount was essentially set at the fiscal 2012 level and replaces the previous formula based on a percentage of utility usage. This will assist management in its revenue forecasts and help keep this revenue source constant, mitigating the projected decrease in revenue as electric usage declines. Fitch rates Tallahassee Combined Energy System's electric utility revenue bonds 'AA-', Stable Outlook.
LOW DEBT LEVELS AND MANAGEABLE RETIREE COSTS
Overall debt levels are low at $1,855 per capita and 2% of market value. Amortization after issuance of the series 2012 bonds is above average at 75% of debt retired within 10 years. The capital improvement plan (CIP) for fiscal 2013-2017 totals a high $720 million, a reduction of $53 million from fiscal 2012, but is primarily for the city's self-supporting enterprise systems. Future tax-supported financing requirements are reported to be minimal, but capital and maintenance needs are expected to become more prominent in the next few years. The low debt ratios and rapid amortization mitigate concern if additional non-enterprise debt is issued.
Pension and other post-employment benefit (OPEB) liabilities are well-managed. The city-administered defined benefit pension plan was 100% funded as of Sept. 30, 2010. The city's annual OPEB cost was $2 million in fiscal 2011 and the city made 100% contribution of its ARC. The unfunded liability totaled a low $20.3 million as of Oct. 1, 2010.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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, Zillow.com, 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
U.S. Local Government Tax-Supported Rating Criteria
Elizabeth Fogerty, +1-212-908-0526
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Kathy Masterson, +1-415-732-5622
Source: Fitch Ratings