Fitch Rates South Florida Water Management District's COPS 'AA-'; Outlook Stable
--\$418.1 million COP), series 2015.
The COPS are scheduled for a negotiated sale on June 23. Proceeds will be used to refund outstanding COPS for debt service savings.
In addition, Fitch affirms the following district ratings:
--\$466.9 million COPs, series 2006 at 'AA-';
--\$6.7 million special obligation land acquisition refunding bonds, series 2002 and 2003 at 'A';
--Implied unlimited tax general obligation (ULTGO) at 'AA'.
The Rating Outlook is Stable.
SECURITY
The COPs are backed by lease rental payments made by the district, subject to annual appropriation. In the event of non-appropriation, the district must surrender all facilities lease-purchased under the master lease agreement to the trustee who may re-let or sell the facilities for the benefit of certificate owners.
The special obligation land acquisition bonds (final maturity Oct. 1, 2015) are secured by a first lien on all payments received by the district from a water management lands fund trust (the trust fund). The payments consist of a designated portion of revenues derived from excise taxes on documents (the documentary stamp tax) imposed by the state on certain document filings including mortgages, original issues of stock, bonds and debentures, promissory notes or other written obligations to pay money.
KEY RATING DRIVERS
DISTRICT CREDITWORTHINESS SOUND: The 'AA' implied ULTGO rating reflects the district's limited control over revenues, extensive and diverse economy, adequate financial position, a moderate debt burden, limited exposure to employee-related spending pressure, and essential operating purpose that centers on flood control and restoration of the Everglades.
COPS NOTCHED OFF IMPLIED ULTGO: Payment of COP debt service is subject to appropriation. The one-notch distinction reflects Fitch's belief that there are strong incentives to appropriate given the essentiality of the leased assets subject to loss due to non-appropriation.
ADEQUATE DOCUMENT STAMP COVERAGE: The 'A' rating on the special obligation bonds reflects adequate coverage from pledged revenues, statutory restrictions that prohibit the issuance of additional bonds, and short remaining life on the debt that minimizes risk to revenue volatility.
RATING SENSITIVITIES
OPERATING STABILITY: The rating on the COPs and the implied ULTGO rating are sensitive to the district's ability to maintain sound operations in light of its limited independent control over revenues.
PLEDGED REVENUE PERFORMANCE: For the special obligation land acquisition bonds, the rating is sensitive to changes in the collection of documentary stamp taxes driven by the real estate market, principally transaction volume and prices.
CREDIT PROFILE
SFWMD is the largest of five regional water districts created by the state in 1972 to provide regional flood control, water supply and water quality protection, ecosystem restoration, and to operate and maintain Lake Okeechobee and the Everglades. The district serves a population of 7.9 million residing in all or parts of 16 south and central Florida counties including Broward, Miami-Dade, Orange and Palm Beach.
LIMITED REVENUE CONTROL; CONSIDERABLE PROPERTY TAX BASE
Ad valorem taxes serve as the major revenue source for district operations and for repayment of the COPs. Property tax rates are set by the state at the rolled-back rate, designed to produce the same property tax revenues as in the prior year with the exception of values related to new construction. Due to rising property values, use of the rolled-back rate has resulted in actual tax rate decreases in each of the past four fiscal years through fiscal 2015.
Ad valorem taxes declined from a peak of nearly \$550 million in fiscal years 2007 and 2008 in all governmental funds to \$269 million in fiscal 2014; they remain well in excess of maximum annual debt service (MADS) on the COPs projected at \$33.6 million. Ad valorem tax revenues have been relatively stable for at least the past four fiscal years.
District taxes are billed and collected by each county on a single tax bill combining county, city, school district and other special district taxes. The district's share represents a very small portion of the overall bill, and collection rates remain strong at 99% or better on a total basis.
STRONG INCENTIVES TO APPROPRIATE
The critical nature of the assets under the lease and budgetary process provide the district with strong incentives to appropriate lease payments. An event of non-appropriation would force the district to surrender all leased assets to the trustee. Leased assets include the Everglades Agricultural Area reservoir, several stormwater treatment areas and a flow equalization basin.
Fitch considers these assets to be essential to the district's core mission and ability to achieve its mandated goals. Furthermore, the project sites were largely acquired by the district under grant agreements with the U.S. Department of the Interior that would impose on the district the obligation to provide replacement land of at least equal fair market value if not used for purposes consistent with Everglades restoration.
The district's budget is subject to review and approval by the governor, minimizing the possibility that a budget would be approved that does not adequately provide for the full repayment of debt. In addition, the governor also appoints the district board, subject to confirmation by the state senate. Finally, state law requires that the district's preliminary budget include debt service on its COPs and special obligation land acquisition bonds as the first obligation for payment.
CONSIDERABLE SPENDING FLEXIBILITY SUPPORTS ADEQUATE BALANCES
Financial operations are relatively well-managed as characterized by adequate reserves and strong liquidity. The district has considerable spending flexibility due to its ability to control its non-unionized labor force while pension and other post-employment benefit costs are modest relative to operations. These strengths mitigate the district's lack of revenue autonomy.
In response to a sharply lower revenue base stemming from significant tax base loss and a state directed 30% cut in the district's ad valorem tax rate in 2012, management instituted extensive budgetary reductions. Measures included the elimination of nearly 350 or 19% of positions between fiscals 2009 and 2014. As a result, annual operating expenditures and transfers out of the main operating funds - the general fund and the Okeechobee basin fund - totaled \$264.6 million in fiscal 2014 compared to \$470.4 million in fiscal 2008.
Despite modest operating deficits in two of the last three audited fiscal years, reserves in the general fund and Okeechobee Basin fund remain robust. Fiscal 2014 combined unrestricted fund balance totaled \$63.4 million or a healthy 24% of spending. Liquidity is ample with total cash and investments totaling \$172.7 million, equal to nearly eight months of spending.
The district's fiscal 2015 budget for all operations totaled \$720.4 million, an increase of nearly \$100 million over the fiscal 2014 budget. The fiscal 2015 budget was bolstered by a \$100 million increase in state funding for restoration purposes. District budgets typically include sizable use of reserves but actual results historically outperform the budget. Management's policy is to maintain a minimum balance of \$60 million for economic stabilization. The \$60 million minimum in fiscal 2015 totals 8.3% of spending, which Fitch considers adequate.
The fiscal 2016 preliminary budget is slightly less than fiscal 2015. A drawdown of \$203 million is proposed which would still be in compliance with the district's minimum fund balance policy.
FAVORABLE DEBT POSITION
The district's debt burden is estimated at roughly \$2,979 per capita and 2.5% of market value inclusive of the outstanding debt of all underlying governments. District debt contributes nominally to the overall burden as only \$456 million in principal will be outstanding following bond issuance.
Fiscal 2014 debt service costs totaled \$42.1 million or a moderate 9.7% of spending. Almost \$7 million in debt charges relate to the special obligation bonds which have a final maturity of Oct. 1, 2015.
The district has no additional debt plans. The capital improvement plan (CIP) totals \$1.23 billion, of which almost \$611 million is funded by ad valorem taxes (an average of \$122.2 million per year). The costs of construction and maintenance of the district's flood control and water supply infrastructure constitute the bulk of district expenditures.
Pension benefits are offered through the Florida Retirement System which retains an adequate funding ratio. The combined costs for retiree pension and health care benefits are a low 3.1% of governmental fund spending.
SUSTAINED DOCUMENTARY STAMP TAX GROWTH
The documentary stamp tax is collected by the state and shared between the state general revenue fund and various trust funds pursuant to statutory distribution formulas. The district's share of documentary stamp taxes is derived from amounts deposited in the water management lands trust fund (the trust fund). In 2011 the legislature limited the district's allocation of tax revenue from the trust fund to the sum necessary to pay debt service on the special obligation land acquisition bonds.
The district received \$10.7 million in documentary stamp tax revenue in fiscal 2014, resulting in an adequate 1.6x debt service coverage ratio inclusive of pledged interest income and civil penalties. Coverage would have remained close to 1.5x under the prior distribution formula which allocated the first 33% of revenue deposited to the trust fund to the district.
The trust fund receives 4.2% of the statewide documentary stamp tax revenue available for distribution, subject to a cap of \$60.5 million. Actual trust fund deposits in fiscal 2014 totaled \$61.2 million, compared to \$607.5 million in total revenue available for distribution after deposits to the state treasury and payment of debt service on state bonds.
Documentary stamp tax revenues have experienced exceptional growth since fiscal 2010, averaging 13.9% annually. Year-to-date collections for fiscal 2015 are 7.5% over same period collections in fiscal 2014. The state forecasts documentary stamp tax revenue growth to average 8% per year through fiscal 2019. Importantly, both series of special obligation land acquisition bonds land acquisition bonds mature on Oct. 1, 2015 and the district is prohibited by state law from issuing any additional new money bonds, limiting bondholders' exposure to future tax revenue volatility.
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