Fitch Rates Hillsborough County, FL's CIT Revenue Bonds 'AA'; Outlook Stable
--\$134.4 million community investment tax (CIT) refunding revenue bonds, series 2015.
The bonds are scheduled for sale on a competitive basis on July 8. Proceeds will be used to refund outstanding community investment tax revenue bonds, series 2007 for debt service savings and to refund approximately \$40 million of outstanding commercial paper.
In addition, Fitch affirms the following ratings:
--\$55.6 million in outstanding general obligation (GO) bonds at 'AAA';
--\$219.5 million community investment tax (CIT) revenue bonds at 'AA';
--\$29.4 million court facilities refunding revenue bonds, series 2005 at 'A+'.
The Rating Outlook is Stable
SECURITY
The CIT bonds are payable from the county's share of revenues derived from a 1/2 cent sales tax named the community investment tax (CIT).
The court facilities bonds are payable from court surcharge revenues and a lien on CIT revenues on parity with the CIT bonds. The CIT revenues are available to cover any shortfalls in traffic surcharge fees, but may be released under certain conditions (see below for details).
The GO bonds are supported by the full faith, credit and unlimited taxing power of the county.
KEY RATING DRIVERS
TOP-LINE CREDIT STRENGTH: The 'AAA' GO rating is based on the county's broad based and diverse economy, consistently healthy financial position and manageable debt and retiree benefit liabilities.
SOLID DEBT SERVICE COVERAGE: Four years of growth have brought CIT collections close to the pre-recession peak. Coverage of maximum annual debt service (MADS) by the county's share of fiscal 2014 collections is satisfactory at 1.56x, including court facilities bonds debt service.
COURT BONDS STRUCTURAL RISKS: The 'A+' rating on the court facilities bonds incorporates the potential release of the CIT revenues if court facilities revenues maintain 1.5x debt service coverage. The rating further reflects Fitch's expectations that the county will utilize restricted funds on hand to defease and/or refund certain maturities of these bonds that extend beyond the term of the CIT.
SOLID FINANCIAL MANAGEMENT: County officials have been able to restore fiscal balance through a concerted effort to reduce spending. Despite a modest general fund drawdown in fiscal 2014, reserve levels remain healthy.
ROBUST ECONOMIC RECOVERY: The area economy is experiencing solid growth, as evidenced by increasing employment, housing values and taxable retail sales. Despite a recent pause in job base expansion, a plethora of development projects currently underway throughout the county signals continued economic expansion.
RATING SENSITIVITIES
DETERIORATION OF RESERVES: Ratings on the revenue bonds are capped by the GO rating. Significant operating deficits leading to declines in reserves could lead to downgrades in the GO as well as non-ad valorem bond ratings.
REDUCED CIT RECEIPTS: Diminution of CIT revenues or additional leverage narrowing coverage on the county's CIT bonds may result in downwards rating movement on both the CIT and court facilities bonds.
CREDIT PROFILE
Located midway down the western coast of Florida, Hillsborough County encompasses 1,266 square miles and features Tampa as the county seat and largest city. The 2014 county population estimate of 1.3 million represents a 7.1% increase from 2010, slightly below population trends during the 2000 to 2010 decade (when population growth averaged 2.1% annually).
CIT REVENUE GROWTH BOOSTS COVERAGE
CIT revenues are derived from a discretionary 0.5% sales tax distributed first to Hillsborough County School District and Tampa Sports Authority before allocation to the county and its three municipalities based on relative population. Fiscal 2014 marked the fourth consecutive year of CIT growth following four consecutive years of decline. The overall gain since fiscal 2010 totaled 20% and fiscal 2014 CIT receipts of \$105.4 million are just under the pre-recession peak collection of \$107.1 million. The county's share of CIT distributions since fiscal 2009 has expanded even faster, gaining 24% due to a drop in Tampa Sports Authority (TSA) distributions, which are based on TSA local option sales tax bonds debt service requirements, and an increased percentage of distributions to the county vis-a-vis the municipalities. Eight month year-to-date fiscal 2015 CIT distributions to the county are up 6.1% from the same period in fiscal 2014.
Pro forma coverage of MADS on the CIT revenue bonds is a solid 1.69x. CIT revenues can decline by over 40% and still cover MADS by at least 1.0x. A 1.35x MADS additional bonds test (ABT) provides some protection against over-issuance, but is viewed as fairly lenient by Fitch. Fitch believes that the absence of a debt service reserve fund does not significantly detract from credit quality given the solid coverage and breadth and diversity of the underlying economy.
CIT REVENUE BACK UP COURT FACILITIES BONDS
The CIT also secures the county's court facilities bonds as backup revenues in case pledged court surcharge revenues are insufficient. Bond provisions allow for the release of the CIT revenues if court surcharge revenues cover court facilities bond MADS by at least 1.5x for three consecutive years. Fitch considers the probability of release of the CIT to be remote given marginal coverage of debt service by traffic surcharge revenues, which has averaged about 1.1x since fiscal 2011. CIT revenue coverage of combined CIT and court facilities bond MADS is a healthy 1.6x, assuming no court fee revenues.
Court facilities' debt service runs five years beyond expiration of the CIT in 2025, which raises concerns given modest debt service coverage from court surcharge revenues. Some mitigation is provided by the presence of \$8.2 million of contingency reserves legally restricted for court facilities bond debt costs. These reserves are currently sufficient to redeem 88% of bond principal scheduled to mature after 2025, leaving only modest debt service to be paid from court surcharge revenues. Management is planning on using the restricted revenues as part of a refunding of the court facilities bonds in order to lower debt service and shorten final maturity to within the effective date of the CIT.
STRONG FINANCIAL PROFILE
County financial operations have been consistently sound, as evidenced by sizable reserves and strong liquidity. Management has been proactive in reducing spending in response to planned sizable declines in property taxes, the major source of general fund revenues. Between fiscals 2009 and 2013, property tax revenues declined at an average annual rate of 8% due to falling valuations and the county's long-term policy of reducing tax rates every year.
Cost cutting measures included personnel reductions, operating efficiencies, lowered capital spending and programmatic changes. The county reduced its staff, eliminating about 1,500 or 15% of full-time positions between fiscals 2008 and 2012. Non-enterprise staffing levels increased in fiscal 2013 but declined again in fiscal 2014.
Management has maintained general fund balance modestly above the county's informal target of 15% to 20% of expenditures. Liquidity is healthy and provides additional financial flexibility, with the ratio of available cash and investments to liabilities well over 2.0x.
The fiscal 2014 budget proposed a \$14 million general fund drawdown due to a number of capital or other one-time spending items. Actual results show a \$17.4 million general fund deficit, attributable to a one-time economic salary adjustment in the form of a lump sum payment and added spending for software and parks. The deficit pushed unrestricted general fund balance down to a still-ample 19.5% of spending. However, general fund spending is overstated due to sizable internal transfers within the general fund. If these transfers are excluded, the fiscal 2014 unrestricted general fund balance represents over 30% of net expenditures.
For fiscal 2015, the county is projecting a very modest general fund deficit of \$6.2 million of which \$2.2 million consists of one-time economic development items. Officials indicate that this projection is conservative. Long-term forecasts by the county show successive small operating surpluses through fiscal 2019.
MODEST DEBT LOAD
Debt levels are manageable, as indicated by an overall debt burden of 2.2% of fiscal 2014 market value. More than half of the debt burden is attributable to the Hillsborough County School District and the city of Tampa. Principal amortization rates are relatively aggressive, with 70% of tax-supported principal retired within the next 10 years.
Officials plan on issuing about \$34 million of commercial paper over the next 24 months for various redevelopment and community projects. While the ultimate source of security has yet to be determined, debt utilized for CIT-eligible projects may be payable from CIT revenues. Capital needs overall are moderate with \$380 million of non-utility capital projects planned over the next five fiscal years.
RETIREMENT COSTS DO NOT PRESSURE FINANCES
The county participates in the Florida Retirement System (FRS), a state-run multiple employer pension plan for virtually all of its employees. Pension costs increased by 27% to \$63.4 million in fiscal 2014 from \$50 million in the prior year. Despite the increase, pension spending remains manageable at 4.5% of fiscal 2014 general government expenditures. As of fiscal 2014, the FRS is funded at approximately 81% utilizing Fitch's assumed 7% discount rate. Retiree healthcare benefits are funded on a pay-go basis. The county sets aside funds for future other post-employment benefit (OPEB) costs in an internal service fund (currently about \$17.3 million), but has elected not to establish a dedicated trust in order to retain flexibility.
BROAD-BASED ECONOMY EXHIBITING A STRONG RECOVERY
The county serves as the economic center for Florida's Gulf Coast. Major sectors include business services, government, health care, education and tourism; MacDill Air Force Base and the Port Tampa Bay are major economic engines.
Following a severe recession, the county has been experiencing a sustained and vigorous recovery. Employment growth has been robust and levels now exceed pre-recession highs. Between 2009 and 2014, the county has gained over 110,000 jobs for a 20.8% gain, well ahead of state and national growth. Job growth slowed in 2015 averaging just 0.7% over the first four months. The unemployment rate of 5.2% as of March 2015 is lower than both the state (5.5%) and national averages (5.6%).
The housing market continues its ascent, with home prices as of April 30, 2015 up 5.7% year over year (according to Zillow Group). The Greater Tampa Association of Realtors reports 2015 home sales through April increased by 17.3% over the prior year. Furthermore, foreclosure filings were down 35% during 2014 and are only at 21% of 2009 peak activity. Climbing sales and tourist taxes are also indicative of the county's economic recovery.
The gain in housing values has had a positive effect on the county's tax base. Taxable values grew by 5.4% in fiscal 2014, the first increase in six years. This gain was followed by an additional 7.1% increase in fiscal 2015. Officials expect further expansion of taxable assessed values at least through fiscal 2017. The tax base is not concentrated, with the top ten taxpayers accounting for only 7% of total valuations.
Wealth levels hover around regional and national averages, with poverty rates slightly above those of the state and nation. In addition to the planned expansion of insurer USAA which is projected to add 1,200 new jobs, a large upgrade at Tampa International Airport, a new Amazon distribution facility in the county and a proposed \$1 billion waterfront mixed use development project in Tampa are expected to further bolster job growth. Fitch believes that underlying economic characteristics of the county point to favorable prospects for continued tax base expansion and resumption of brisk employment growth.
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