TEXT-Fitch rates Jacksonville, Fla.'s special revs 'AA'
Nov 7 - Fitch Ratings has assigned a rating of 'AA' to the following revenue bonds to be issued by the City of Jacksonville, Florida (the city): --$197,410,000 special revenue refunding bonds, series 2012C; --$12,535,000 special revenue refunding bonds, series 2012D; --$35,065,000 taxable special revenue refunding bonds, series 2012E; --$125.1 million capital improvement refunding revenue bonds, series 2012. The special revenue bonds are scheduled for negotiated sale on Nov. 15. Proceeds will refund all of the city's outstanding excise taxes revenue bonds, along with a portion of the city's guaranteed entitlement revenue bonds, and local government sales tax revenue bonds. The city is presently estimating net present value (NPV) savings of $34.8 million or 13.1% of refunded par. The capital improvement revenue bonds are scheduled for negotiated sale on Dec. 5. Proceeds will refund all of the city's outstanding capital improvement revenue bonds, series 1997, 1998, 2002A, 2002B, and 2002C. The city is presently estimating NPV savings of $19.2 million or 14.1% of refunded par. In addition, Fitch affirms the following ratings: --Implied unlimited general obligations (ULTGO) at 'AA+'; --Approximately $685.5 million special revenue bonds at 'AA'; --Approximately $136 million capital improvement revenue bonds at 'AA' (these bonds are expected to be refunded from the current offering). The Rating Outlook is Stable for all bonds. SECURITY The special revenue bonds are secured by the city's covenant to budget and appropriate non-ad valorem revenues, by amendment if necessary. The availability of non-ad valorem revenues to pay debt service is subject to the funding of essential government services and obligations with a specific lien on non-ad valorem revenues. The issuer's non-ad valorem covenant is cumulative and continues until the bonds have been fully paid. The bonds are not secured by a debt service reserve fund (DSRF). The capital improvement revenue bonds are secured by a lien upon receipts from a 2% convention development tax (CDT), a 1% professional sports facility tourist development tax (TDT), certain franchise fees, a portion of the local option communication service tax (CST), and a fixed sales tax rebate authorized pursuant to state law to certified applicants for the attracting or retaining of professional sports franchises. The CDT and TDT are each a tax on transient rental accommodations. The refunding revenue bonds, series 2012 will be secured by a cash funded DSRF equal to maximum annual debt service (MADS); outstanding bonds are secured by a DSRF funded by a combination of cash ($5.4 million) and surety policies ($6.1 million). KEY RATING DRIVERS RATINGS CAPPED AT CITY IMPLIED ULTGO: The implied ULTGO rating of the city ('AA+'; Stable Outlook) provides the ceiling for all of Jacksonville's other tax-supported ratings. COVENANT DEBT: A one-notch distinction between the special revenue bond rating and the implied ULTGO rating reflects the absence of a pledge of specific revenue and inability to compel the city to raise non-ad valorem revenue sufficient to pay debt service. Covenant revenues are diverse and are expected to continue to provide adequate debt service coverage given the reliance on these revenues to fund operations. GOOD COVERAGE ON CAPITAL IMPROVEMENT REVS: Taxes on transient room accommodations and communication services remain somewhat volatile, but have shown some signs of recent stability. MADS coverage is projected at 1.79x post refunding and no additional leveraging is expected. SOLID FINANCIAL PERFORMANCE: The implied GO rating of 'AA+' is based on the city's history of sound financial management evidenced by consistent operating surplus and growth in reserves and introduction of recurring solutions to solve recent budgetary challenges. WEAK PENSION PICTURE: Of increasing concern to Fitch is the city's significant unfunded pension liability, particularly for public safety employees. Pension costs have risen dramatically and consume an increasing share of discretionary resources that generally limits overall financial flexibility. AVERAGE DEBT: Key debt ratios and annual servicing costs are considered average by Fitch. Future capital needs and borrowing plans appear manageable. STABLE ECONOMY: Jacksonville's economy is anchored by the presence of the U.S. Navy and trade and transportation activity at the Port of Jacksonville. Employment levels continue to grow at a good pace, but unemployment remains somewhat high and income levels are average. WHAT COULD TRIGGER A RATING ACTION FAILURE TO CONTROL PENSION COSTS: The city is in the process of unveiling pension reform measures with the hope that changes to the pension system may be negotiated and implemented by fiscal 2014. The failure to do so for any reason could lead to negative pressure on the rating. CREDIT PROFILE POSITIVE RESULTS FORECAST FOR 2012; BALANCED BUDGET ADOPTED FOR 2013 Entering fiscal 2012 the city's unrestricted fund balance (the sum of the unassigned, assigned, and committed fund balance under GASB 54) totaled $123.8 million or a sound 12.7% of spending. Fiscal 2011 marked the sixth consecutive year of surplus operating results after transfers, during which time a total of $66.4 million was added to reserves. Fitch considers this record impressive considering the challenges posed by property tax reform, the housing market collapse, and recession. The city is forecasting a $13.8 million addition to fund balance in fiscal 2012. The surplus stems from expenditures that are projected to be $26.5 million below budget, primarily related to personnel spending. The city consistently underspends its appropriations, a trend that reflects its careful budget monitoring and controls and commitment to financial stability. The city has adopted a balanced budget for fiscal 2013 closing a preliminary gap of $68.7 million. Almost 550 jobs were eliminated from the budget, including 225 by layoff. The city had eliminated budget gaps aggregating approximately $100 million in fiscal 2011 and 2012. While these cuts are significant in scope relative to the general fund budget, management believes there remains capacity to achieve savings that would not dramatically impact service provision. The fiscal 2013 budget does not appropriate existing reserves. The millage rate is held constant for a third consecutive year at 10.04 which is well below the city's statutory limit of 20 mills and considered by Fitch competitive to the combined city/county tax rate of other major Florida metro areas. The city's taxable assessed value (TAV) has not yet stabilized, however, declining 4.8% in fiscal 2013. Budgeted revenues and transfers in are lower by 1% from the fiscal 2012 budget. The budget re-appropriates $11 million in efficiency savings within the sheriff's 2012 budget for citywide purposes. There does not appear to be any other notable reliance on one-time sources. PENSION PROBLEM PERSISTS The city's pension burden is considered high, particularly for the 'AA+' implied ULTGO rating. For all city plans the Fitch-adjusted funded ratio (which assumes a 7% investment rate of return) is very weak at 50.5%, and the unfunded actuarial accrued liability (UAAL) a significant $2.67 billion or 3.3% of market value (MV). In fiscal 2013 the city has budgeted approximately $150 million in pension costs, of which $122 million is related to police and fire. The city continues to fully fund the actuarial required contribution (ARC) which Fitch considers favorably. However, the city's pension contribution will consume more than 15% of general fund spending; in comparison, in fiscal 2006 the city paid $65.3 million for pension or 7.7% of spending. The spike in pension contributions reflects market losses incurred during the recession (which are smoothed over a five-year period) and a reduction in the assumed investment rate of return (now 7.75% for police and fire and 8.25% for general employees and correction officers). Pension costs are forecast to rise more modestly over the near term, reaching $183 million by fiscal 2017. The city has recently ratified new labor contracts with its police and fire unions expected to yield approximately $8 million in annual savings. While Fitch views these concessions favorably, they effectively offset a very small portion of the recent increased pension costs. COVENANT REVENUES OFFER DIVERSITY AND SATISFACTORY COVERAGE The city is forecasting non-ad valorem revenue of $508.2 million in fiscal 2012 (a 1.4% year-over-year increase). Fiscal 2012 budgeted non-ad valorem revenues include utility taxes ($132.5 million), contributions from the electric and water and sewer utility operations of the Jacksonville Electric Authority (JEA) ($104.2 million), the city's share of one-half cent local government sales tax ($74.3 million), and franchise fees ($44.2 million). The city is proposing certain 'springing' amendments to the anti-dilution test that are, in Fitch's view, neutral to credit quality and consistent with other Florida non-ad valorem transactions. Fitch considers risk to over-leveraging limited by the city's reliance on non-ad valorem revenue to fund operations. IMPROVED COVERAGE ON CAPITAL IMPROVEMENT BONDS The capital improvement revenue bonds likewise benefit from good revenue diversity, but the key components of the revenue stream, the CDT, TDT, and CST, generally exhibit a fair degree of economic volatility. The fixed nature of the sales tax rebate from the state somewhat mitigates this risk, but that component comprises only $2 million annually or approximately 19% of MADS of $10.5 million (projected post-refunding). Fiscal 2012 pledged revenues were up 1.7% (unaudited) on the year to $18.7 million due to gains in the CDT and TDT. MADS is expected to be lower by about $1 million post-refunding improving MADS coverage to 1.79x from 1.59x in fiscal 2011. Fitch estimates that existing pledged revenues can decline by as much as 44% before coverage would fall below 1.0x (or approximately 4x the cumulative loss experience during the recession). Fitch notes the various pledged revenues are essentially levied at their respective maximum permissible rate. Additional new money bonds are not presently contemplated (the additional bonds test requires 1.5x MADS coverage). AVERAGE DEBT BURDEN; FUTURE BORROWING MANAGABLE Overall debt (including overlapping debt of the county school board) is equal to 3.8% of MV or $3,732 per capita. The city continues to revise its capital plan lower. Fitch does not anticipate a major change in the city's debt profile as future borrowing is expected to vary from $30 million to $65 million annually during the 2013-2017 capital improvement plan (CIP) period. The amount of debt to be issued is notably lower than the amount of outstanding debt scheduled to amortize over the same period. In fiscal 2013 the city has budgeted almost $230 million in tax-supported debt service, including special revenue fund debt service, which equates to close to 19% of related fund spending. Together with its pension cost, the city's fixed debt burden is considered high by Fitch. BROAD ECONOMY ANCHORED BY TRANSPORTATION, HEALTH CARE, AND MILITARY Monthly non-farm employment figures have exhibited steady, albeit modest, growth dating back to mid-2010. The city's unemployment rate remains elevated, however, at 9.3% as of August 2012. Global Insight forecasts annual employment growth for the Jacksonville metro area of 2.6% from 2013-2016 which is slightly ahead of its U.S. and Florida employment projection. Wealth and income levels are average. The Port of Jacksonville continues with major expansion projects that should serve to boost the metro's sizable trade and transportation sectors. Growth in the healthcare sector has helped diversify the economy, with major employers including Baptist Health, the Mayo Clinic, and St. Vincent's Health. The city has a sizable military presence anchored by the Jacksonville Naval Air Station and Mayport Naval Station, which collectively employ approximately 36,000 (civilians and military). In addition, the Trident Nuclear Submarine Base, located 35 miles north of the city in Kings Bay, Georgia, employs 9,000. The military is estimated to contribute approximately $8 billion to the local economy annually. Construction funding to support the Navy's plan to homeport a nuclear fleet in Mayport has been eliminated from the federal budget proposal, offset by some degree by the announcement Mayport would gain a group of amphibious assault ships and 2,000 sailors between 2013 and 2016. 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 the 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, and National Association of Realtors. Applicable Criteria and Related Research: --'Tax-Supported Rating Criteria', dated Aug. 14, 2012; --'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 14, 2012. Applicable Criteria and Related Research: Tax-Supported Rating Criteria U.S. Local Government Tax-Supported Rating Criteria