TEXT-Fitch rates St. Augustine, Fla. capital improvement refunding bonds 'A+'
Jan 28 - Fitch Ratings has assigned an 'A+' rating to the following City of St. Augustine, Florida's (the city) bonds: --$18.5 million capital improvement refunding revenue bonds, series 2013. The bonds are expected to sell via negotiation during the week of Feb. 4, 2013. The bonds will refund the city's outstanding series 2004 capital improvement revenue bonds. In addition, Fitch affirms the following ratings: --Implied general obligation at 'AA-'; --$26.2 million capital improvement revenue bonds at 'A+'. The Rating Outlook Stable SECURITY The bonds are secured by the city's covenant to budget and appropriate non-ad valorem revenues, by amendment if necessary, in an amount sufficient to pay debt service. The availability of non-ad valorem revenues to pay debt service is subject to the funding of essential government services. The issuer's non-ad valorem covenant is cumulative and continues until the bonds have been fully paid. SENSITIVITY/RATING DRIVERS COVENANT DEBT LINKED TO IMPLIED GO: The rating on the capital improvement bonds is notched down from the implied GO rating on the city, reflecting appropriation risk associated with the security structure and lack of a mechanism to compel the city to generate sufficient non-ad valorem revenue to pay bondholders. STABLE AND SUFFICIENT NON AD VALOREM REVENUES: The city's non ad valorem revenue base exhibits good diversity and stability, and is more than sufficient to meet debt service requirements on the outstanding capital improvement bonds. STRONG FINANCIAL PERFORMANCE: Robust general fund reserves and ample liquidity provide the city with a high degree of financial flexibility. Reserves have remained healthy despite large assessed value (AV) declines and associated reductions in property tax revenues. MIXED DEBT PROFILE: The city's debt profile is mixed. Below average amortization reflects management's attempt to keep total annual debt service expenditures level despite the addition of new debt in 2011. LIMITED ECONOMY: The local economy is concentrated in tourism, which introduces some risk. However, the city is located within commuting distance to Jacksonville and its large regional economy. CREDIT PROFILE St. Augustine is located approximately 35 miles south of Jacksonville on the state's northeast coast and has an estimated year-round population of 13,000. NON AD VALOREM REVENUES ARE AMPLE AND DIVERSE The city's non-ad valorem revenues under the covenant are diverse and include franchise fees, parking fees, and a public service tax. These revenues typically account for approximately 50% of annual general fund revenues; they totaled $12 million in fiscal 2012 based on unaudited financial statements, which was an increase of more than 10% from the prior year. Non-ad valorem revenues have been more than sufficient to meet debt service requirements, as well as fund other essential general government services. Debt service coverage in fiscal 2011 was a solid 4x and MADS coverage was also healthy at 3.3x. Unaudited fiscal 2012 results indicate similar coverage levels. Fitch expects coverage levels to remain healthy, given the prominent role these revenues play in operations and the absence of near-term borrowing plans. STRONG FINANCIAL PERFORMANCE DESPITE REVENUE PRESSURES Property tax revenues fell by more than $2 million or 19% from fiscal 2009 to fiscal 2011 due to a 26% drop in AV over that period and maintenance of the city's operating tax rate at 7.5 mills (which offers a decent cushion under the statutory 10 mill cap). The city's tax base fell an additional 7.9% in fiscal 2012 and is projected to be flat in fiscal 2013, which corresponds with Fitch's expectation of generally improving tax base stability throughout the state. The most recent Case-Shiller Quarterly Index available for St. Johns County (2012Q1) depicts single-family home prices increasing 2.5% year-over-year. Despite the revenue pressure, unrestricted general fund reserves remained robust at nearly $7.5 million or 36% of spending in fiscal 2011. Small declines in fund balance in fiscals 2009 through 2011 were attributable to one-time spending for capital improvements. Audited fiscal 2012 results are unavailable, but management expects no material changes to fund balance and remains committed to maintaining a high level of reserves (despite no formal fund balance policy). The fiscal 2013 budget is balanced without the use of reserves or other non-recurring resources, and given historic trends Fitch anticipates that over the near term reserves will be maintained at or near the current level. MIXED DEBT PROFILE AND HIGH CARRYING COSTS The city's debt profile is mixed, with overall debt a moderate 3.8% of market value but above average at $5,085 per capita. Amortization is slow with only 35% of principal retired within 10 years. The slow amortization is the result largely of the issuance of new debt in 2011 and management's desire to maintain total annual debt service at the current level. Total carrying costs including debt service, pension, and other post employment benefits (OPEB) are currently high at approximately 25% of fiscal 2011 governmental expenditures. The high carrying costs could limit the city's capacity to issue additional debt, although no new debt is expected in the near term. MANAGEABLE PENSION & OPEB COSTS City employees participate in one of three single-employer pension plans for general employees, police officers, and firefighters. The police and firefighter plans are well funded at 89% and 95%, respectively; however the general employees plan is funded slightly below average at 68%. Funding levels were calculated using Fitch's conservative 7% rate of return assumption. The city's pension payments equal the full actuarial required amount, which in fiscal 2011 totaled $2.2 million. Other post-employment benefits are funded on a pay-go basis and the unfunded liability is a low 0.1% of market value. LIMITED LOCAL ECONOMY The local economy is based mainly in tourism, but the largest area employers provide some diversity. Top employers include St. Johns County School Board (3,400), Flagler Hospital (1,600), and the US Army National Guard (1,300). The 6.8% unemployment rate recorded in September 2012 was down from 8.8% a year prior due largely to job growth, and it was well below both the state (8.6%) and national averages (7.6%) for the month. 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, and 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
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