TEXT-Fitch affirms Winter Springs, Fla. improvement revs at 'AA'
Feb 12 - Fitch Ratings has affirmed the following ratings of Winter Springs, FL (the city): --$9.6 million improvement revenue bonds, series 1999 and 2003 at 'AA'; --Implied unlimited tax general obligation (GO) bonds at 'AA'. The Rating Outlook is Stable. SECURITY The revenue bonds are secured by a first lien on the franchise fees levied and collected by the city from the Florida Power Corporation; the public service tax levied and collected by the city on purchases of electricity, metered or bottled gas, and water service within the corporate limits of the city; and the city's communication services tax. The current franchise with the power company expires in 2014, prior to the final maturity of the bonds. KEY RATING DRIVERS STRONG PLEDGED REVENUE COVERAGE: Pledged revenues continue to provide strong maximum annual debt service (MADS) coverage for the revenue bonds at over 4.0x. The city has no need to leverage the revenue stream further, which is supported by the city's reliance on surplus revenues for operations. DEPENDENCE ON REGIONAL LABOR MARKET: The city serves as an affluent bedroom community for nearby Orlando, the economic anchor of central Florida. Economic indicators for Winter Springs compare favorably to state and national averages. SOUND FINANCIAL PROFILE: Reserve levels remain robust and are expected to stay at this level given the city's commitment to maintain current fund balance levels, its proven ability to achieve structural balance, and its practice of conservative budgeting. MODERATE BUT RISING CARRYING COSTS: Annual debt service and retirement costs represent a manageable share of annual spending. Overall debt levels are affordable and expected to remain so as the city has no future debt plans. Low pension funding levels will likely pressure currently manageable long-term liability costs. CREDIT PROFILE The city of Winter Springs is a prosperous residential community located 15 miles north of downtown Orlando (Fitch Implied GO rating of 'AAA', Stable Outlook). STRONG DEBT SERVICE COVERAGE, RESILIENCE TO STRESS TESTS Fiscal 2011 and 2012 pledged revenues exhibited annual losses of 15.8% and 6%, respectively; however, MADS coverage remains strong at 4.17x as of fiscal 2012. The city attributes these declines to the correlation between pledged revenues and weather patterns, as fiscal 2011 and 2012 were warmer than average winters for the city. City estimates for fiscal 2013 show 7.8% growth based on year-to-date collections. The current franchise agreement with Florida Power Corp. (rated 'BBB+', Negative Outlook) expires in fiscal 2014, four years before the bonds' final maturity. While the agreement will most likely be renewed due to the essentiality of Florida Power's service, coverage remains healthy at 2.79x excluding this revenue. Fitch notes positively that due to low leverage, pledged revenues responded very well to stress testing. Pledged revenues could decline by over 75% and still provide 1.0x coverage. There are no plans to leverage the revenue stream further. LARGELY RESIDENTIAL COMMUNITY, PROXIMITY TO ORLANDO The city, with a 2011 population of 33,470, serves as a bedroom community for nearby Orlando. The local economy of Winter Springs is relatively limited. Seminole County School Board and the city serve as the largest employers, with 1,420 and 216 employees, respectively. Many residents commute out of the city to the Orlando MSA for employment. Orlando's local economy is experiencing a sustained recovery as evidenced by solid job growth. Tourism, a major industry, continues to recover. Tourist development tax revenues for fiscal 2012 are up over 4% from the prior year, net of a one-time litigation settlement payment in fiscal 2011. Hotel occupancy and room rates have generally expanded during 2012. Economic diversification continues to take hold in Orlando, most notably within the education and health services sectors. A growing biotechnology and life sciences cluster is anchored by the University of Central Florida's (UCF) Health Sciences Campus, which is home to its College of Medicine and the Burnett College of Biomedical Sciences, in addition to M.D. Anderson Cancer Center and Sanford-Burnham Medical Research Institute. Economic indicators for Winter Springs compare favorably to state and national averages. The city has a relatively low unemployment rate (6.7% as of December 2012) and high wealth levels (median household income equal to 132% of the nation's). Total assessed value (TAV) has fallen 28% from its peak in fiscal 2008. Declines have begun to moderate recently, with losses of 5.6% and 1.4% in fiscal 2012 and 2013, respectively. Property taxes account for a relatively low 28% of general fund revenues, and the tax rate of 2.54 mills is considered very low by Fitch. MAINTENANCE OF ROBUST RESERVE LEVELS DESPITE PRESSURED OPERATING ENVIRONMENT Fund balance levels have held relatively steady in the recent past, notwithstanding a small drawdown in fiscal 2009. The city ended fiscal 2011 flat with a marginal $9,000 operating surplus (after transfers) for an unrestricted fund balance of $7.7 million or a strong 45% of spending. The city's liquidity position remains solid, with year-end cash and investments equal to 9x total liabilities. Winter Springs has achieved structural balance over the past few years through conservative budgeting practices and moderate spending cuts, such as the implementation of a hiring freeze and the merging of departments. Flexibility to cut discretionary expenditures remains, particularly those related to capital needs to which the city contributes on annual basis. FISCAL 2012 AND 2013 ESTIMATES AND BUDGET Fiscal 2012 unaudited year-end results show improvement to budget, with a slight addition to reserves. The city was able to avoid use of the $700,000 (4% of spending) fund balance appropriation through expenditure variances related to departmental reorganizations and attrition. The fiscal 2013 budget includes a $343,000 (2% of spending) fund balance appropriation for capital. The city expects to end the year slightly better than budget due to conservative budgeting practices and year-to-date revenue growth to budget. The city slightly decreased its operating millage, which is quite low for the region, for the second consecutive year (cumulative 1.7% decrease since fiscal 2011). MANAGEABLE DEBT BURDEN, CARRYING COSTS Overall debt levels are low at $682 per capita and 0.9% of market value (MV). Fitch expects the city's debt burden to remain affordable given the city's lack of additional debt plans and rapid amortization schedule, with 65% of outstanding principal retired within 10 years. The city has no exposure to variable-rate, short-term, or derivative debt instruments. Debt and other-long-term liabilities related to pension and other post-employment benefits (OPEB) consume a moderate 18.6% of governmental fund spending (less capital). These expenditures are largely split between tax-supported debt service ($2.8 million) and the annual required contribution (ARC) for the city's defined benefit pension plan ($2.7 million). Historically, the city has made 100% of its pension ARC payment. Funding levels for the city's pension plan are a weak 53.4% (using Fitch's 7% rate of return), which will ultimately lead to increased funding costs. As of Jan. 1, 2010, the unfunded liability of $16.4 million represented a moderate 0.6% of MV. Fitch notes positively that the city took steps to limit this liability by reducing benefits for new employees hired after October 2011. While the long-term financial impact of these changes for the city is currently under actuarial review, Fitch expects the impact to be modest. The city also provides an implicit subsidy for OPEB as required by law, which it funds on a pay-go basis. The unfunded OPEB liability as of January 2010 totaled $754,000 or a modest 0.03% of market value. 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, 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