TEXT - Fitch revises Fort Myers, Fla. rating outlook to negative
Feb 20 - Fitch Ratings has affirmed the ratings on the following bonds of the city of Fort Myers, Florida (the city): --$88.8 million improvement revenue bonds at 'AA-'; --$10.1 million gas tax revenue bonds at 'A+'; --Implied general obligation (GO) at 'AA-'. The Rating Outlook for the implied GO and improvement revenue bonds is revised to Negative from Stable. The Rating Outlook for the gas tax revenue bonds is Stable. SECURITY The improvement revenue bonds are secured by a pledge of utilities tax, communication services tax, franchise fees, and occupational taxes imposed by the city, guaranteed entitlement revenues received from the state revenue sharing trust fund, and the city's share of local government half cent sales tax revenues collected within the county and shared with its municipalities pursuant to a population based formula. The bonds are also secured by a surety funded reserve account. The gas tax revenue bonds are secured by a pledge of local option gas taxes levied by Lee County (the county) and received by the city pursuant to interlocal agreement. The bonds are also secured by a surety funded reserve account. KEY RATING DRIVERS SHIFT IN FINANCIAL PERFORMANCE: The Negative Outlook on the implied GO reflects Fitch's growing concern about the city's historically stable financial profile, recently pressured by rapidly rising pension costs and significant tax base declines necessitating the use of reserves to fund operations. CONCERNING PENSION BURDEN: The city's pension liability is expected to remain very high despite recent efforts to curb employee benefits. MODERATE DEBT: The city's pension problem is somewhat tempered by its moderate debt burden, rapid amortization of principal, and absence of major capital needs and borrowing plans. HIGH TAX RATE: Fitch notes as a credit positive the city's willingness to counterbalance severe tax base losses with rate increases in order to maintain reserves but notes with some concern that the now high tax rate relative to the statutory cap does limit overall budget flexibility. TOURISM DEPENDENT ECONOMY: Economic activity is mainly driven by tourism activity, retail, and real estate and therefore exposed to variability of economic cycles over the long term. STRONG REVENUE BOND COVERAGE: Both revenue bond securities exhibit coverage of maximum annual debt service (MADS) above 2.0 times (x). The one-notch rating differential principally reflects the distinction in the diversity of pledged sources. The implied GO rating serves as the ceiling for the improvement bonds and as a result, the Outlook on the improvement bonds is also revised to Negative. RATING SENSITIVITIES RETURN TO FISCAL BALANCE: Rating stability is predicated on the city's ability to align spending with recurring revenue with the fiscal 2014 budget, and stem the recent dependence on one-time sources for operations. COVERAGE MAINTENANCE: The revenue bond ratings are subject to leveraging risk and revenue volatility linked to general economic conditions. The latter risk is considered more probable but adequately tempered by the strong debt service coverage. CREDIT PROFILE Fort Myers is located along Florida's southern Gulf Coast in Lee County (implied GO rating 'AA') immediately east of Cape Coral and adjacent to Interstate 75. The city is a very popular tourist destination with a year-round population of approximately 63,500 residents. COVERAGE REMAINS STRONG AS REVENUES RETURN TO POSITIVE GROWTH Fiscal 2012 coverage of MADS on the gas tax and improvement revenue bonds remains sound at 2.4x and 2.2x, respectively. Each security experienced moderately positive annual revenue growth in fiscal 2012 following several years of decline. Additional leveraging is not expected. EXTREMELY WEAK PENSION FUNDING Of paramount concern to Fitch are the city's very weak pension funding levels. The firefighters, police, and general employee plans have a combined funded ratio of just 47% (adjusted by Fitch to reflect a 7% investment rate of return); Fitch considers a funded ratio below 60% as weak. The adjusted unfunded actuarial accrued liability (UAAL) totals more than $220 million or a high 3.9% of market value (MV). On a positive note the city continues to fund the full actuarial required contribution (ARC), but the growing burden placed on the budget by pensions is a concern. Pension contributions have more than doubled from $9.3 million in 2007 to $21 million in 2012. Combined with debt service of $12.5 million and the cost of funding other post-employment benefits (OPEB), the city's long-term liabilities consumed a very high 37% of governmental fund spending (less capital related activity) in fiscal 2012. RECENT REFORM EFFORTS YIELD SOME RELIEF The city has recently reached agreement with the general employee and police collective bargaining units on certain pension reforms, including revisions to the multiplier, definition of pensionable wage, and cost-of-living-adjustments. These changesare expected to yield more than $2 million in annual savings for the city. The city will seek similar reforms when the firefighter's contract is open for pension negotiation in 2014. The police pension savings (estimated at $1 million) may not be realized during the current fiscal year, as the city is currently at an impasse with the union over management rights and restoration of prior salary reductions. Under Florida law, the city council has ultimate authority to resolve labor impasse. Wage reinstatement for police would add about $900,000 to the budget, largely offsetting any pension savings. Fitch is concerned that wage reinstatement could embolden the city's other labor groups to seek similar demands at an additional estimated cost of close to $4 million. It is unclear how the city would absorb these theoretical expenditure increases. GENERAL FUND RESERVES REMAIN HEALTHY DESPITE RECENT DEFICITS Unaudited results for fiscal 2012 indicate a $1.6 million operating deficit (after transfers) in the general fund, equal to 1.9% of spending. The operating deficit, the fourth in six fiscal years, lowers the unrestricted fund balance to $21.6 million or a still healthy 25.3% of spending. The fiscal 2013 general fund budget appropriates about $4.6 million in existing reserves, a slightly lower amount from the preceding fiscal year. Management reports first quarter results on track with the budget. The pension savings noted above were not fully budgeted and revenues are slightly ahead of budget, therefore the city is hopeful it can reduce its fund balance use by about $500,000 on the year. As recent as fiscal 2011 the city had adopted a budget that did not rely on general fund reserves. The city has also increased transfers in from the risk management fund for operations. The recurrent use of reserves and other one-time sources to balance the budget is a serious credit concern. Continued erosion in the city's financial flexibility, a factor that mitigates concerns regarding the city's limited, tourist based economy and growing fixed cost burden, will lead to negative rating action. DIFFICULT DELIBERATIONS EXPECTED WITH 2014 BUDGET The city has stated its intention to address the prevailing structural imbalance with the 2014 budget. The city has stated that expenditure reductions will focus on pension savings and a review of general fund subsidies to the Fort Myers Yacht Basin, Harborside Event Center, and Southwest Florida Historical Museum, among other enterprise funds, which collectively consume $3.9 million of the current year budget. In Fitch's view the city's dependence on tourism related activity will likely weigh heavily on, and possibly curb successful implementation of, lower subsidies for recreation venues. Other expenditure cuts would come at the expense of core services according to management. The city's approach on the revenue side includes a fire assessment fee that can be implemented with approval of city council and could potentially enhance revenue by $3-5 million annually (3-5% of the budget). The imposition of any new revenue will be scrutinized given the city's improved but still high unemployment, and 40% increase in the property tax rate enacted from fiscal 2008-2013. The current tax rate of 8.776 mills represents another concern, as it leaves little room under the 10-mill statutory cap thus restricting revenue raising capacity and increasing vulnerability to tax base loss. IMPROVED EMPLOYMENT AND TAX BASE PERFORMANCE The city has experienced monthly job growth over the previous year for 24 consecutive months dating back to January 2011. Unemployment has improved from a peak of 12% during the summer of 2010 to 7.5% in December 2012. Global Insight forecasts very favorable employment and wage growth over the next five years within the Cape Coral-Fort Myers metropolitan statistical area (MSA). Although positive news, Fitch cautions that the economy remains somewhat vulnerable to economic shifts given its limited breadth and dependence on retail (145% of the U.S. average). The Fort Myers housing market and tax base is beginning to show evidence of a modest turnaround after being hit exceptionally hard during the recession. The city's taxable assessed value (TAV) declined by 0.1% for fiscal 2013 after having dropped 42% from fiscal years 2008-2013. Single family home prices within Lee County were up 6.8% year-over in the second quarter of 2012 according to the Case-Shiller Quarterly Index, a good indicator that fiscal 2014 TAV will show further improvement, as are city reports of an uptick in building permit activity.
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