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
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
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
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
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
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
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