NEW YORK, November 14 (Fitch) Fitch Ratings has assigned a rating of ‘AA-’ to the following utilities tax bonds issued by Tampa, Florida (the city):
--$25 million utilities tax refunding revenue bonds, series 2012A;
--$15.7 million utilities tax revenue bonds, series 2012B;
--$7.6 million taxable utilities tax refunding revenue bonds, series 2012C.
The utilities tax bonds are scheduled for sale by negotiation during the week of Nov. 26th. Proceeds of the series 2012A and series 2012C bonds will refund a portion of outstanding utilities tax bonds.
Proceeds of the series 2012B bonds will be used to finance the purchase of software for an enterprise resource planning system.
In addition, Fitch affirms the rating on the following parity bonds:
--Approximately $179.9 million utilities tax bonds at ‘AA-'. In addition, Fitch affirms the ‘AA’ rating on the following bonds:
--$36.3 million utilities tax and special revenue refunding bonds, series 2001B (senior lien);
--Implied general obligation credit. The Rating Outlook is Stable.
The series 2012 utilities tax bonds are secured on parity with outstanding junior lien utilities tax bonds by a lien and pledge of utility taxes, subject to the prior payment of the city’s outstanding senior lien utilities tax and special revenue refunding bonds, series 2001B.
The utilities tax and special revenue refunding bonds, series 2001B (senior lien bonds) are secured by and first payable from tax increment revenues (TIR) derived from a community redevelopment area within two tax increment financing areas within the city and to the extent tax increment revenues are insufficient, a senior lien and pledge of utilities services tax revenues (utility taxes). The lien of the senior bonds on utility taxes is closed. The senior bonds fully mature by 2015.
STRONG COVERAGE OF JUNIOR LIEN UTILITY TAX MADS: Fiscal 2011 utility taxes cover maximum annual debt service (MADS) on junior lien bonds by a healthy 2.4x, excluding federal subsidy payments associated with the city’s series 2010A and B Build America Bonds (BABs). MADS coverage is expected to improve modestly with this issue as the refunding will extend certain maturities and lower front-loaded debt service.
TIR SUPPORTS SENIOR LIEN BOND DEBT SERVICE: The senior lien bonds benefit from a pledge of tax increment revenues, which covered 98% of debt service in fiscal 2011, as well as a senior lien on utilities services taxes.
ESSENTIAL SERVICES: The utility taxes represent levies on essential commodities and services, including electricity, water, gas and telecommunications purchases. These revenues have not exhibited the steep declines experienced by other city tax revenues. WEAK LEGALS: The debt service reserve fund (DSRF) for the series 2012 bonds will not be funded at issuance. The bond resolution provides for a springing reserve to be funded over four years only if utility tax coverage falls below 1.25x MADS. The additional bonds test requires coverage of only 1.25x, although Fitch believes the practical limitation is higher given the city’s dependence on residual revenue for operations.
OVERALL CREDIT STRENGTHS: The city’s general credit is characterized by conservative fiscal management, a diverse and expanding economy and moderate debt load.
STABILIZED TAX BASE AND BALANCED FINANCIALS: Stabilization or an uptick in the city’s tax base combined with balanced combined general fund and utility tax fund operating results could trigger an upgrade in the city’s tax-supported ratings.
The utility taxes are levied on the purchase of electricity, metered or bottled gas, water service, and telecommunications services within the city. The city levies at the maximum tax rate allowed by law. Between fiscals 2007 and 2011, utility taxes experienced overall growth of over 6%, despite a 6% decline in fiscal 2011. This trend differs markedly from other major revenue streams such as property and sales taxes which suffered significant declines during this period.
The contrast in trends is attributable in part to the essential nature of the services upon which the utility tax is levied. The fall in fiscal 2011 revenues is attributable to a recession-driven decline in electrical usage and decreased CST revenues stemming from changes in the way communications services are provided. Taxes on electricity and communications purchases together constitute 90% of total utility tax revenues. Based on 11 months of actual results, officials estimate that fiscal 2012 collections will be up modestly from the prior year.
Debt service coverage has historically been solid. Fiscal 2011 utility tax collections covered combined senior and junior lien utility tax MADS by 2.4x. Projected coverage will rise to 2.8x MADS after the issuance of the new bonds. The coverage calculation excludes pledged tax increment revenues from two community development districts within the city which are the first source of payment for the senior lien bonds. It also excludes federal subsidy payments in connection with the city’s series 2010A and B BABs issues. Senior lien debt service net of tax increment revenues has a first claim on utility taxes.
Between fiscals 2007 and 2010, tax increment revenues fully covered senior debt service requirements enabling all utility tax revenues to be available for junior lien debt service. However, taxable values within the tax increment areas have been falling since fiscal 2009. Fiscal 2011 tax increment revenues were sufficient to pay 98% of debt service requirements requiring the use of approximately $275,000 of utility taxes or less than 0.5% of total utility tax collections for senior lien debt service. Officials estimate a larger gap between TIR collections and senior debt service for fiscal 2012 but project only modest utilization of utility taxes for the senior bonds before their final maturity in 2015.
Bond proceeds will be used in part to restructure a portion of utility tax debt attributable to the financing of city parking garages. By smoothing out front-loaded debt service through the extension of certain maturities, Officials are attempting to lower debt service associated with the parking garages so that revenues from the garages may eventually cover both operating costs and their respective portion of debt service.
There is no provision for a cash-funded DSRF similar to other outstanding parity utility tax issues. The indenture provides for a springing DSRF if utility tax revenues are less than 1.25x MADS. In such a circumstance, the issuer must cash-fund the DSRF in equal monthly installments over four years. While the senior lien in closed, additional junior lien bonds can be issued if utility tax collections for 12 of the 18 months prior to issuance equals at least 1.25x MADS for senior and junior lien bonds. A more practical limitation on over-issuance is the city’s reliance upon these revenues for operations.
Recent economic indicators evidence ongoing growth in local economic activity. The Tampa-St. Petersburg-Clearwater metropolitan statistical area (MSA) has experienced consistent year over year monthly employment gains in 2012. BLS employment data for September (preliminary) of 2012 indicates a 3.1% increase in MSA jobs over the same month in 2011. Service-based employment, particularly in the professional and business, education and health, and leisure and hospitality sectors, has been the chief driver of these gains. As a consequence, unemployment rates declined from 10.9% in September 2011 to 8.7% in September 2012, although rates remain below the national benchmarks.
The improving economic picture has had a modest but positive impact upon housing. Housing prices have increased for the last two quarters through the first quarter of 2012 according to Case Schiller. Other independent real estate web sites also indicate a recent trend of rising home values. Fitch expects these trends to continue given the city’s economic recovery and the availability of affordable housing. Despite the improvement, the housing market remains weak, characterized by elevated housing vacancies and foreclosures which may inhibit the pace of near term recovery.
Tampa serves as an economic hub for the regional economy. Leading employers include the Hillsborough County School Board, MacDill Air Force Base (AFB), Hillsborough County government and Tampa International Airport. MacDill AFB is a major economic contributor employing 21,000 military and civilian personnel. The base is currently competing to house the new air force KC-46A re-fueling tankers which would serve to enhance AFB’s strategic significance. The relocation of 500 jobs at Time Warner from New York to Tampa and the recent opening of the $30 million Center for Advanced Medical Learning and Simulation (CAMLS) at the University of South Florida are expected to provide positive economic benefits.
Fiscal 2013 will be the fifth straight year of contraction in the city’s tax base although the rate has slowed considerably. Fiscal 2013 taxable values drop by only 2% from the prior year. Overall, the tax base has declined by 29% since fiscal 2008 due to a combination of state property tax reform and the effects of the past recession. Officials expect assessed valuations to dip slightly in fiscal 2014 before stabilizing in fiscal 2015 which Fitch believes is reasonable given recent housing trends. Property tax revenues have fallen in lockstep with the slide in assessments as officials have kept property tax rates constant since fiscal 2008.
FINANCIAL RESERVES REMAIN ELEVATED DESPITE REVENUE PRESSURES
Financial operations are conservatively managed as evidenced by sizable reserves and robust liquidity. The city had built up a large unreserved fund balance by fiscal 2010 equal to 48% of spending for the combined general fund and utility tax fund (the operating funds). The city generated operating surpluses during the recession despite precipitous declines in property tax revenues through prudent budgeting and spending reductions. A sizable operating deficit was reported for fiscal 2011; however, the decline in fiscal 2011 reserves was tempered by a restatement of the prior year’s general fund balance which added $10 million to fund balance. Unrestricted operating fund balance (the sum of assigned, unassigned and committed fund balances under GASB 54) for fiscal 2011 remained elevated at $160.9 million or 44% of expenditures. (The city’s measure of financial flexibility considers the unassigned fund balance in the general fund and the assigned fund balance in the utility tax fund.)
For fiscal 2012, city officials project a budgeted $16 million operating deficit which still leaves overall balances at just under 40% of spending. For fiscal 2013 budget provides for a much smaller operating funds drawdown of $8.7 million reducing operating fund balance to a still robust $137 million or 36% of spending. Liquidity levels are very ample as fiscal 2011 cash and investments covered liabilities by over 9.0x.
Debt levels are manageable with a direct and overlapping debt to market value of 2.5% and overall debt per capita of approximately $2,300.
The city has no general obligation bonds outstanding. Debt service carrying costs are slightly above average attributable to rapid principal amortization. Approximately 71% of principal is retired within the next 10 years. The city’s capital needs are relatively modest at $380 million for five years with the focus on repair and replacement of existing infrastructure. Most of the projects are funded on a pay-go basis with less than $100 million of debt planned for the next five years.
City employees participate in one of two city-sponsored pension plan: the general employees retirement fund, which includes most employees, and the firefighters and police officers pension fund. Both plans are well-funded at 88.9% for the general employees plan and 82.5% for the firefighters and police officers plan both assuming Fitch’s more conservative 7% discount rate.
At present, the city’s pension contribution requirements are manageable accounting for about 10% of fiscal 2011 operating spending. This is due in part to state contributions to the firefighters and police officers fund, which modestly reduce the city’s funding obligation. For retiree health care benefits, the city provides an implicit subsidy by allowing retires to participate in the city’s medical and prescription drug coverage plan at the group rate. The plan is funded on a pay-go basis and the city has not created a dedicated OPEB trust fund.