News Column

Fitch Affirms Citrus County, FL's Capital Improvement Rev Bonds at 'A+'; Outlook Stable

February 26, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings affirms the 'A+' rating on Citrus County, Florida's (the county) $24 million capital improvement revenue and refunding bonds, series 2010A and series 2010B (Build America Bonds).

In addition, Fitch affirms its 'AA-' implied unlimited tax general obligation (ULTGO) rating for the county.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a covenant to budget and appropriate (CB&A) legally available non-ad valorem (NAV) revenues, by amendment if necessary, in an amount sufficient to pay debt service on the bonds. The availability of NAV revenues to pay debt service is subject to the funding of essential government services and obligations with a specific lien on NAV revenues. The issuer's NAV covenant is cumulative and continues until the bonds have been fully paid.

KEY RATING DRIVERS

REDUCED BUT STILL ADEQUATE RESERVES: Despite recent reductions, county reserve levels remain adequate. Fitch assumes in its rating affirmation that the county will adhere to its fiscal 2014 budget, which assumes no additional draw-down of fund balance.

BELOW-AVERAGE ECONOMIC PROFILE: The county economy is limited and highly concentrated, with Duke Energy its top taxpayer and second largest private employer. County wealth and income indicators are below average and unemployment remains above state and national levels. Duke Energy has filed a lawsuit challenging the county property appraiser's calculation of its taxable assessed value (TAV) as overstated, and has underpaid its property taxes for the last two years, resulting in significant county revenues losses.

LOW DEBT BURDEN: Debt levels are low and expected to remain moderate, even with potential issuance considered in the near term. Principal amortization is average. Carrying costs, including debt service, pension and other post-employment benefit expenses (OPEB) are low.

BROAD AND DIVERSE NAV REVENUE BASE: NAV revenues are broad and diverse and are more than adequate for use toward the bonds' maximum annual debt service (MADS) even after accounting for coverage of MADS on county debt with a prior claim on NAV revenues.

COVENANT DEBT NOTCHING: A one-notch distinction between the capital improvement revenue bond rating and the implied ULTGO rating reflects the absence of a pledge of specific revenue and the inability to compel the county to raise NAV revenue sufficient to pay debt service.

RATING SENSITIVITIES

MAINTENANCE OF RESERVES: Despite a recent trend of use of reserves to fund operations, reserves remain satisfactory. However, continued use of reserves for operating purposes, with reserves dropping below policy levels, could pressure the rating.

CREDIT PROFILE

Citrus County is located in the west-central region of Florida, midway between Tampa and the Florida panhandle. The county's 2013 population of 139,360 represents an increase of 18% over 2000, as compared to 22% for the state. A significant number of residents are of retirement age, as residents who are 65 years or older account for about 34% of the total population.

NAV REVENUES PROVIDE SOUND BASE FOR DEBT REPAYMENT

Covenant revenues are broad and diverse, with the largest components being fuel taxes, the local government half-cent sales tax, state revenue sharing, and charges for services. Fiscal 2013 revenues totaled about $31 million, declining 1.9% from fiscal 2012. An intergovernmental revenues accounting change reducing the availability of certain revenues countered growth across most other areas in fiscal 2013. Fiscal 2014 revenues are projected to remain flat.

Certain NAV revenues are pledged first to other county debt issuance. Including MADs on this other debt, coverage is still strong at about 5.6x. The county depends on excess revenues to fund general government operations, and consequently, Fitch expects coverage to remain at similarly high levels.

ADEQUATE RESERVES DESPITE DRAW-DOWNS

Fund balance levels are adequate despite five consecutive annual drawdowns through fiscal 2013. The county's budget has been structurally imbalanced in recent years even with expenditure reductions including elimination of capital projects, early retirement incentives, and reduction in workforce. General fund revenues have seen declines resulting from general economic weakening and property tax decreases driven by tax base losses and maintenance of a flat millage rate. The county had made the strategic decision to maintain a stable tax rate, using reserves to plug gaps between recurring revenues and expenditures.

The fiscal 2013 total general fund balance is estimated at $12.1 million or 15.1% of general fund expenditures and transfers out, down from $18.1 million or 23.1% of expenditures in fiscal 2012. The county expects the fund balance to remain at this level for fiscal 2014. Unrestricted balances have generally been close to total ending balances. The county's fund balance policy requires maintenance of an unassigned fund balance at 8% of spending, and the county expects be close to this level for fiscal 2013.

TAX DISPUTE CHALLENGES FINANCES

For fiscal years 2013 and 2014 the county had to address the impact of a tax dispute between the county property appraiser and Duke Energy. A lawsuit challenged the county property appraiser's calculation of the TAV of Duke Energy's Crystal River Energy Complex, which includes nuclear and coal power plants. Although it made a 'good faith' tax payment, Duke Energy underpaid its full tax bill, resulting in a loss to the general fund of about $5 million in fiscal 2013. The county made up for the shortfall with spending reductions related to vehicle purchases and capital projects, freezing positions, and transfers from available balances outside the general fund. The suit is still pending, and the county property appraiser and Duke Energy have initiated mediation discussions.

For the fiscal 2014 budget, the county estimated a total value for Duke Energy disputed tax payments of about $19 million. General fund revenues, excluding the disputed taxes, are budgeted to be sufficient to cover expenditures. The fiscal 2014 budget is balanced, with no further budgeted draw-down of reserves. It reflects a significant county increase in the general fund millage rate to 7.0271 from 5.1871 in fiscal 2013 and a reserve for the disputed property taxes. Expenditures are expected to be essentially flat.

LIMITED LOCAL ECONOMY

Power-generation has long been a dominant county industry, with Duke Energy the county's top taxpayer and second largest private employer. Duke Energy alone accounted for 24% of TAV in fiscal 2012. The company's Crystal River Nuclear Power Plant, which currently employs about 275, is in the process of being shut down, a factor in the valuation dispute. Construction of a new natural gas power plant is planned, to be completed by 2018, which could create over 500 temporary construction jobs and under 100 permanent jobs when completed, partly offsetting the loss from the shutdown of the Crystal River nuclear facility.

The county's TAV has declined annually in recent years, with a total decline of 27% for fiscal years 2008 through 2013. For fiscal 2014, TAV was initially assessed at $10.2 billion (a 12.5% increase from fiscal 2013), but the figure was reduced to $7.5 billion (a 17% decrease from fiscal 2013) based on the impact of the Duke dispute. Future assessments will depend on the outcome of the Duke Energy litigation, but management expects modest base growth in the near term.

Healthcare is also an important economic sector, though to a lesser degree. Citrus Memorial Hospital is the county's largest private employer, with 1,400 employees. Seven Rivers Hospital is the third largest with over 500 employees. Although it has declined from 8.9% a year prior, the county's December 2013 6.8% unemployment rate remains above comparable state (5.9%) and national (6.5%) rates. County wealth and income indicators are below state and national averages.

LOW DEBT LEVELS

Debt levels are low at $747 per capita and 0.76% market value (MV) for fiscal 2012 and are likely to remain modest even with potential additional near-term issuance related to a county administrative building and road projects. Fiscal 2012 debt service as a percentage of governmental expenditures was low at 5.8%. Amortization of outstanding principal is above average, with about 62.5% maturing in 10 years.

The county provides pension benefits through the state-administered Florida Retirement System (FRS) and funds 100% of its required contribution. Pension costs were a low 2.9% of total governmental spending in fiscal 2012. The FRS funding ratio as of June 30, 2013 was 85.4% or 78.9% under Fitch's more conservative 7% discount rate assumptions. The county offers only an implicit subsidy for other post-employment benefits (OPEB) and funds the liability on a pay-as-you-go basis. The fiscal 2012 OPEB contribution was 0.5% of governmental spending. Total debt service, required pension contribution, and OPEB payment requirements were modest, at 9.2% of governmental spending.

Additional information is available at 'www.fitchratings.com'.

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=821820

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Maria Coritsidis, +1-212-908-0514

Analytic Consultant

Fitch Ratings, Inc.

One State Street Plaza

New York, NY 10004

or

Secondary Analyst

Michael Rinaldi, +1-212-908-0833

Senior Director

or

Committee Chairperson

Amy Laskey, +1-212-908-0568

Managing Director

or

Media Relations

Elizabeth Fogerty, +1-212-908-0526 (New York)

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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