News Column

Fitch Affirms Fort Myers, FL Ratings

February 5, 2014

NEW YORK --(BUSINESS WIRE)-- Fitch Ratings affirms the ratings on the following bonds of the city of Fort Myers, Florida (the city): -- $83.7 million improvement revenue bonds at 'AA-'; -- $8.8 million gas tax revenue bonds series 2004A at 'A+'; --Implied general obligation (GO) at 'AA-'. The Rating Outlook for the implied GO and improvement revenue bonds is Negative. 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 concern about the city's financial profile and the pressures posed by rising pension costs. PENSION BURDEN A CONCERN: The city's pension liability is expected to remain very large despite recent efforts to curb employee benefits. MODERATE DEBT LOAD: 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. LIMITED TAX RATE MARGIN: The city's tax rate is relatively close to the statutory cap, although efforts are underway to add non-ad valorem revenues. TOURISM DEPENDENT ECONOMY: Economic activity is mainly driven by tourism activity, retail, and real estate; the city therefore is 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) of 2.4 times (x). The one-notch rating differential reflects the different pledged revenue 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 Negative. RATING SENSITIVITIES IMPROVEMENT IN FINANCIAL PROFILE: Rating stability is predicated on further steps by the city in fiscal 2015 to restore structural budgetary balance and the maintenance of adequate reserve levels. Failure to restore structural balance to ensure maintenance of these reserves will lead to negative rating action. 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 is 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', Stable Outlook) 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. WEAK PENSION FUNDING Of paramount concern to Fitch is the city's very weak pension funding levels. The firefighter, police, and general employee plans funding levels (unadjusted) as of Oct. 1, 2013 were 56%, 52% and 58%, respectively. Fitch considers a funded ratio below 60% as weak. The 2013 combined unadjusted unfunded actuarial accrued liability (UAAL) totaled $175 million or a high 3.1% of market value (MV). On a positive note, the city continues to fully fund the 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 fiscal 2007 to $20.8 million in fiscal 2013. Combined with debt service of $12.6 million and the cost of funding other post-employment benefits (OPEB), the city's long-term liabilities consumed a very high 33.6% of total governmental fund spending in fiscal 2013. The city is undertaking pension reform efforts that are designed to generate near-term spending relief and reduce the benefit burden over time. Modifications to the general employees' pension plan were adopted in September 2012 . Disputes regarding the police union's contract which delayed pension reform were recently resolved, and reduced costs for the police pension are expected to be implemented in early April. Firefighter contracts expire at the end of fiscal 2014 and pension reforms will be part of the negotiations. NARROWING GENERAL FUND RESERVES Fiscal 2012 results included a $1.6 million operating deficit (after transfers) in the general fund, equal to 1.9% of spending. The unrestricted fund balance of $21.6 million was a healthy 25.3% of spending. In fiscal 2012 the general fund relied on $15 million in transfers from the water-wastewater, solid waste and internal service funds (ISFs), including an increased transfer from the risk management fund for operations. Unaudited results for fiscal 2013 indicate a $2.3 million general fund operating deficit; with transfers, the total reduction in fund balance is $3.5 million . Transfers in were $13.4 million , still high but with a slight reduction in transfers from the ISFs. The preliminary unrestricted fund balance of $21.6 million is an adequate 21.2% of spending. The fiscal 2014 general fund budget appropriates about $5.3 million in reserves, a slightly higher amount from the preceding fiscal year. Real property taxes, the dominant revenue source, grew modestly in the fiscal 2014 budget due to a 3.5% increase in real property assessments. The ad valorem tax millage rate of 8.7760 mills is the same as prior year. Transfers to the general fund from the risk management fund are budgeted to draw down the balance in that fund to $5.5 million (from $12.3 million at the close of fiscal 2011). The city indicates a $5.5 million balance is the minimum level required in the risk management fund to cover loses. By exhausting available reserves in this fund, the city is further limiting its flexibility. General Fund expenditures are budgeted at $85.3 million , an increase of $1.1 million or 1.3% from the prior year budget. Personnel cost increases of $3.4 million are driven by a 3% wage reinstatement and pension plan increases of $2.3 million . City officials indicate the pension contribution is based on full employment and the actual number is expected to be lower. For the first time the city is budgeting expenditure savings ( $1.5 million ) to reflect savings from attrition or employment turn over. The further narrowing of reserves expected in fiscal 2014 heightens the need for the city to close its budgetary gap. The recurrent use of reserves and other one-time sources to balance the budget is unsustainable and a serious credit concern. To address the imbalance, the city is pursuing a fire assessment fee for fiscal 2015 to be billed with property taxes; the fee would generate approximately $3.5 million annually. Since the current tax rate of 8.776 mills leaves little room under the 10-mill statutory cap, expansion of non-ad valorem revenues is critical. Adequate reserves are a key mitigant to concerns regarding the city's limited, tourist based economy and growing fixed cost burden. Failure to restore structural balance to ensure maintenance of these reserves will lead to negative rating action. IMPROVED EMPLOYMENT AND TAX BASE PERFORMANCE Economic indicators are showing signs of a moderate recovery. The economic base is dependent on tourism, and passenger traffic at Southwest Florida International Airport as of June 3013 is up 4% from the prior year. The city has experienced modest job growth annually since 2010. Unemployment has shrunk from a peak of 12% during the summer of 2010 to 6.3% in October 2013 . However, city wealth levels are low. The median household income is only 70.8% of the U.S. median, and the poverty rate is a high 25.2%. The Fort Myers housing market and tax base are beginning to show evidence of a turnaround after being hit exceptionally hard during the recession. The city's taxable assessed value (TAV) increased 3.5% for fiscal 2014 after dropping 42.3% from fiscal years 2008-2014. The Zillow home value index was up 14.8% in 2013, suggesting that fiscal 2015 TAV will show further improvement. COVERAGE REMAINS STRONG Unaudited fiscal 2013 coverage of MADS on both the gas tax and improvement revenue bonds remains sound at 2.4x. Pledged gas tax revenues were essentially unchanged in the most recent year and pledged improvement revenues showed modest growth. Additional leveraging is not expected. 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=819672 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: Patricia McGuigan , +1-212-908-0675 Director 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: Steve Murray , +1-512-215-3729 Senior Director or Media Relations: Elizabeth Fogerty , +1-212-908 0526 elizabeth.fogerty@fitchratings.com Source: Fitch Ratings


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