In addition, Fitch downgrades to 'A-' from 'A' the ratings for the city of
The Rating Outlook is revised to Stable from Negative.
The bonds are limited obligations of the FMLC, payable solely from loan payments made by the city in an amount equal to debt service to the FMLC. The loan payments are secured by a pledge of the city's one-half-cent sales tax, Public Service Tax (PST) revenues, and Communication Services Tax (CST) revenues.
KEY RATING DRIVERS
REDUCED FINANCIAL FLEXIBILITY DRIVES DOWNGRADE: The downgrade of the implied GO rating to 'A-' reflects continued deterioration of the city's financial performance. General fund reliance on non-recurring revenues and subsidies to certain enterprise funds of the city, most notably its golf course and airport funds, have seriously restricted the city's financial cushion.
MANAGEABLE DEBT, ELEVATED CARRYING COSTS: Overall debt levels are moderate, and the city has no future debt plans. Annual debt service, pension costs, and other post-employment benefits (OPEB) contributions consume a relatively high share of governmental fund spending.
STRONG AND STABILIZING PLEDGED REVENUE COVERAGE: The 'A-' rating on the city's revenue bonds reflects still-strong coverage levels, which improved modestly in fiscal 2013 following several years of recessionary decline.
UNSUSTAINABLE FINANCIAL PRACTICES: Further financial deterioration and continued reliance on one-time revenues to sustain operations with continued enterprise dependency would lead to downward rating pressure; however, sustained balanced operations could lead to positive rating action.
CONTINUED WEAKENING OF FINANCIAL FLEXIBILITY
Unrestricted reserves, which Fitch considers an indicator of financial flexibility, have declined appreciably over the past several years, due largely to enterprise funds' reliance on the general fund for support. Declines would have been even greater without non-recurring support for the general fund from other funds.
From a high of
Over the past five fiscal years total reserves have increased, but an increasing portion is restricted for the city-owned golf course and airport enterprises.
INCREASING RELIANCE ON NON-RECURRING TRANSFERS
Operating surpluses (after transfers) in fiscal 2011 through 2013 were realized in large part by increases in non-recurring transfers from governmental and enterprise funds. In aggregate, these transfers represent
Expenditure reductions to date have been reported as moderate, including a soft hiring freeze and the deferment of capital projects. The city has indicated it retains some flexibility to reduce spending further without a material impact on service provision. Although the ability to raise additional revenues is somewhat more constricted, the city has indicated that it is considering a fire assessment fee, which could generate over
STABILIZING TAX BASE
Property tax revenues have been hit moderately by declines in the tax base. The city's TAV decreased by over 15% between fiscal years 2008 and 2013, declining each year save 2012, in which the addition of two hotels and a restaurant to the tax rolls offset tax base contraction. TAV declined in fiscal 2013 by a sizable 6.3%, though TAV increased by a modest .9% for fiscal 2014 with the addition of new commercial riverfront property.
Fitch is concerned that further property value declines may occur, given continuous, though moderated, declines in housing prices according to Zillow, despite the recent stabilization of assessed value. The ability to offset additional declines in TAV is limited both by the cap and the effect the rate has on affordability.
HEAVILY DEPENDENT GOLF AND AIRPORT FUNDS
Fitch views with concern the impact of the city's frequent use of general fund reserves to support golf and airport operations on overall financial flexibility. In fiscal 2012, the general fund advanced
Prospects for elimination of the golf course deficit appear minimal as progress towards reducing general fund support has been limited, and past considerations of selling the facility have ceased.
The airport fund requires operational and debt service support to a lesser extent than the golf fund, though dependence has increased in recent years. The general fund used a portion of reserves in three of the last five fiscal years to support airport operations, with advances of
UNFAVORABLE LONG-TERM SOCIO-ECONOMIC PROSPECTS
The city has a limited employment base, consisting mainly of local government, health care, and retail. The latter two are heavily represented among the city's top 10 taxpayers, which collectively represent an above-average 19.5% of the fiscal 2013 tax base. Economic development is limited, though the recent sale of city-owned riverfront property may lead to modest development.
Economic indicators are quite weak. Wealth levels are at least 50% below state and national averages. Since 2007, the population has declined modestly by 2.4%. Annual improvement in the unemployment rate over the past two years has been due to greater contraction in the labor force than the employment base. As of
Management attributes population losses to the high tax burden, which has led many residents to relocate just outside city limits. The combined millage rate of 25.078 per
MANAGEABLE DEBT, ELEVATED CARRYING COSTS
Annual expenditures related to debt service and retirement benefits were elevated at 20.4% of governmental fund spending in fiscal 2012, driven largely by increased pension funding.
Overall debt levels are low at 2.2% of market value (MV) and
Current funding for the city's three single-employer defined benefit pension plans and other post-employment benefits (OPEB) represents a notable cost pressure, as pension contributions accounted for a high 15% of governmental fund spending in fiscal 2013. Pension funding levels have improved, with two of the three plans estimated to be adequately funded, based on the 7% investment rate of return used by Fitch.
STRONG DEBT SERVICE COVERAGE
Revenue bond coverage from pledged tax revenues remains strong at 2.7x maximum annual debt service (MADS) in fiscal 2013, despite a weak revenue environment and the restriction of CST revenues by an interlocal agreement. Pledged revenues increased by a modest 2.2% in fiscal 2013, marking the first year of growth since fiscal 2008. Management reports that pledged revenues are performing better than budget for fiscal year 2014 to date, which is consistent with recently improved revenue performance overall.
Pledged revenues respond well to stress testing. Fiscal 2012 revenues could fall by another 49%, their cumulative decline since 2008, and still provide 1.4x MADS coverage.
There are no plans to leverage this revenue stream further. An additional bonds test requires 1.35x MADS coverage during any 12 consecutive months designated by the city within the 18 months preceding issuance of additional bonds. Fitch considers this a somewhat weak test.
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,
--'Tax-Supported Rating Criteria' (
--'U.S. Local Government Tax-Supported Rating Criteria' (
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
Source: Fitch Ratings
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