News Column

Fitch Affirms West Melbourne, FL Revs at 'A+'; Outlook Stable

June 30, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'A+' rating on the following Florida Municipal Loan Council (FMLC) revenue bonds:

--$3.4 million series 2010D (city of West Melbourne) at 'A+'.

In addition, Fitch assigns an 'AA-' implied unlimited tax general obligation (ULTGO) bond rating to the city of West Melbourne, FL (the city).

The Rating Outlook is Stable.

SECURITY

The bonds are limited obligations of the FMLC, payable from payments equal to debt service made by the borrower, the city, pursuant to the loan agreement. Under the loan agreement, the city covenants to budget and appropriate (CB&A) in its annual budget, by amendment if necessary, an amount of non-ad valorem revenue to satisfy its loan agreement. Additional security is provided by a cash-funded debt service reserve fund equal to the IRS standard.

The issuer has assigned and pledged all of its right, title and interest in and to the loan agreement, including the right to receive loan repayments, to the trustee for the benefit of bondholders.

KEY RATING DRIVERS

SUBSTANTIAL FINANCIAL FLEXIBILITY: Ample reserve levels, significant legal capacity to increase revenues, and conservative budgeting underscore the city's strong financial profile.

NARROW ECONOMY: The primarily residential city has a thin commercial base. Wealth levels hover around regional and national averages.

LIGHT DEBT BURDEN: Limited capital needs and a lack of intermediate term financing plans will help support maintenance of a low debt burden. Pension and other post-employment benefits (OPEB) remain minimal.

COVENANT DEBT NOTCHING: A one-notch distinction in the rating on revenue bonds from the implied ULTGO reflects the debt service payments as subordinate to essential services spending and the inability to compel the city to generate non-ad valorem revenue sufficient to pay bondholders. Available non-ad valorem revenues for debt service are ample and stable.

RATING SENSITIVITIES

FUNDAMENTAL SHIFTS: The rating is sensitive to fundamental shifts in credit characteristics, including the city's sound financial management practices. The Stable Outlook reflects Fitch's belief that these shifts are unlikely.

CREDIT PROFILE

The city is located along the Atlantic coast in central Brevard County (implied ULTGOs rated 'AA', Outlook Stable by Fitch). The city is mainly residential and relatively small, encompassing 10 square miles with a population of 19,667.

GROWTH IN TAXABLE ASSESSED VALUE

The city's taxable assessed value (TAV) stabilized in fiscal 2013 after three consecutive years of significant declines. TAV is currently experiencing robust growth, increasing by 7.6% in fiscal 2014 and projected to grow an additional 7.9% in fiscal 2015. The city maintains substantial legal revenue raising capacity in its 2.3 millage rate, well-below that of the statutory 10 mill cap and very competitive in terms of neighboring areas.

Despite the termination of the space shuttle program at the Kennedy Space Center in July 2011, the aero-tech industry still serves as a driving force in the county as a whole. In addition to Lockheed Martin and other aerospace companies within city limits, the Brazilian aircraft manufacturer Embraer recently opened its first offshore manufacturing facility on the border of West Melbourne and the city of Melbourne, and Northrop Grumman is constructing a 220,000 square foot design center that will open in 2015, further supporting the industry's prominence and employment prospects in the county. As of April 2014, county unemployment had dropped to 6.3% from 7.8% just 12 months prior.

STRONG NON-AD VALOREM REVENUE AVAILABLE FOR DEBT SERVICE

Non-ad valorem revenues available to meet the city's CB&A requirement for debt service payments are broad, accounting for over three-quarters of total governmental revenues, totaling $2.3 million in fiscal 2014 compared to maximum annual debt service (MADS) of just $275,875. Non-ad valorem revenues are also very diverse, comprised mainly of mix of franchise fees, utility taxes, and state shared sales tax. The anti-dilution test governing additional debt issuance is viewed as reasonably rigorous, and the city's reliance on excess non-ad valorem revenue to fund general governmental operations serves as a practical limit on additional CB&A issuance.

SOLID RESERVE LEVELS

The city has maintained sound reserve levels and ample liquidity in recent years. Fiscal 2013 ended with an operating surplus after transfers of $1.2 million and an unrestricted fund balance equal to $5.85 million or a healthy 65.1% of general fund spending. Approximately $1.1 million of fund balance related to the long-term portion of a performing loan to the water and sewer fund and $2.5 million from the collection of gas tax revenues used exclusively for road projects was reclassified as restricted fund balance during the year.

The city has historically budgeted expenditures conservatively and has budgeted a deficit of about $800,000 for fiscal 2014, or approximately 8% of general fund spending. The deficit is due to one-time capital spending of $1.3 million on a community parks project and a new public works building. Despite the use of reserves in fiscal 2014 the city will far exceed its fund balance policy of 20% of spending in unassigned funds at year-end. Fitch believes that the city's sound management will continue to exhibit a willingness to maintain healthy reserves and liquidity going forward.

WELL-MANAGED DEBT POSITION

Overall debt is extremely low on a per capita basis at $453 and 0.67% of market value. Amortization is rapid with 70% of principal retired within 10 years. The city has no plans for intermediate term debt issuances.

General employees participate in the Florida Retirement System (FRS) that has a Fitch-adjusted funded ratio of 78.9% using a 7% rate of return. Members of the police department participate in the city's single-employer defined benefit police employees' pension plan (police plan).

To meet its near-term stated goal of achieving 80% funded status for the local police plan, the city has been contributing more than 100% of the annual pension cost. Due to the increased contributions, favorable market returns, and reduced benefits for new hires, the city's police pension plan's funded status has improved significantly from a Fitch-adjusted 48.3% on Oct. 1, 2009 to 70.1% on Oct. 1, 2013. The city OPEB obligation is an implied subsidy, and carrying costs for all debt and retiree benefits constitute a low 8.2% 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, and the 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=837157

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

Leslie Ann Cook

Analyst

+1-212-908-0507

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Larry Levitz

Director

+1-212-908-9174

or

Committee Chairperson

Mike Rinaldi

Senior Director

+1-212-908-0833

or

Media Relations

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

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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