News Column

Fitch Rates Palm Beach County, FL's GO Bonds 'AAA'; Outlook Stable

July 18, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AAA' rating to the following general obligation (GO) bonds of Palm Beach County, Florida (the county):

--$13.2 million GO refunding bonds, series 2014 (Library District Improvement Projects);

--$30.7 million GO refunding bonds, series 2014 (Waterfront Access Projects).

The GO bonds will be sold on a competitive basis on July 29, 2014. Proceeds will be used to refund portions of outstanding GO bonds for debt service savings.

In addition, Fitch affirms the ratings on the following outstanding bonds:

--$179.4 million general obligation (GO) bonds at 'AAA';

--$482.4 million non-ad valorem revenue bonds at 'AA+'.

The Rating Outlook is Stable.

SECURITY

GO bonds constitute general obligations of the county, for which its full faith, credit, and unlimited taxing power are irrevocably pledged for the payment of principal and interest. The library district improvement bonds are secured by an unlimited tax levied against all property within the library district.

The county's non-ad valorem revenue bonds are special obligations of the county, payable from its covenant to budget and appropriate (CB&A), by amendment if necessary, non-ad valorem (NAV) revenues. The availability of non-ad valorem revenues to pay debt service is subject to the funding of essential government services and obligations with a specific lien on non-ad valorem revenues. Such a covenant shall be cumulative to the extent not paid, and shall continue until all required amounts payable under the indenture have been paid.

KEY RATING DRIVERS

ADEQUATE BUT DIMINISHED FINANCIAL PROFILE: Finances have declined in recent years with projected results for fiscal 2014 bringing reserves down to the minimum balance of 15% of spending under the county's financial policies. Management expects to achieve fiscal balance in fiscal 2015.

SUSTAINED ECONOMIC RECOVERY: The area economy is experiencing a prolonged post-recession recovery which is now in its fourth year. Ongoing job growth and a rebounding housing market is expected to further boost tax base growth over the next two or three years.

MODERATE DEBT LEVELS: The county's debt burden is generally modest with direct debt rapidly amortized. Fitch expects debt levels to remain manageable given limited capital needs and bonding plans.

AMPLE NAV REVENUE BASE: NAV revenues represent a broad and diverse set of revenue streams which in aggregate provide adequate coverage of CB&A debt service requirements.

CB&A DEBT ONE NOTCH OFF GO: CB&A debt is rate one notch below the county's GO bonds due to the absence of a specific pledge and the inability to compel the county to generate NAV revenues sufficient to pay debt service.

RATING SENSITIVITIES

STRUCTURALLY BALANCED OPERATIONS: Fitch views the county's return to structural balance as planned in 2015 to be important to rating stability.

CREDIT PROFILE

The county, located along the southeast coast of Florida, is the largest county in the state, encompassing 2,228 square miles. With a population of nearly 1.4 million, the county contains 38 municipalities including the cities of West Palm Beach and Boca Raton.

DIVERSE ECONOMIC UNDERPINNINGS

The county's economy is supported by its traditional underpinnings of agriculture, tourism, government, healthcare, and aerospace supplemented by growing bioscience and higher education sectors. Leading employers include the Palm Beach County School Board, the county government, Tenet Healthcare Corporation, and Florida Power and Light. Florida Atlantic University (FAU) enrolls over 20,000 students on campuses within the county.

County employment fell by over 9% between 2007 and 2010 as a result of the recession but has consistently gained jobs since then. Employment growth in 2013 was over 3% and the pace of growth has endured throughout 2014. April 2014 jobs were up 3.9% year over year, dipping the unemployment rate down to 5.6%, below the state and national unemployment rates.

The county is experiencing a wave of new development, including office buildings and mixed use projects in the downtown urban areas and large residential projects in the suburbs. Other indicators of economic growth include building permit values which increased by 30% in fiscal 2013 and year to date were up again in fiscal 2014. Tourism has also rebounded strongly. Fiscal 2013 tourist development tax receipts were 6% higher than in the prior year and an additional 7% uptick in collections is estimated for fiscal 2014.

EMERGING BIOSCIENCE CLUSTER

The location of the Scripps Research Institute, a biomedical research firm, and Max Planck Florida Institute to the northern part of the county in connection with FAU has spurred the formation of a bioscience cluster that has attracted smaller bio-science firms to the area. Scripps is proposing to partner with nearby Tenet Healthcare to open a teaching hospital while Cancer Treatment Centers relocated to Boca Raton from Illinois in February 2014.

TAX BASE GROWTH ACCELERATES

An improved housing market has propped up the county's tax base. Following a 27% drop between fiscal years 2008 and 2012, taxable values stabilized in fiscal 2013 and have since trended up. Valuations grew by 4% in fiscal 2014 and jumped an additional 7% for upcoming fiscal 2015 valuations. Officials are projecting similar growth in assessed values over the next two or three years, a reasonable prognosis given recent economic trends.

REDUCED BUT SATISFACTORY FINANCIAL POSITION

Since fiscal 2008, officials have been challenged by sizable declines in taxable values which generate property taxes, the county's largest source of general fund revenues, and other economically sensitive revenues against its goal of maintaining government services. Management has responded by raising tax rates three times during this period, reducing the number of employees and other costs and tapping reserves.

Modest, planned general fund operating deficits have been reported in four of the past six fiscal years with an additional deficit projected for fiscal 2014. While reserve levels are diminished, they remain adequate and within the county's target range. Fitch believes that further deterioration of financial margins on a sustained basis would raise potential rating concerns.

FISCAL 2013 DEFICIT LOWER THAN FORECAST

The county reported a fiscal 2013 general fund net deficit of $17.7 million. The results were better than the projected $33 million drawdown at the time of our last review in September 2013 and the original budgeted use of reserves of $43 million. County budgets historically have been very conservative. Higher than anticipated sheriff fees, stronger sales tax and other revenue receipts combined with below-budget spending were the major drivers for the improved performance. The drawdown reduced unrestricted fund balance to $176 million or 17.2% of spending, within the county's targeted unassigned fund balance level range of 15% to 20% of general fund expenditures and transfers out.

RESTORATION OF FISCAL BALANCE BY FISCAL 2015

The fiscal 2014 budget projected a general fund drawdown of about $36 million. An across the board salary increase of 3% for most employees, higher costs for public safety operations and rising pension contribution requirements raised overall cost levels which were only partially balanced by revenue growth. Revenues did benefit from a 4% increase in taxable values, generating $24 million in additional revenues, plus growth in sales tax, utility tax and other major revenue sources.

Management is projecting an approximate $30 million general fund net deficit at fiscal 2014 year end with an unassigned fund balance of $144.9 million or 15% of spending. This places reserves at the low end of the county's fund balance target, although year-end actual results have tended to be better than the county's forecasts. Officials are projecting structurally balanced operations in fiscal 2015. Finances will benefit from a $20 million drop in debt service costs and a substantial uplift in property tax revenues stemming from the expanded tax base.

MODEST DEBT LOAD

Debt levels are moderate with a debt burden of 2%, or $2,485 on a per capita basis. About three-quarters of the county's direct debt consist of bonds secured by the county's NAV revenues. Amortization is relatively rapid, with 67% of principal retired within the next 10 years. The county's five-year capital improvement plan for fiscal years 2015-2019 identifies a modest $112 million of general government capital needs with most of those needs funded through bond issuances.

Debt levels are not expected to rise, as $366 million of outstanding principal is scheduled to mature over the next five years. Debt plans for fiscal 2015 includes a $58 million issuance for the convention center parking garage, secured by non-ad valorem revenues.

RETIREMENT OBLIGATIONS NOT A COST PRESSURE

The county participates in three pension plans. Most employees are members of the state-administered Florida Retirement System (FRS), which is relatively well-funded. The other two plans are small defined benefit and defined contribution plans: a plan covering firefighters from the Town of Lantana employed by the county (Lantana Plan) and the Palm Tran pension plan for members of the Amalgamated Transit Union (ATU) members. The Lantana Plan is adequately funded but the Palm Tran plan is underfunded at 65.8%, or an estimated 59.3% under Fitch's 7% return assumptions.

The county's contribution rates, established through negotiations with ATU, have been insufficient to cover plan benefits. A recent agreement between the county and the ATU requires the county to fund up the plan but reduces benefits for new employees and allows the county to determine benefits going forward. These changes are expected to provide future pension savings, according to officials. Overall pension costs are not a cost pressure, accounting for less than 5% of general government spending.

OPEBs are offered to retirees as an implicit subsidy with the exception of retirees from the Sheriff and Fire Rescue Union, who receive direct subsidies from the county. Consequently over 90% of the county's aggregate OPEB annually required contributions (ARC) derive from those two programs. Funding is on a pay-as-you-go basis and fiscal 2013 contributions constituted nearly one-third of the ARC requirements.

In addition, the county provides long-term disability benefits to retirees also funded on a pay-as-you-go basis. Combined unfunded actuarial accrued liability for the county's OPEB plans of $398 million represents a modest 0.2% of fiscal 2014 market value. Carrying costs, including debt service, pension contributions, and the OPEB ARC are manageable at less than 14% of general government spending.

EXTENSIVE AND DIVERSE NAV BASE

The county's NAV revenues include a broad mix of special taxes, license and permit revenues, fee income, and service charge revenues. While most NAV tax revenues are levied at the maximum or set rate, the large component of service charges and fees afford the county some flexibility in the ability to raise additional revenues. Overall NAV revenues have fluctuated over the past five years but were up slightly in fiscal 2013 and are projected to expand by 2% in fiscal 2014.

Fiscal 2013 NAV revenues totaling $376 million are sufficient to cover NAV-secured maximum annual debt service, even when essential services consisting of general government and public safety expenditures are taken into account. Coverage is expected to improve as annual NAV debt service costs decline sharply after fiscal 2015.

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 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=840509

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Fitch Ratings

Primary Analyst

Larry Levitz, +1 212-908-9174

Director

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Michael Rinaldi, +1 212-908-0833

Senior Director

or

Committee Chairperson

Arlene Bohner, +1 212-908-0554

Senior Director

or

Media Relations:

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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