News Column

Fitch Affirms Tampa, FL's Sales Tax Revs at 'AA'; Outlook Stable

August 13, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the following ratings on bonds of the city of Tampa, Florida (the city):

--$47.6 million sales tax revenue bonds at 'AA';

--$24.9 million utilities tax and special revenue refunding bonds series 2001B (senior lien) at 'AA';

--$186 utilities tax bonds (junior lien) at 'AA-';

--$45.7 million occupational license tax refunding bonds, series 2007 at 'AA-';

--$19.2 million taxable non-ad valorem revenue bonds, series 2011 at 'AA-';

Implied general obligation (GO) rating at 'AA'.

The Rating Outlook is Stable.

SECURITY

The sales tax bonds are secured by the city's share of a voter-approved one-half-cent sales tax called the local option community investment tax (CIT).

The utilities tax and special revenue refunding bonds are secured by and first payable from tax increment revenues (TIR) derived from two community redevelopment areas within the city and to the extent tax increment revenues are insufficient, a senior lien and pledge of utilities services tax revenues.

The utilities tax bonds (junior lien bonds) are secured by a lien and pledge of the utilities services tax, subject to the prior payment of the city's outstanding senior lien bonds.

The taxable non-ad valorem revenue bonds and the occupational license tax (OLT) revenue bonds are secured by the city's covenant to budget and appropriate (CB&A), by amendment if necessary, legally available non-ad valorem (NAV) revenue in an amount sufficient to pay debt service. The OLT revenue bonds are initially secured by a pledge of the city's OLT revenue, derived from a business tax imposed throughout the city.

KEY RATING DRIVERS

HEALTHY RESERVES DESPITE DRAWDOWNS: The 'AA' implied GO rating reflects the city's solid financial position, despite drawdowns of reserves in each of the past three fiscal years, with a modest operating deficit projected for fiscal 2014. Available reserves are maintained well above the city's minimum target of 20% of combined general fund and utilities services tax fund spending.

STRENGTHENED ECONOMIC CLIMATE: Tampa remains the hub of economic activity for Florida'sGulf Coast. The local economy continues its recovery, as evidenced by rapid job growth, extensive development activity and a revived housing market.

TAX BASE SHIFTS UPWARD: Taxable values have reversed prior losses with two consecutive years of substantial growth. Fiscal 2015 certified assessed values are up 6.9% following a 6.5% gain for fiscal 2014. The recent growth only partially restores losses in previous years.

WIDE SALES TAX DEBT SERVICE COVERAGE: The 'AA' rating on the sales tax bonds, on par with the implied GO rating reflects strong maximum annual debt service (MADS) coverage of nearly 3.0x in fiscal 2013, absent any plans to further leverage the pledged revenue stream coupled with an adequate additional bonds test (ABT), and the broad countywide sales tax base from which pledged revenues are derived.

TIR ADDS TO SENIOR BOND COVERAGE: The 'AA' rating on the senior lien utilities tax bonds primarily reflects the strength of the senior pledge of utility service tax revenue. While the initial pledge of tax increment revenues covered 94% of debt service in fiscal 2013, the combined TIR and utilities services tax revenues provided a notably high 5.2x coverage of senior lien bond debt service. The senior lien is closed and all senior bonds are retired by 2015.

WIDE MARGINS OFFSET REVENUE VOLATILITY: The 'AA-' rating on the junior lien utility tax bonds reflects strong coverage offset somewhat by a weak 1.25x ABT. Fiscal 2013 utility taxes totalled 2.6x maximum annual debt service (MADS) on junior lien utilities services tax bonds which offset recent volatility in tax collections.

ONE-NOTCH RATING DIFFERENTIAL: The 'AA-' rating on bonds secured by net asset value (NAV) revenues is one notch below the implied GO rating due to the absence of any requirement to raise revenues to pay debt service and the mandate that essential services and any debt secured by specific NAV revenue must be paid before CB&A debt service. OLT bonds benefit from an initial pledge of OLT revenues, which historically has been sufficient to pay OLT debt service costs.

RATINGS CAPPED AT GO: The 'AA' implied GO rating serves as a cap for the city's other rated bonds.

RATING SENSITIVITIES

ACHIEVEMENT OF FISCAL BALANCE: The rating reflects Fitch's expectation that the city will return to fiscally balanced operations by fiscal 2015. Results that vary significantly from this expectation could lead to negative rating pressure.

FINANCIAL STABILITY COULD LIFT RATINGS: Reestablishment of balanced financial operations combined with further economic growth could lead to upward movement in the ratings.

DILUTION OF DEBT SERVICE COVERAGE: Depletion of coverage margins on any of the city's revenue bonds could pressure the ratings on those bonds.

CREDIT PROFILE

Tampa is situated on the west coast of Florida in Hillsborough County (the county) and serves as the county seat. Encompassing 116 square miles, the city is the third largest in the state by population with an estimated 352,957 residents as of 2013. Mostly built out, population growth over the past decade has been modest but steady, averaging about 1% annually.

RECENT DEFICIT OPERATIONS

Since fiscal 2010, the city has been utilizing its sizable reserves to offset declines in property tax revenues and ongoing spending pressures. The city reported operating deficits for the combined general fund and utilities services tax fund (the city's operating funds) in each year between fiscals 2011 and 2013, reducing operating fund balance by $45.2 million or 26%.

At the time of Fitch's last review in September 2013, management projected a small year-end general fund deficit of $5.5 million. The actual drawdown was considerably larger at $16 million or 4.8% of spending. Combined with an operating deficit in the utilities services tax fund of $5.6 million, the reduction in operating fund balance was nearly $22 million or 6% of spending. Most of the discrepancy was attributable to unrealized gains or losses in the city's investment, which officials do not expect given market interest rate volatility. Furthermore, the city's switch from a two-week to a one-week pay cycle resulted in additional expenditures for fiscal 2013 because of the timing change.

FINANCIAL RESERVES REMAIN ROBUST

Fiscal 2013 unrestricted operating fund balance at $77.3 million represents 21.5% of spending, down from 35.1% in fiscal 2012. However, unrestricted reserves are understated as $48 million of utilities services tax fund balance assigned for general government operations was reclassified in fiscal 2013 as restricted. The reclassification does not affect how these monies can be used and these reserves remain available for general government purposes. Without the reclassification, unrestricted fund balance would be maintained at the fiscal 2012 level of 35% of expenditures. City officials regard the reserves in the utilities services tax fund as part of the city's unassigned fund balance.

The fiscal 2014 budget incorporated a $7.8 million increase in property taxes to help balance an across the board 2% pay raise and higher pension contributions. A modest operating funds deficit of $7.5 million was projected. Based on actual results to date, officials predict an $8.7 million use of reserves. Utilities services taxes, red-light camera revenues and electric franchise fees are forecast to come in moderately below budget, offset by below-budget spending. Despite the drawdown, reserves will remain well above the city's minimum reserve policy level of 20% of expenditures

The proposed fiscal 2015 budget is balanced with a projected $5.9 million deficit in the general fund offset by a $6.5 million surplus in the utilities services tax fund. The improved economic environment is anticipated to grow revenues, especially property taxes and other sales-related revenue streams. A planned 2.5% wage hike will be partly covered by lower pension contribution requirements as a result of large pension fund investment gains.

DIVERSE SERVICE AREA; LOCAL EMPLOYMENT PICKS UP

Tampa serves as an economic hub for the regional economy. Leading employers include the Hillsborough County School Board, MacDill Air Force Base (AFB), Hillsborough County government and Tampa International Airport.

The local economy, hit hard by the recession, continues its brisk expansion. Since 2010, employment within the city has grown by 10% or over 13,000 jobs, pushing the 2013 unemployment rate down to 7.7% from 9.3% the year before. The job expansion has continued into 2014. April 2014 employment was up a healthy 3.1% over April 2013 levels, matching the pace of job growth within the state but at more than twice the national rate. The April 2014 unemployment rate of 6.0% was just above both the state and national benchmarks.

Housing is also experiencing a sustained recovery. June 2014 housing values are up by over 13% over prior year values according to Zillow.com. Since November 2011, housing values have grown by 47% but remain well below pre-recession peak valuations. The growth in housing and other favorable economic trends is reflected in recent movements of taxable assessed values. Fiscal 2015 valuations represent the second consecutive year of tax base growth, reversing a five-year decline in taxable values totaling a cumulative 28%. The two-year gain of 14% was driven almost exclusively by the rising level of residential valuations, which represent almost half of all values. Sizable residential and commercial activity, including six large residential projects and several new hotels, signal vigorous local economic activity for the near- and medium-term.

MODERATE DEBT LOAD

Debt levels are manageable, with overall debt at 2.5% of current market value and $2,207 per capita. The city has no GO bonds outstanding. Debt service carrying costs based on total governmental expenditures are moderate despite rapid principal amortization. Approximately 72% of principal is retired within the next 10 years.

The city's capital needs are relatively modest with proposed funded non-enterprise fund capital projects totaling about $130 million over the next five years. Most of the projects are funded on a pay-go basis. No long-term debt is planned for the next two years although the city may issue short-term debt during fiscal 2015 to initially fund certain infrastructure projects.

MANAGEABLE RETIREMENT OBLIGATIONS

City employees participate in one of two city-sponsored pension plans: the general employees retirement fund, which includes most employees, and the firefighters and police officers pension fund. According to recent reports, both plans report high funding levels at 98.9% for the general employees plan and 92.5% for the firefighters and police officers plan. Under Fitch's more conservative discount rate assumption of 7%, these estimated funding ratios are reduced to a still strong 89.1% and an estimated still adequate 74.6%, respectively.

The firefighters and police officers' plan uses an unusually high investment return assumption of 10%, exacerbating the funding decline under Fitch's 7% scenario. Officials had indicated that the firefighters and police officers' plan discount rate assumption would drop to 8.5% for fiscal 2012 reporting, but maintained the rate at 10%.

The city's pension contribution requirements are manageable, accounting for about 9% of fiscal 2013 governmental spending. This is due in part to state contributions to the firefighters and police officers fund, which modestly reduce the city's funding obligation. For retiree health care benefits, the city provides an implicit subsidy by allowing retirees to participate in the city's medical and prescription drug coverage plan at the group rate. The plan is funded on a pay-go basis and the city has not created a dedicated OPEB trust fund. The plan's fiscal 2013 OPEB unfunded actuarial accrued liability of $55.5 million is comparatively modest, representing less than 0.2% of the city's market value.

CIT REVENUES UP FOR THIRD STRAIGHT YEAR

Fiscal 2013 sales tax bond debt service coverage is robust at 2.9x MADS. CIT collections have grown in each of the past three fiscal years after a 19% drop between fiscals 2006 and 2010. CIT growth since fiscal 2010 totals 10.9%. Based on year-to-date distributions, officials project a sizable increase in fiscal 2014 of about 7%.

A 1.5x MADS ABT protects against over-issuance. The series 2006 bonds have a surety-funded debt service reserve fund (DSRF). The series 2010 sales tax bonds do not include a DSRF, which Fitch does not consider to be a concern given the wide levels of coverage and absence of plans for additional leveraging.

UTILITY TAX BONDS COVERAGE REMAINS AMPLE DESPITE DROP

Debt service coverage of both senior and junior utilities services tax bonds remains robust despite 6% declines in utilities services tax collections in two of the past three fiscal years. While the taxed utilities include essential services such as electricity, telecommunications and water, collections are subject to changes in demand or rates charged for those services. Recent downturns were partly due to rate reductions and local weather conditions, which respectively dampened the use of electricity in fiscal 2011 and reduced water usage in fiscal 2013. Based on year-to-date collections, utilities services tax revenues are forecast to increase by about 6% in fiscal 2014.

Senior bond debt service is over 90% covered by TIR, although these revenues have fallen significantly since fiscal 2009. Remaining senior bond debt service, which totaled less than $1 million in fiscal 2013, and junior lien debt service are amply covered by utilities services tax revenues by over 7.0x. Coverage of MADS on the junior lien debt, which occurs after the senior bonds terminate in fiscal 2015, remains healthy at 2.6x. Legal provisions are considered somewhat weak with a springing reserve if coverage falls below 1.25x and a 1.25x ABT. Use of residual revenues for operations serves as a practical limit on additional bond issuance.

BROAD NAV REVENUE BASE, STRONG COVERAGE

The city's NAV revenue base is broad and diverse, including locally sourced sales-based revenues, state revenue-sharing funds, service charges and license and permit fees. In fiscal 2013, no individual revenue source constituted more than 16% of total NAV revenues. Revenues have fluctuated in recent years; however, in fiscal 2013 increased utility revenue transfers were offset by significantly lower interest earnings.

Occupational license tax revenues provide more than adequate coverage on occupational license tax bonds without additional NAV revenue support; in fiscal 2013 these revenues covered fiscal 2013 debt service by nearly 1.6x. NAV revenues are ample in relation with CB&A debt service, even when general government and public safety expenditures and prior lien debt service are taken into account. Anti-dilution tests limit additional NAV bonds.

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=850754

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

Larry Levitz

Director

+1-212-908-9174

Fitch Ratings, Inc.

33 Whitehall Street

New York, N.Y. 10004

or

Secondary Analyst

Andrew Hoffman

Analyst

+1-212-908-0527

or

Committee Chairperson

Karen Ribble

Senior Director

+1-415-732-5611

or

Media Relations:

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

Email: elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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