News Column

Fitch Affirms Leon County, FL's Capital Improvement Revenue Bonds at 'AA'; Outlook Stable

August 28, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has taken the following rating action on Leon County, Florida (the county):

-- Implied general obligation (GO) rating affirmed at 'AA+';

-- $41.4 million capital improvement revenue bonds series 2005 affirmed at 'AA'.

The Rating Outlook is Stable.

SECURITY

The capital revenue improvement bonds are secured by a combination of the county's portion of the half-cent sales tax as well as guaranteed entitlement revenues, second guaranteed entitlement revenues, and certain additional state revenue sharing funds.

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: The county's financial profile is characterized by prudent, forward-looking budgeting, high reserve levels, and strong liquidity supported by a demonstrated willingness to raise recurring revenues.

STABLE ECONOMY: The county's stable economy is supported by a large public sector presence including the state capitol and higher education. The economy continues to rebound from the recent slowdown, as exhibited by increasing permit activity and renewed positive growth in the tax base.

LOW DEBT BURDEN: The debt burden is expected to remain low given the county's rapid principal amortization, continued utilization of a one-cent local option sales tax for larger near-term capital projects, and prudent use of pay-go for the more minor capital projects.

GRADUALLY IMPROVING SPECIAL TAX COVERAGE: Coverage of maximum annual debt service (MADS) was an adequate 1.54x in fiscal year 2013 and continues to slowly increase as half-cent sales tax revenues post annual gains. MADS decreases substantially over the medium-term and the county has no further plans to leverage this revenue stream, which will also improve the coverage metric.

RATING SENSITIVITIES

SHIFT IN FUNDAMENTALS: The rating is sensitive to shifts in credit fundamentals. The Stable Outlook reflects Fitch's opinion that such shifts are unlikely.

CONTINUED ADEQUATE COVERAGE: The special tax bond rating could be pressured if coverage declines from current levels, which are considered just adequate.

CREDIT PROFILE

The county is located in the northwest Florida panhandle and is home to not only the state capitol of Tallahassee (implied GO rated 'AA' by Fitch; Outlook Stable) but also three institutions of higher education: Florida State University (FSU), Florida Agricultural & Mechanical University (FAMU), and Tallahassee Community College (TCC). The county's population in 2013 was 281,845.

STRONG FINANCIAL POSITION

Fitch believes the county's stable economy, conservative revenue assumptions, careful expenditure management, and historic trend of budget surpluses should support sound reserves over the longer term.

The county consistently exceeds its fund balance policy, which calls for unrestricted reserves in the general fund and fines and forfeitures fund (both recipients of the countywide property tax levy) to exceed 15% of combined spending in both funds. The county posted $44.4 million in unrestricted fund balance across both funds in fiscal 2013, a strong 32.7% of spending in both funds.

The county adjusted both revenues and expenditures to mitigate the impact of recessionary revenue pressure, yielding surplus operations in four of the last six fiscal years. Attrition, layoffs, and capital spending deferrals helped control expense growth. The county enhanced recurring revenues by implementing a five-cent gas tax, raising the property tax levy by 1.3% following three years of decline, and increasing storm water fees for the first time since 1990.

Fitch believes county projections for a fiscal 2014 (ending Sept. 30) modest budget deficit are somewhat conservative. Tax collection rates consistently exceed the state required 95% budgeted level and a large portion of delinquent property taxes are expected in August. As a result, combined unrestricted reserves will likely fall less than the minimal 9% reduction budgeted. The county's preliminary fiscal 2015 budget is balanced with another $4 million (about 4% of general fund spending) appropriation of fund balance.

STABLE ECONOMY ANCHORED BY STATE CAPITOL AND EDUCATION

A significant public sector presence continues to support stability in the regional economy. The unemployment rate has decreased to 5.8% as of June 2014 from 6.8% a year prior and remains below the state and at the national average. Employment has increased over the same period and outpaced labor force growth. The local housing market has not exhibited the same level of severe stress that has plagued many Florida communities. The county's tax base is projected to resume growth in fiscal 2015 following multiple years of modest losses. Wealth levels are slightly below-average reflecting the dominance of government employment and a large student population.

LOW DEBT, MANAGEABLE CAPITAL PROGRAM

Overall debt is low at $1,130 per capita or 1% of market value and no new debt is anticipated. Amortization is very rapid with nearly 90% of outstanding principal retired in 10 years. Its $78 million fiscal 2014-2018 capital improvement plan (CIP) is largely funded by a one-cent local option infrastructure sales tax and accumulated capital improvement funds. Annual general fund pay-go is expected to be between $2.5 to $3.5 million.

The county's contribution to the Florida Retirement System (FRS) is a manageable cost pressure at $7.9 million (3.5% of governmental spending) for fiscal 2013. Due to the state plan's relatively solid funded rate of 79% at fiscal yearend 2013, Fitch does not anticipate material contribution increases are over the near term. The county does not explicitly subsidize post-employment healthcare. The county recognizes a negligible unfunded actuarial accrued liability (UAAL) associated with retirees' participation in the county's healthcare plan at the group rate. Total carrying costs, including debt service and costs related to retirement benefits, are very low at 7.5% of governmental spending.

IMPROVING DEBT SERVICE COVERAGE

The pledged revenues are largely composed of the county's portion of the half-cent sales tax, accounting for 84% of pledged revenues in fiscal 2013. This revenue stream is projected to post 2.5% average annual growth through fiscal 2014. MADS coverage has increased from a low of 1.38x in 2010 to an adequate 1.54x in fiscal 2013, still below pre-recession levels. The additional bonds test is weak, requiring that pledged sales tax revenue during any 12 consecutive months of the 24 months immediately preceding the issuance of additional bonds must equal 1.35x MADS for all outstanding bonds.

The county has no plans to further leverage the pledged revenue and the stable economy and increasing development activity should support stable to growing coverage in the near term. Current MADS of $8.5 million falls to $7.6 million in 2018 and to $3.3 million in 2021 through final maturity in 2025. MADS coverage stands up well to a variety of stresses, with a high 38% year-over-year decline in pledged revenue required to reach 1.0x MADS coverage.

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, and Zillow.

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=860215

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, Inc.

Primary Analyst

Brendan Scher, +1-212-908-0686

Analyst

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Larry Levitz, +1-212-908-0174

Director

or

Committee Chairperson

Jessalynn Moro, +1-212-908-0608

Managing Director

or

Media Relations, New York

Elizabeth Fogerty, +1-212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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