News Column

Fitch Affirms Clay County, FL's Infrastructure Sales Tax Bonds at 'AA-'; Outlook Stable

August 29, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the following Clay County, Florida (the county) ratings:

-- $40.8 million infrastructure sales tax revenue bonds, series 2009 at 'AA-';

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

The Rating Outlook is Stable.

SECURITY

The infrastructure sales tax revenue bonds are secured by a pledge and lien upon the county's local government infrastructure sales surtax, a one-cent sales tax levied by the county. A cash-fund debt service reserve fund provides additional security.

KEY RATING DRIVERS

ULTGO RATING CAP: The sales tax rating is capped at the 'AA' implied unlimited tax general obligation (ULTGO) rating of the county which is supported by its proximity to the broad and diverse economy of Jacksonville (rated 'AA+'; Outlook Stable by Fitch). The unemployment rate has improved, and population growth remains healthy.

SOUND RESERVES: General fund reserves and liquidity are consistently ample. Conservative financial management and planning allows the county to regularly outperform budget despite recessionary revenue pressures.

FAVORABLE LIABILITIES BURDEN: The county's overall debt and carrying cost burden is very low, strengthened by rapid principal amortization, manageable capital needs, and affordable long-term liabilities.

ADEQUATE COVERAGE SUPPORTS REVENUE RATING: The 'AA-' infrastructure sales tax revenue bond rating is supported by Fitch's expectation that debt service coverage will remain adequate. Coverage increased modestly in fiscal 2013 compared to the prior year, and is projected to remain level for fiscal 2014. Infrastructure sales surtax collections have increased in each of the two prior fiscal years and are up moderately year-to-date in fiscal 2014.

RATING SENSITIVITIES

STRONG FINANCIAL PROFILE: The ULTGO rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices as exhibited by healthy reserve levels. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

SALES SURTAX BONDS: The rating on the infrastructure sales tax bonds is sensitive to declines in debt service coverage and material shifts in the ULTGO rating, given the cap. The Stable Outlook reflects Fitch's expectation that coverage levels will remain adequate.

CREDIT PROFILE

Clay County is located in northeastern Florida along the St. Johns River approximately 30 miles from the city of Jacksonville. The county's 2013 population of 196,399 has grown significantly over the last decade, spurred by economic activity in Jacksonville.

ECONOMY BENEFITS FROM PROXIMITY TO JACKSONVILLE

The county is primarily a residential community located within the greater Jacksonville area. Historically based in mining and dairy agriculture, more recent activity in real estate, wholesale and retail trade and light industrial firms have added some diversity to the local economic profile.

County wealth levels are mixed, with per capita personal income 87% and 82% of the state and national medians, respectively. On a median household income basis, county indicators are well above state and national averages at 126% and 112%, respectively. Unemployment continues to recover, with the 5.3% May 2014 rate well below the 6.3% rate of the prior July and lower than the state and national rate of 6.1%. Employment increased by a strong 4.4% during that period, beating both the state and nation at 2.9% and 1.4%, respectively.

Fitch is optimistic about the county's long-term prospects for tax base growth. The county has experienced steady population growth over the past decade, increasing 39.5% since 2000, but moderating in recent years. The recently completed St. Vincent's Hospital provides over 400 jobs to the community and is currently planning further development. Construction of the first part of the First Coast Outer Beltway, a proposed four-lane roadway, is currently underway. The Outer Beltway will pass through the county, further improving access to Jacksonville and northeast Florida.

The county experienced steady declines in assessed value (AV) between the peak in fiscal 2008 and fiscal 2013, decreasing a total of 26%. The tax base grew in fiscal 2014 by 2.1% due to an improved housing market and the addition of new taxable property. AV posted moderate growth of 4.4% for fiscal 2015, with tempered positive momentum expected in future years. The county has moderate revenue raising ability, with a 7.851 millage rate, below the 10 mill cap. The proposed fiscal 2015 budget recommends an increase to 8.458 mills, leveraging some flexibility while remaining regionally competitive.

PRUDENT MANAGEMENT MAINTAINS AMPLE RESERVES

Consistent and healthy reserves and solid liquidity are hallmarks of the county's sound financial management. Unrestricted general fund balance levels have consistently been higher than 20% of spending, bolstered by a history of positive operations.

Fitch notes some pressure from reduced revenues due to the economic downturn and housing correction. Despite these pressures the county has actively managed spending to yield budgetary surpluses in recent years. After budgeting for the use of $5 million (11.2% of spending) in general fund balance in fiscal 2013, the county concluded the fiscal year with a modest operating surplus after transfers of $427,000. The unrestricted general fund balance increased to $28.2 million, or an ample 32% of general fund spending. Careful departmental spending control and expenditure savings from the use of outside services contracts were principally responsible for the favorable results.

The county's fiscal 2014 budget calls for similar results as fiscal 2013 with the use of approximately $6.6 million (22% draw) in reserves across the general, fine and forfeiture and law enforcement MSTU funds, which encompass the county's personnel spending. The fiscal 2015 budget as introduced shows a slight budget surplus for fiscal 2014. Management expectations for further budget surplus by year-end appear reasonable given the county's history of conservative budgeting and favorable year-end results. Fitch expects fund balance levels to remain robust.

Revenues for the general and MSTU funds are budgeted to increase by 13% in fiscal 2015 over budgeted 2014 due to increases in the general, fine and forfeiture, and law enforcement MSTU fund tax rates, increasing the county's direct tax rate from 7.851 to 8.458 mills. The tax rate increase will fund the creation of 14 state-required positions and law employee raises.

The county has historically budgeted to use a significant amount of reserves, since according to state law, reserves cannot exceed 10% of budget, and the county is required to budget revenues at 95% of expected collections. The county has consistently exceeded budget due to conservative expenditure budgeting and on-going monitoring throughout the year. Fitch believes the county retains a fair amount of expenditure flexibility, allowing it to reduce spending further if needed.

WELL-MANAGED LONG-TERM OBLIGATIONS

Overall debt equals a low 0.7% of market value (MV) and $472 per capita. Amortization is exceptionally rapid with 100% of principal retired in the 10 years. The infrastructure sales surtax revenue bonds make up the majority of the county's debt and retire in 2018. Fitch notes that the county has no exposure to variable-rate debt or derivatives.

The county's fiscal 2014-2018 capital improvement plan (CIP) totals a modest $23.2 million, excluding debt service payments. The CIP is fully funded through prior year carry-over balances and sales tax revenues. The county has no plans for additional debt issuance. The one-cent sales tax expires on Dec. 31, 2019, at which time the county may need to find alternative sources of revenue for capital funding.

Pension and other post-employment benefits (OPEB) obligations do not pressure the credit. Employees participate in the state administered Florida Retirement System (FRS). The county's fiscal 2013 annual required contribution (ARC) was $6 million, or 4.3% of governmental fund spending. The county administers an OPE) plan, and continues to fund it on a pay-as-you-go basis, contributing $848,000 (0.6% of governmental fund spending) in fiscal 2013. Management has no plans to develop a trust at this time, and will continue to fund the OPEB plan on a pay-as-you-go basis in the future. Total carrying costs, including debt service, pension ARC, and OPEB contributions, equaled a low 12% of governmental fund spending in fiscal 2013.

DEBT SERVICE COVERAGE REMAINS SUFFICIENT

The one-cent infrastructure sales surtax was approved by voter referendum in 1989, extended in 1998 and set to expire in 2019. The tax is levied on the same tax base as the state sales tax but applies only to the first $5,000 of each item sold excluding long distance telephone service.

Infrastructure sales tax revenues fell significantly in fiscal 2009 and more modestly in fiscal 2010 due to recessionary pressures. Since fiscal 2010, collections have exhibited moderate but steady growth. Sales tax revenues through the first nine months of fiscal 2014 are up 3.6% from the prior year. Management projects modest sales tax growth for future years as retail activity continues to rebound.

Fiscal 2013 infrastructure sales tax collections provide satisfactory maximum annual debt service (MADS) coverage of 1.57x increasing from 1.51x in fiscal 2012. Fiscal 2014 projected collections for the year would cover debt service by 1.55x. Debt service is essentially level, and Fitch expects debt service coverage to remain stable given the county's lack of additional debt plans and improving tax collections.

Legal provisions are sound. The additional bonds test requires a weak 1.35x MADS coverage to issue additional debt. Fitch believes additional issuance is highly unlikely, given the 2019 expiration. The debt service reserve fund is standard and cash funded.

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.

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=861435

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

George M. Stimola, +1-212-908-0770

Analyst

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Larry Levitz, +1-212-908-9174

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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