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HomeMy WebLinkAbout2011 03 28 Informational 101 Review of 2011 Fitch Rating - General Fund Revenue BondsCOMMISSION AGENDA ITEM 101 March 28, 2011 Regular Meeting Consent Informational X Public Hearing Regular MGR. /DEPT. Authorization REQUEST: The City Manager and Finance Department would like to make available for review by the City Commission the 2011 Fitch Ratings affirmation of the City's AA rating on the $11.8 million dollars of General Fund Revenue Bonds. SYNOPSIS: Fitch Rating in a routine surveillance has affirmed its AA: Very high credit quality rating for the City of Winter Springs General Fund Revenue Bonds. 'AA' ratings denote expectations of very low default risk. It indicates a very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events. The Primary reasons Fitch site for the affirmation of its rating is a strong debt coverage ratio, strong financial management and robust fund balances. CONSIDERATIONS: There are three primary credit rating agencies in the US; Standard and Poor's, Fitch Ratings and Moody's. These three credit rating agencies are responsible for reviewing and assigning a standard rating based on a scale that depicts an organization's (public and private) ability to repay their bond issues. Individual and institutional investors rely on these ratings to determine the level of credit risk inherent in the bond issuer. Fitch's rating system can be broken into two major categories. First are the top quality investment grade bonds which range from AAA to BBB. The second is what some people have categorized as "junk bonds ". These ratings would be in the range of BB to C. Bonds that carry a superior rating, such as Winter Springs Bonds, are highly desired by most investors because of the very high probability that the investor will realize his /her anticipated investment returns. Maintaining this very high credit rating will assure that if the City should require additional bonding in the future there will be a large group of willing investors to purchase our debt at comparably lower than average market cost. FISCAL IMPACT: It is difficult to assess the exact impact of such a strong credit rating in the near future. However, in a market such as we are in today, it is obvious that both institutions and individual investors still have a strong appetite for Winter Springs Debt. This was recently demonstrated when we went to the market for funding the "Reclaimed Water Project" and three major investors step forward and competed for the right to finance the project. COMMUNICATION EFFORTS: This Agenda Item has been forwarded to the Mayor and City Commission; City Manager; City Attorney /Staff, placed in Press Packets; placed in the City Hall (Lobby) City Commission Meeting binder; and will be available on the City's Website, LaserFiche, and the City's Server. Additionally, information related to this Agenda Item has been sent to media /press representatives who have requested Agendas /Agenda Item information, all Homeowner's Associations on file with the City, all individuals who have requested Agendas /Agenda Item information, Department Directors; and also posted outside City Hall; posted inside City Hall with additional copies available for the general public; and posted at five (5) different locations around the City. RECOMMENDATION: Staff recommends that the City Commission review and accept the information in this agenda item. ATTACHMENTS: Fitch Ratings Press Release Fi*tchRatiengs FITCH AFFIRMS WINTER SPRINGS, FLvS IMPROVEMENT REVS AT'AA'; OUTLOOK STABLE Fitch Ratings -New York -10 March 2011: In the course of routine surveillance, Fitch Ratings takes the following rating actions on Winter Springs, FL (the city): - -$11.8 million improvement revenue bonds affirmed at 'AA'; -- Implied general obligation (GO) affirmed at 'AA'. The Rating Outlook is Stable. RATING RATIONALE: - -The 'AA' rating on the improvement revenue bonds reflects the city's general credit characteristics, very strong debt service coverage and lack of additional leveraging plans. - -The 'AA' implied GO rating reflects the city's strong financial management, with surplus results generally recorded in the general fund and robust fund balance levels. -- Pension funding levels are very weak, and pension contributions continue to assume an increasingly large share of budget resources. - -Debt levels are expected to remain low, given the absence of additional issuance plans and above average amortization of outstanding principal. -- Winter Springs serves as a bedroom community for Orlando, FL; residents exhibit above - average educational attainment and income characteristics. KEY RATING DRIVER: -- Sustained financial flexibility by a continued demonstration of conservative budgeting and expenditure controls. - -The city's ability to accommodate increasing budgetary pressure resulting from rising pension costs. SECURITY: The bonds are payable from and secured by a first lien upon and pledge of the franchise fees levied and collected by the city from the Florida Power Corporation, the public service tax levied and collected by the city on purchases of electricity, metered or bottled gas, and water service within the corporate limits of the city, and the tax imposed by the city on communication services. The current franchise with the power company expires in 2014, prior to the final maturity of the bonds. CREDIT SUMMARY: Located in central Florida, Winter Springs is largely residential with many residents commuting to Orlando, which is located 13 miles away. The Orlando MSA has a broad, diverse economy with business and professional services, health care, and education sectors, in addition to the area's traditional concentration in tourism. Unemployment for the city has decreased to 9.4% in December 2010 from 10% a year prior, and remains below the state and slightly higher than the nation. While the current economic downturn has had a concentrated effect in Florida, Fitch believes the diversity and solid foundation of the area's economy will allow it to withstand the economic downturn while remaining strong. The improvement revenue bonds are secured by a combination of franchise fees, public service taxes, and the local communications tax. The current franchise agreement with Florida Power Corp. (rated 'BBB +' with a Stable Outlook by Fitch) expires in fiscal 2014, four years before the bonds' final maturity. While the agreement will most likely be renewed due to the essentiality of Florida Power's service, coverage remains healthy excluding this revenue. Pledged fiscal year 2010 revenues provided 5.26 times (x) maximum annual debt service (MADS) coverage while coverage excluding franchise fees would be a sound 3.56x. Year to date pledged revenue collections show a 20% increase over the same period last year. Legal provisions require historical pledged revenues to cover MADS 1.25x. The city has no plans to further leverage the security. Unaudited fiscal year 2010 financial statements show a slight surplus in the general fund, marking the fifth year out of the prior six fiscal periods in which positive results have been recorded. Entering fiscal year 2011, the city's unreserved fund balance totals approximately $8.3 million or a strong 50% of spending, well above the city's fund balance policy of 25 %. Dating back to fiscal year 2002, the city's unreserved fund balance has been no less than 29% of spending. The city has budgeted a $539 thousand decline in reserves in fiscal year 2011, but officials anticipate ending the year balanced. The general fund budget is largely supported by property taxes revenues, representing 25% of revenues in fiscal year 2011. The city has maintained a flat property tax rate since fiscal year 2009 at a very low 2.47 mills. During this period, the city's taxable assessed value (TAV) has declined by more than 25% resulting in the loss of approximately $800 thousand or 5% of annual revenue. The city aggressively cut spending. In particular, the city achieved savings in the area of public safety as the city consolidated its fire department with that of Seminole County in fiscal year 2009. Officials contend there is flexibility to cut spending further in a manner that would not impact the level of service provided to residents. Other general fund sources include the public service tax, communication service tax, and electric franchise fees, which collectively account for approximately 40% of revenues; these funding sources have continued to perform well through the downturn. Debt levels are low with above average amortization of 63.7% of principal being retired in 10 years. The city's five -year capital improvement plan (CIP) for fiscal years 2011 -2016 totals a manageable $32.8 million. The city does not have any exposure to variable rate debt, derivatives, or short -term notes, and has no additional debt issuances planned. All full -time employees participate in a city administered pension plan. The city annually funds 100% of the actuarially required contribution (ARC), which totaled $2.6 million or the equivalent to 16.3% of general fund spending in fiscal year 2010. Pension contributions have risen 29% since fiscal year 2007 and with the current low 59% funded ratio, are likely to continue to increase. The city's ability to absorb the rise in fixed costs while maintaining ample financial flexibility is a key rating driver. The city funds other post employment benefit payments on a pay -as- you -go basis, although Fitch notes that the unfunded liability is relatively modest. Contact: Primary Analyst Leora Lipton Analyst +1- 212 - 908 -0507 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Michael Rinaldi Senior Director +1- 212 - 908 -0833 Committee Chairperson Jessalynn K. Moro Managing Director +1- 212 - 908 -0608 Media Relations: Cindy Stoller, New York, Tel: +1 212 908 0526, Email: cindy.stollergfitchratings.com. 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, LoanPerformance, Inc., and IHS Global Insight. Applicable Criteria and Related Research: 'Tax - Supported Rating Criteria', dated Aug. 16, 2010; 'U.S. Local Government Tax - Supported Rating Criteria', dated Oct. 8, 2010. For information on Build America Bonds, visit 'www.fitchratings.com /BABs'. Applicable Criteria and Related Research: Tax - Supported Rating Criteria http://www.fitchratings.com/creditdesk/reports/report — frame. cfm?rpt _ id= 548605 U.S. Local Government Tax - Supported Rating Criteria http: // www. fitchratings.com /creditdesk/ reports /report _ frame.cfm ?rpt_id = 564566 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.