In the course of routine surveillance, Fitch Ratings has taken the following actions on Port St. Lucie, Florida's (the city) general obligation (GO) and sales tax bonds:
--Approximately $87 million outstanding GO bonds affirmed at 'AA-';
--Approximately $15 million outstanding sales tax revenue bonds affirmed at 'A+'.
The Rating Outlook for the GO and sales tax bonds is Stable.
KEY RATING DRIVERS
--WEAKENED BUT STABILIZING FINANCES: The city reported sizable operating deficits in fiscals 2009 and 2010 as ongoing revenues failed to keep up with expenditure needs. Fiscal 2011 operations are projected to report a small surplus as city officials implemented significant spending cuts over the past three fiscal years.
--RESERVES REMAIN ADEQUATE: The city's sizable general fund balance dropped substantially since fiscal 2008; however, officials built up reserves during the boom years so that current reserve levels remain adequate.
--EMERGING BIOTECH SECTOR: Officials have attracted several well-known bio-tech firms as well as other prominent businesses to locate within the city, creating the potential for a more robust and diversified local economy.
--STEEP TAX BASE DECLINES: Taxable values have fallen by over 50% between fiscals 2007 and 2011 after a massive run-up in the early and mid-2000s. The pace of decline has slowed recently.
--SIGNIFICANT DEBT LOAD: Debt levels are above average for this once rapidly growing city with fiscal 2010 debt service constituting over 20% of general government expenditures.
--DEPRESSED ECONOMY: The area economy was hard hit by the recession as evidence by reduced employment opportunities and a steep downturn in the housing market.
--STRONG SALES TAX BOND COVERAGE: Pledged half cent sales tax collections have dropped by over 20% over the past four fiscal years but coverage of maximum annual debt service (MADS) on sales tax bonds remains ample.
SECURITY
The GO bonds are general obligations of the city backed by a pledge of the city's full faith and credit and ad valorem taxing authority without limit as to rate or amount.
The sales tax bonds are secured by and payable from a first lien on the city's receipt of local government half-cent sales tax revenues.
CREDIT PROFILE
Financial operations have been challenged by the weak area economy. Between fiscals 2008 and 2010, general fund property taxes fell by over $9 million or 30%, reflecting the steep decline in the city's tax base. Property taxes are the city's largest source of general fund revenues comprising about 40% of the revenue base.
Despite measures to limit costs including personnel reductions and wage freezes for non-union staff, the sudden drop in revenues led to significant general fund operating deficits in fiscals 2009 and 2010. General fund balances decreased by nearly $9 million or over 40% over that period; however, fiscal 2010 unreserved general fund balance remains adequate at nearly 19% of expenditures and transfers. Fitch takes comfort that part of the reserve use was purposeful, as the city had built up sizable reserves during the rapid run-up in taxable values in anticipation of an eventual downturn.
The city's financial performance improved in fiscal 2011. The city projects a surplus in the general fund of $1 million to $1.5 million (% of spending) as additional cost cutting measures in fiscal 2011 combined with previous spending reductions have enabled the city to move towards structural balance. Operating revenues were bolstered by higher electric utility taxes as a result of an increase in the city's public service tax rate from 5% to 10%. In addition, unexpected FEMA reimbursements and lower health-related expenditures from reduced insurance claims also improved fiscal results.
Fiscal 2012 general fund operations are budgeted to decline an additional $2.5 million, although the city historically budgets conservatively. Fitch would view with concern any further erosion of reserves, especially given the city's high debt service and growing maintenance costs.
Port St. Lucie is located in southeast Florida along the Atlantic coast. The city encompasses 116 square miles with a population of approximately 164,000. Once considered one of the fastest growing municipalities in the nation during the mid-2000s, the city was hit particularly hard by the recession and ensuing housing crisis. Precipitous drops in housing prices, high rates of home foreclosures and an almost virtual halt in construction activity have recently characterize the city's economy. City unemployment rates soared to nearly 13% in 2010 while the number of residential building permits within the city fell by over 97% between fiscal 2005 and 2010. Unemployment remains high at 11.6% in July 2011 but modest recent job growth for both the city and the county and an up-tick in 2010 construction permit values suggest that the economy may be improving.
Tax base trends mirror those of the city's housing sector. Between fiscals 2005 and 2008, taxable values more than doubled reflecting extensive development activity taking place within the city. However, the sharp 50% fall in assessments over the past four years has almost entirely nullified those earlier gains. Fiscal 2012 valuations are only slightly above fiscal 2005 assessed values. On a positive note, the pace of decline has slowed considerably in recent years which may be indicative of near term stabilization. The city has raised property tax rates by 36% since fiscal 2008 to partially offset the reductions in valuations. Despite the increases the city's operating tax rate of 4.51 mills remains low, and comfortably within the statutory 10-mill cap. The tax base is diverse with the top 10 taxpayers accounting for a modest 5.9% of values.
The city has had some success in attracting business by providing infrastructure improvements and, in some cases, backup security on loans for land acquisition and facility construction through a covenant to budget and appropriate pledge of non-ad valorem revenues. This debt has been included in Fitch's debt ratio calculations, and has not required city support to date.
The recent location of several established bio-research firms including Torrey Pines Institute of Molecular Studies, and an expanding digital production studio are viewed as positive developments by Fitch with the potential for high-wage job creation. Economic development efforts combined with the city's access to major north-south highways and the nearby availability of open land are expected to further spur commercial and industrial growth within the city.
Debt levels are above average with an overall debt burden of 7.2% and $4,154 on a per capita basis. The city issued extensively during the past decade to accommodate its rapid population growth. Over half of the city's direct debt consists of special assessment bonds secondarily backed by the city's covenant to budget and appropriate non-ad valorem revenues. The special assessment bonds were used to fund basic infrastructure needs across the city.
The bulk of the city's annual debt service costs are recorded outside of the general fund, related to various special assessment district debt backed by the city's covenant to budget and appropriate non-ad valorem revenue. The special assessment debt remains self-supporting. Fiscal 2010 debt service constituted over 40% of general fund expenditures and a still high 21% of all governmental fund expenditures. Principal amortization of outstanding bonds is about average with 48% of principal retired within 10 years. The city has approximately $71 million of un-issued general obligation authorization which it plans to issue in stages over the next several years.
The sales tax bonds are supported by the city's receipts of the half cent sale tax revenues. Although sales tax collections have declined by over 20% between fiscals 2006 and 2010, coverage of MADS remains adequate at 2.13 times(x). A 1.2x MADS additional bonds test affords protection against over-issuance. Fiscal 2011 sales taxes are reported to have increased by about 4% over prior year collections.
The city provides pension benefits to its retired employees through three defined contribution and one defined benefit plan. Because most employees participate in defined contribution plans, the city's long term liabilities are limited.
Although the funding ratio of the defined benefit plan is a below average 68% and drops to a low 58% under Fitch's more conservative 7% discount rate assumptions, the unfunded actuarial accrued liability (UAAL) of $18 million represents a marginal .027% of taxable values. Total fiscal 2010 city pension costs of $5.6 million represented a modest 8.4% of fiscal 2010 general fund expenditures.
Retired employees also receive health care and life insurance benefits (other post-employment benefit [OPEB]) from the city, although OPEB benefits have been eliminated for new employees. As of Oct. 1, 2009, the city's OPEB plan was 6.4% funded with a manageable UAAL of $10.5 million.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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, Zillow.com, National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 15, 2011;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 15, 2011.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842
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