Fitch Ratings has assigned a 'AA-' rating to the following bonds to be
issued by the city of Jacksonville, Florida:
--$89,885,000 special revenue refunding bonds, series 2016A;
--$57,475,000 special revenue refunding bonds, series 2016B.
The bonds will be sold via negotiation on or about Aug. 9. Proceeds will
refund several series of outstanding bonds for debt service savings and
to refinance on a long-term basis $24 million of outstanding commercial
paper.
Fitch also affirms the following Jacksonville ratings:
--Issuer Default Rating (IDR) at 'AA';
--$985 million in special revenue bonds at 'AA-'.
SECURITY
The special revenue bonds are backed by the city's covenant to budget
and appropriate non-ad valorem (NAV) revenues sufficient to pay debt
service. The NAV covenant shall be cumulative to the extent not paid and
shall continue until such non-ad valorem revenues or other legally
available funds are sufficient to make all such required payments under
the bond resolution.
KEY RATING DRIVERS
The 'AA' IDR reflects Fitch's expectation that the city will continue to
demonstrate a prudent level of fiscal management, contributing to
generally stable financial results and adherence to formal reserve
policies that Fitch views as an integral part of the city's overall
financial resiliency. The rating also reflects Fitch's view that the
city will continue to make efforts to moderate the impact of its pension
liability on the annual budget. The 'AA-' rating on the special
obligation bonds is one notch below the IDR as the bonds are not general
obligations but viewed as an ongoing and enforceable obligation of the
city payable from a broad base of resources.
Economic Resource Base
Jacksonville is the most populous city in the state of Florida and the
anchor of the northeast Florida economy. The regional economy has grown
at a steady pace and is adequately diverse, but there is some
concentration to the federal government owing to the presence of several
naval installations. Unemployment tends to track closely to the state,
and resident income levels are moderately below average.
Revenue Framework: 'aa' factor assessment
Fitch believes general fund revenues are likely to grow at a slow pace
consistent with historical patterns that are generally in line with
inflation absent policy action. The city retains a significant margin
within existing statutory tax rate limits, which lessens risk to revenue
volatility in periods of economic downturn.
Expenditure Framework: 'bbb' factor assessment
Fitch view the city's expenditure flexibility as limited given its very
high cost of servicing debt and retiree benefits (over 30% of
governmental spending). Furthermore, the city continues to operate with
a considerably smaller workforce than prior to the recession,
constraining its ability to lower spending without meaningful reductions
to service.
Long-Term Liability Burden: 'aa' factor assessment
The city's debt and unfunded pension liabilities measure 16% of personal
income, which Fitch views as moderate. Declining levels of debt have
been offset by a rising net pension liability (NPL). The city's capital
program appears manageable, and the city contends it is continuing to
meet necessary infrastructure investment.
Operating Performance: 'aaa' factor assessment
The city's financial performance remained fairly stable during the last
recession due to a variety of revenue and expenditure policy actions.
Reserves remain compliant with formal policies and contribute to an
exceptionally strong level of financial flexibility when considered in
the context of the city's revenue raising powers and limited spending
flexibility.
RATING SENSITIVITIES
Liability Burden Constrains Rating: Fitch believes the IDR will likely
remain constrained by the high cost of servicing the city's long-term
debt and unfunded pension liabilities despite recent some recent
favorable developments that may alleviate the pension burden over time.
CREDIT PROFILE
The city serves as the focal point of the Jacksonville metropolitan
statistical area (MSA), which has an estimated population of 1.4 million
residents and ranks as the 42nd largest regional economy in the U.S. The
economy is anchored by the trade, transportation, and utilities sector
(21% of employment), professional and business services (15%), education
and health care (15%) and leisure and hospitality (13%). Key
infrastructure and economic assets within the MSA include the Port of
Jacksonville, the Jacksonville Jaguars franchise of the National
Football League, and three naval installations with a collective
military and civilian employment of more than 41,000. The most prominent
of these facilities, Naval Station Mayport, is the third largest naval
facility in the nation. Mayport will homeport the first of eight new
combat ships later in 2016, and the Navy's continuing investment in the
base would appear to lessen risk over the short term to federal cuts in
military spending.
The Jacksonville economy also has a notable concentration of jobs in
financial service and insurance firms including Bank of America (8,000),
Florida Blue (6,500), and Citi (4,000). The operations of these firms
are largely comprised of administrative and call centers, which tend to
exhibit lower wages relative to the broader sectors they represent.
Resident incomes slightly lag the state norm while median home values
are about 30% below the statewide figure reported by Zillow Group.
Revenue Framework
Property taxes fund roughly 50% of the city's $1 billion general fund
budget. The next largest revenue stream for the general fund is an
annual contribution from the Jacksonville Electric Authority (JEA) at
about 11% of total revenue. The JEA contribution is outlined in an
interlocal agreement between the city and the JEA that was recently
extended through fiscal 2021. The agreement establishes a funding floor
at the current year level and annual increases in the contribution
amount of at least 1%. The JEA is a component unit of the city whose
governing body is appointed by the mayor and budget subject to approval
by the city.
Utility taxes and the city's share of the statewide local government
half-cent sales tax (LGST) each represent about 9% of general fund
revenue. Utility taxes are based on the sale of water, electric, and
natural gas within the city and the LGST distributions are based on
sales tax activity within the city and the ratio of incorporated to
unincorporated population (there are no incorporated municipalities
within the joint Duval County/Jacksonville government).
Fitch believes general fund revenues are likely to grow in line with the
level of inflation. The 10-year historical general fund revenue CAGR of
3% reflects a variety of policy actions that served to alleviate the
impact of the recession and housing market crisis on its fiscal
condition.
The city has ample legal revenue raising authority. As a joint
city-county Jacksonville is subject to a statutory property tax cap of
20 mills. The adopted tax rate for fiscal 2016 was 11.44 mills. Fitch
estimates the city could generate roughly $380 million in additional
revenue through an increase in the property tax rate to the maximum
legal rate, the equivalent of nearly 40% of the total general fund
budget. Fitch views favorably the fact that the city has demonstrated a
willingness to increase revenues during prior periods of economic stress
to help stabilize its financial position.
Annual changes in the property tax rate are determined using a roll-back
or revenue neutral rate, which is then adjusted for changes in the
Florida per capita personal income. However, this limitation may be
overridden by vote of the county governing body. The city also has the
ability to increase various license and permit revenues and service
charges that make up a smaller but still notable portion of its revenue
base.
Expenditure Framework
Jacksonville provides a broad range of governmental activities, but
spending is led by the operation of the sheriff's office and fire and
rescue, which account for roughly 60% of the general fund budget.
General fund spending has increased at a higher pace than revenue in
recent years despite the aforementioned policy actions taken by the city
during and subsequent to the recession. Fitch would expect this trend to
continue absent stabilization of the city's pension costs, which reached
$254 million in fiscal 2015 compared to $125 million in fiscal 2011. The
city estimates its pension cost at $280 million in the next fiscal year
(see below for more on the city's pension reform efforts).
Credit concerns center on Jacksonville's very high cost of funding debt
service and annual contributions for pension and retiree health
benefits, which generally diminish financial flexibility and the
availability of resources for other spending needs. In fiscal 2015 the
city paid close to $450 million in total for these expenses or the
equivalent of 32% of total governmental fund spending.
The city engages in collective bargaining with various labor groups
representing general employees, police, fire, and correction officers.
All six of the city's unions are operating under expired contracts but
have reportedly agreed to postpone negotiations until the pension surtax
referendum. Under Florida law if an impasse is declared both parties are
required to engage in a non-binding mediation process following which
the governing body of the local government may ultimately impose
contract terms for the year. Fitch believes the city and its organized
labor groups have shared a generally cooperative relationship,
illustrated by agreed upon wage reductions during the recession and more
recent reform of the city's Police and Fire Pension Fund (PFPF).
From a practical perspective Fitch believes flexibility around personnel
spending may be somewhat constrained as the size of the citywide
workforce (7,109 in fiscal 2016) is about 14% lower than pre-recession
budgets. The proposed fiscal 2017 budget aims to add close to 100
workers government wide with the majority in the general fund for public
safety.
Pension Reform Update
The city reached an agreement in 2015 with the PFPF pursuant to which it
subscribed to making additional annual payments above the actuarially
determined contribution to accelerate the amortization of the NPL (the
PFPF is the largest of the city's three defined benefit pension plans
with a Fitch-adjusted NPL of $1.8 billion or 5% of personal income). The
2015 agreement did not specify a funding source for the additional
pension contributions to be made by the city. The city subsequently
proposed a plan that was adopted by the 2016 state legislature that
allows for the extension of the Better Jacksonville Plan (BJP) one-half
cent local option sales tax for the explicit purpose of paying down the
city's pension liability (the pension surtax). The pension surtax is
subject to approval by voter referendum scheduled for August 30. If
approved the pension surtax would commence on the date of the expiration
of the BJP surtax on Dec. 31, 2030 for a period of up to 30 years or
until the city's pension plans are fully funded, whichever comes first.
In addition to voter approval the pension surtax is further subject to
the closure of at least one of the city's three current defined benefit
pension plans and a requirement that each employee who is a member of a
closed plan contributes 10% of salary to the plan. These provisions
would be subject to collective bargaining. The 2015 pension agreement
with police and fire did not address the closure of the PFPF to new
hires, but it did increase the contribution rate for new hires to 10%
effectively immediately and for current members upon restoration of a 2%
wage reduction agreed to in 2010.
The dedication of a revenue stream to amortize the NPL would be viewed
by Fitch as a positive, as the actuarial recognition of this revenue
stream would have the effect of lowering the city's actuarially
determined contribution. The BJP sales tax generated a considerable $78
million in fiscal 2015 (roughly 30% of the current year's actuarially
determined pension cost) and has increased at a CAGR of 2.3% since
fiscal 2004. The state law authorizing the pension surtax further
stipulates that the amortization period of any affected pension plan(s)
reset to 30 years immediately (the effective amortization dates of the
city plans currently range from 21-25 years). Re-amortizing the pension
plans would lower the city's annual pension contribution by roughly $50
million in the near term at the expense of higher contributions in
future years which would align with the collection of the pension surtax.
Long-Term Liability Burden
Jacksonville's long-term liabilities are estimated by Fitch at $5.5
billion or a moderate 16% of personal income. The long-term liability
estimate includes $2.5 billion of overall net debt and a Fitch-adjusted
NPL of $3 billion. The Fitch-adjusted NPL has increased close to 20%
since fiscal 2011. The total NPL is expected to remain fairly stable
over the next 10 years then steadily decline and reach full funding by
fiscal 2046 based on an actuarial analysis conducted by Milliman. The
Milliman analysis assumes a phased-in increase in the employee
contribution rate to 10% through fiscal 2018, 7.0% to 7.5% investment
rates of return, and the re-amortization of the pension plans to 30
years, among other factors. The Milliman analysis does not recognize any
benefit to an effective pension surtax revenue stream.
The city has reduced the rate of new money borrowing resulting in a
reduction in direct debt outstanding of $635 million or 23% since fiscal
2011. The proposed general government capital program for fiscal
2017-2021 nears $330 million; the program will largely be debt financed
but closely match the amount of outstanding principal scheduled to
amortize in the five-year period.
Operating Performance
Fitch believes the city maintains an exceptionally strong capacity to
manage challenges associated with an economic downturn and that the city
will continue to take actions necessary to maintain compliance with
formal reserve policies. The city is required to maintain a separate
emergency and operating reserve each equal to 5% to 7% of spending; on a
combined basis the reserve policies amount to a level Fitch views as
sufficient in a downturn for a 'aaa' assessment.
The assessment also considers scenario-estimated changes in revenue and
a budget flexibility profile of 'midrange' which reflects a combination
of the city's high independent revenue raising powers relative to
potential cyclical revenue declines and limited expenditure flexibility
largely driven by a high cost of carry for debt and retiree benefits.
Management of the city's operating budget remains a credit positive. The
city produced positive operating margins (after transfers) throughout
the recession largely through the enactment of various revenue
enhancements and spending reduction measures and despite the challenge
of meeting escalating pension costs.
Post-recession the city has increased the general fund's unrestricted
reserve position to $173 million or 16.8% of spending at fiscal year-end
2015. The city has adopted a structurally balanced budget for fiscal
2016; management reports a favorable revenue variance of $10-14 million
based on year-to-date results through March 31 (six months into the
fiscal year) and expenditures that are tracking below budget consistent
with prior year actual results. The proposed budget for fiscal 2017
submitted by the mayor is also balanced without the use of existing
reserves.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's
applicable criteria specified below, this action was informed by
information from Lumesis and InvestorTools.
Applicable Criteria
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1009719
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009719
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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