November 9, 2016 - 3:14 PM EST
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Fitch Upgrades Citrus County, FL's $29.5MM Non-Ad Valorem Revs & IDR; Outlook Stable

Fitch Ratings has upgraded the following Citrus County, FL ratings:

--Long-Term Issuer Default Rating (IDR) to 'AA' from 'AA-';

--$4.2 million capital improvement revenue and refunding bond series 2010A to 'AA-'from 'A+';

--$15.1 million capital improvement revenue bond series 2010B to 'AA-' from 'A+';

--$10.2 million non-ad valorem revenue bonds series 2015 to 'AA-' from 'A+'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a covenant to budget and appropriate (CB&A) legally available non-ad valorem (NAV) revenues, by amendment if necessary, in an amount sufficient to pay debt service on the bonds. The availability of NAV revenues to pay debt service is subject to the funding of essential government services and obligations with a specific lien on NAV revenues. The issuer's NAV covenant is cumulative and continues until the bonds have been fully paid.

KEY RATING DRIVERS

The upgrade of Citrus County's IDR to 'AA' from 'AA-' and related bond upgrades reflect both the application of Fitch's revised criteria for U.S. state and local governments, which was released on April 18, 2016, and an improvement in credit quality. The application of the revised criteria focuses on the county's solid revenue framework and expenditure flexibility, moderate carrying costs, and low long-term liability burden. Credit improvement centers on a demonstrated ability to manage through periods of revenue decline and to rebuild reserves, providing a better cushion to manage through economic cycles. The rating is tempered by risks inherent in the prominence of Duke Energy as leading taxpayer, particularly since the concentration is expected to rise upon the completion of a new natural gas power plant.

COVENANT DEBT NOTCHING: A one-notch distinction from the IDR reflects the absence of a pledge of specific revenue and the inability to compel the county to raise NAV revenue sufficient to pay debt service. NAV revenues are broad and diverse and are more than adequate for use toward the bonds' maximum annual debt service even after accounting for county debt with a prior claim on NAV revenues.

Economic Resource Base

Citrus County is located in the west-central region of Florida, midway between Tampa and the Florida panhandle. The local economy is centered on power generation and is also bolstered by healthcare, tourism and agriculture. The county's population has been generally stable in recent years with a 2015 census estimate of 141,058. Duke Energy is the leading taxpayer, with a $1.4 billion taxable assessed value of (TAV) in fiscal 2015, comprising 15% of the tax base. Fitch believes the concentration in the tax base will rise upon the completion of the new gas power plant.

Revenue Framework: 'aa' factor assessment

Revenue growth prospects are favorable, driven by development projects planned and underway. The county has substantial independent legal revenue-raising ability although millage rates are subject to a statutory limit.

Expenditure Framework: 'aa' factor assessment

Fitch expects the county's pace of spending to generally match or slightly exceed revenue growth trends, absent policy action. Fixed carrying costs associated with debt and retiree benefits are modest at about 10% of spending.

Long-Term Liability Burden: 'aaa' factor assessment

County long-term liabilities including debt and pensions are equal to a modest 3% of personal income. Liabilities are expected to remain low.

Operating Performance: 'aaa' factor assessment

Fitch expects the county to maintain significant financial resilience in the event of a moderate economic downturn. The county has ample gap-closing ability provided by significant reserves and high budget flexibility.

RATING SENSITIVITIES

IMPROVING PROSPECTS FOR ECONOMIC DIVERSITY: Diversification of the county's economic base would be a credit positive. Two large road projects enhance the prospects for economic diversity.

FINANCIAL FLEXIBILITY: The rating is sensitive to shifts that would lead to a significant decline in the county's financial flexibility and gap-closing ability.

CREDIT PROFILE

County home values endured steep declines during the great recession and have notably recovered but remain below the 2006 peak. The county's tax base is estimated to increase by over 2% in fiscal 2016 after a 36% peak-to-trough decline from fiscal 2008-2015. County unemployment levels exceed the state and national average, although significantly improved from the 2010 recessionary peak. Two major road projects are expected to bolster the economy and future tax-base growth. In 2017, the state is scheduled to begin the extension of the Suncoast Parkway to provide improved access to the Tampa area. The county is planning to begin its county road-491 widening project, enabling access to the Suncoast Parkway.

Duke Energy maintains four coal fired plants with a 2,295MW output and a nuclear plant that closed in 2013 on a 4,700 acre site. Duke Energy is in the permitting stages to build a new $1 billion natural gas power plant with an estimated completion date of 2018, which is expected by the county to create over 600 temporary construction jobs.

Revenue Framework

Property tax revenues are the county's largest revenue source comprising over 60% of fiscal 2015 general fund revenues. Property tax revenues experienced steep declines during the recession due to a significant reduction in home values and to property tax reform. General fund revenues then declined in fiscal 2012 and fiscal 2013 as leading taxpayer Duke Energy underpaid its tax bills in a dispute over its property appraisal. The county raised the millage rate by approximately 4% in fiscal 2013 and 27% in fiscal 2014 to address the revenue decline.

Historical general fund revenues grew at a 3.2% compound annual growth rate (CAGR) from 2004 through 2014, at a level that outpaced the rate of inflation but trailed the national GDP. Fitch believes the historical CAGR is overstated somewhat by the state and county's policy actions, as evidenced by the lower 1.4% CAGR for the county's TAV over the same period. Fitch believes revenue growth prospects are expected to generally match the rate of inflation going forward due to development projects planned and underway.

The county has substantial independent legal revenue-raising ability even though the current adopted general fund operating millage rate for fiscal 2017 is 8.3297 mills, compared to the statutory property tax limit of 10 mills. Raising the millage to the max rate would generate significant additional revenue. Furthermore, the restoration of the county's collection of impact fees in January 2017 also supports its ability to raise revenues going forward.

Expenditure Framework

The county provides a broad range of government services. Public safety is the largest spending item, comprising about 50% of total government spending. General government spending is the second largest spending category, equal to about 35% of the total.

Fitch believes the natural pace of spending will be in line with or marginally exceed the rate of revenue growth.

The county maintains strong expenditure flexibility aided by the legal ability to control wages and benefits in the absence of collective bargaining. Under Florida law, if an impasse is declared both parties are required to engage in non-binding mediation, following which the county may ultimately impose contract terms for the year. In order to manage costs during the great recession, the county eliminated capital projects, deferred vehicle replacement, enacted a hiring freeze and reduced the workforce. The county has since added new positions and reinstated employee pay increases in recent years; however, staffing levels remain below prerecession levels and may present some practical constraints on future expenditure flexibility in an economic downturn. Fixed carrying costs associated with debt and retiree liabilities are modest, equal to about 10% of total government spending.

Long-Term Liability Burden

Long-term liabilities total only about 3.5% of personal income and are expected to remain very low. Approximately 37% of the long-term liability burden is derived from net direct debt ($58 million), which Fitch expects to remain low as the county has no debt issuance plans and debt amortization of 62% in 10 years. The county's $245 million 2016 to 2020 capital improvement plan is manageable with no plans for tax supported debt issuance. Capital projects include county-wide projects (water and wastewater, solid waste, etc.) and unfunded projects, to be funded through a combination of grants, gas tax revenues, operating fees, water and wastewater connection fees, impact fees and other sources.

Overall pension costs are affordable with a net pension liability of $63 million, or about 1 % of personal income (using a Fitch adjusted 7% investment return). The county participates in the adequately funded Florida Retirement System, a cost sharing multiple-employer defined benefit plan. The count makes pay-go contributions for its other post-employment benefits (OPEB) with the bulk of payments reflecting an implicit rate study. The fiscal 2015 OPEB contribution was equal to less than 1% of personal income.

Operating Performance

The county's solid revenue-raising ability and expenditure flexibility provide it with a superior inherent budget flexibility to maintain reserves at a level consistent with a 'aaa' financial resilience assessment. Fitch believes the county would undertake the necessary actions to manage through economic cycles as it has done in the past.

Despite having experienced five years of draws through the great recession and settling a tax dispute with Duke Energy, the county managed the budget through a combination of spending controls, reserve use and tax rate increases. The county also increased its revenue diversity through implementation of a separate millage rate to fund stormwater needs and fire rescue services. In fiscal 2014 and fiscal 2015, county finances regained fiscal health with a restoration of reserves in excess of its unassigned reserve policy range of 8% to 17%. Fiscal 2016 results are expected to produce an operating surplus with an expectation for reserves to remain stable with prior year results. The fiscal 2017 adopted budget represents a 1.7% increase over the 2016 adopted budget and includes a decrease in the millage rate and no use of reserves.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in the 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/site/re/879478

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1014549

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014549

Endorsement Policy

https://www.fitchratings.com/regulatory

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Source: Business Wire (November 9, 2016 - 3:14 PM EST)

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