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
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