Fitch Affirms Sebastian, FL's Bonds at 'AA-'; Outlook Stable

During the course of routine surveillance, Fitch Ratings takes the following rating actions on Sebastian, FL's bonds:

--$5.7 million series 2003 infrastructure sales tax bonds affirmed at 'AA-';

--$1.3 million series 2003A infrastructure sales tax bonds affirmed at 'AA-';

--$4.1 million series 2003 storm water utility revenue bonds affirmed at 'AA-'.

In addition, Fitch assigns the following rating:

--Implied unlimited tax general obligation bonds at 'AA'.

The Rating Outlook is Stable.

KEY RATING DRIVERS

--Strong financial management yielding robust reserve levels despite a low tax rate and extremely pressured housing market.

--Low debt levels with rapid amortization.

--Limited, primarily residential tax base centered on agriculture and service sector employment.

--Historically strong debt service coverage provided by pledged revenues.

--Adequate legal provisions.

SECURITY

Infrastructure Sales Tax (IST) Bonds: The bonds are secured by the city's share of a one cent local option infrastructure sales tax levied within Indian River County (unlimited tax general obligation bonds rated 'AAA', Stable Outlook by Fitch) and distributed between the county, school district and incorporated municipalities based on a population driven formula. The sales tax will expire on Dec. 31, 2019, over a year after the final maturity of the bonds.

Storm Water Revenue Bonds: The bonds are secured by a pledge of storm water assessment fee revenue levied on each equivalent residential unit (ERU) within the city limits.

CREDIT PROFILE

Coverage on IST bonds has been historically sound and with 0.9% growth in fiscal 2010, following three years of average annual 3% declines, remains so at 2.27 times (x) maximum annual debt service (MADS). The city estimates fiscal 2011 pledged revenues will increase by 1.1% from a year prior based on actual results through July, bringing MADS coverage up slightly to 2.30x. The city projects flat performance for fiscal 2012 and 2.5% annual increases through fiscal 2015. Further leveraging is not anticipated, and would be impractical due to the short lifespan of the tax (although the tax may be extended pursuant to a voter approved county ordinance). Legal provisions are adequate with an additional bonds test requiring 1.35x MADS coverage.

The storm water fee (a minimal $4.00 per ERU per month) is included on the property tax bill and collected in the same manner as ad valorem taxes. The assessment collection method and a rigorous tax lien process provide further assurances to bondholders. The city reports that 82% of revenues are derived from residential customers. Annual debt service coverage in fiscal 2012 remained strong at 1.96x. The city estimates a 5% decline in revenues for fiscal 2011 but still ample coverage of 1.85x. The city projects flat revenue for fiscal 2012 making current coverage the lowest for the forecast period.

Storm water bond holders benefit from an additional bonds test (ABT) of 1.35x MADS and the city's covenant to budget and appropriate from non-ad valorem revenues, subordinate to other senior non-ad valorem debt service, to replenish any deficiency in the debt service reserve account. The rating on the storm water bonds does not factor in the deficiency make-up given that the implied ULTGO rating is only one notch above the revenue bond rating. The city has no plans for further leverage of storm water fee revenues.

Located along the Atlantic coast in Indian River County north of Vero Beach, the city of Sebastian is predominately residential with limited commercial activity concentrated in agriculture and services. Unemployment rates for the county remain elevated but a slight uptick (0.2%) in employment and decline in the labor force (0.4%) resulted in a marginally lower May 2011 rate of 12.5% compared to a year prior; well above state (10.5%) and national (8.7%) averages. Wealth levels for the city are moderately below the state average by all measures.

The tax base continues to show signs of severe weakness following the housing downturn earlier in the decade. The county is ranked among the top 40 counties in the nation for home price declines from the peak. Taxable assessed value (TAV) in the city for fiscal 2012 is budgeted at $1.3 billion, down a dramatic 40% from the peak in fiscal 2007. The city is projecting moderating declines through fiscal 2014 with modest recovery beginning in 2016. On a positive note, city property tax collections are at a record high and while the overall tax base is limited, non-residential activity is relatively stable.

Financial results remain strong despite fiscal pressure. As planned, the city continues to augment spending cuts with modest draws on general fund balance to cushion the effects of the declining tax base. Fiscal 2010 ended with a minimal drawdown resulting in an unassigned fund balance equal to a high 48% of spending, well above the city's 25% fund balance policy. A minimal drawdown of less than $100,000 (or 1.1% of spending) is expected in fiscal 2012.

The fiscal 2012 budget includes significant cuts in the areas of public safety and growth management achieved through early retirement and consolidation of services. The fiscal 2012 budget also calls for a stable ad-valorem tax rate, resulting in the loss of approximately $335,000 in revenue, or 3.6% of the fiscal 2012 budget. The city anticipates increases in utility tax and electric franchise fee revenue, along with aforementioned spending cuts and slight use of reserves, should offset the budgeted decline in ad-valorem taxes.

Overall debt levels are average with rapid amortization. Capital needs are manageable with a proposed capital plan for fiscal 2012-2017 totaling $22 million. The city has identified highest priority projects in the areas of drainage and roadway improvements. No additional general fund secured debt is currently planned. Pensions are well funded and the city's other post employment benefit liability is minimal.

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.

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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