Fitch Affirms Various Cape Coral, FL Ratings
Fitch Ratings affirms the following ratings for Cape Coral, FL (the city):
--$106.4 million special obligation revenue bonds, series 2006, 2007 and 2011 at 'A+';
--$16.9 million capital improvement and refunding bonds, series 2005 at 'AA-'.
In addition, Fitch assigns an 'AA-' implied general obligation rating to the city.
The Rating Outlook for these bonds is Stable.
Fitch downgrades $39.4 million gas tax revenue bonds, series 2010A and 2010B (Federally Taxable Build America Bonds-Direct Payment) to 'A-' from 'A'. The Rating Outlook is Negative.
Special Obligation Bonds: The city has covenanted and agrees to appropriate in its annual budget legally available non-ad valorem revenues in an amount sufficient to pay debt service on the special obligation revenue bonds. The obligation shall be cumulative to the extent not paid. An anti-dilution test requires coverage of 1.5x projected maximum annual debt service (MADS) from the average of the prior two fiscal years legally available non-ad valorem revenue.
The gas tax revenue bonds are secured by a lien on the revenues from the 5th and 6th cent local option gas tax imposed by the county and received by the city pursuant to state law and interlocal agreement. The county ordinances authorizing collection of the gas tax revenues does not extend to the scheduled final maturity date of the bonds; therefore, the city has a covenant to budget and appropriate legally available non-ad valorem revenues in the event the city's receipt of gas tax revenues terminates as a result of the county's determination not to extend the levy of either of the local option gas taxes. Additional bonds may be issued if gas tax revenues from the prior fiscal year equal 1.25x projected MADS.
The capital improvement revenue bonds are secured by a pledge of the city's share of the local government one-half cent sales tax. Additional bonds may be issued if pledged revenue in any 12 consecutive months out of the immediately preceding 18 months equal 1.25x projected MADS.
KEY RATING DRIVERS
PRESSURED FINANCIAL PROFILE: Reserve levels remain sound despite successive fund balance draws in fiscal 2011 and 2012, as well as a budgeted draw in fiscal 2013. Expenditure reductions to date have been significant, though flexibility remains to raise recurring revenues.
HIGH CARRYING COSTS: Debt service, pension, and retiree healthcare costs consume a high percentage of total spending, further straining operations.
STRAINED ECONOMIC CONDITIONS IMPROVING: The city continues to face significant challenges as a result of the housing crisis; however, the area labor and housing market show signs of improvement. Economic indicators are slightly below national averages.
SPECIAL OBLIGATION BONDS: The rating on the special obligation revenue bonds is based on the city's covenant to budget and appropriate (CB&A) non-ad valorem revenues to pay debt service. Non-ad valorem revenues comprise a broad base of resources from which to pay debt service, and coverage remains sound, albeit declining in recent periods.
CAPITAL IMPROVEMENT BONDS: The capital improvement revenue bond rating reflects strong coverage of MADS from fiscal 2012 pledged revenues (unaudited) of 2.53x and lack of additional leveraging plans.
GAS TAX BONDS: The gas tax revenue bond downgrade and Negative Outlook reflect coverage of MADS from fiscal 2012 (unaudited) pledged revenues of 1.18x and several years of negative trending collections.
WHAT COULD TRIGGER A RATING ACTION
FURTHER DECLINE IN GAS TAX REVENUES: Should pledged gas tax revenue coverage continue to fall below its current level, there would be downward pressure on the rating.
BUDGETARY SOLUTIONS NARROWED: Should the city continue to rely on fund balance to plug budget gaps, the city will be more susceptible to budget shocks and the challenges posed by a weakened tax base, a relatively high property tax rate, and a slowly recovering economy.
SOUND RESERVES DESPITE PRESSURED OPERATING ENVIRONMENT
Unaudited fiscal 2012 results show a moderate $4.9 million net deficit (after transfers), decreasing the unrestricted fund balance to $29.6 million or 25.1% of spending. Liquidity also remains sound, with cash and investments covering liabilities over four times.
The fiscal 2013 budget appropriates $5 million of the balance being brought forward from fiscal 2012. The city's fund balance policy requires an unreserved fund balance equal to at least two months or 17.8% of spending, which Fitch considers prudent.
The city has options to diversify its revenue base, most notably through the imposition of a public service tax (PST) and fire service assessment. The city estimates these sources could produce more than $40 million in annually recurring revenue, but a majority of the city council has been reluctant to impose new charges on residents. Management believes additional expenditure savings are difficult to achieve without affecting service levels, as the city has cut $18.9 million (14.4%) in operating expenditures since fiscal 2008.
SUBSTANTIAL TAX BASE DECLINES, BEGINNING TO SHOW SIGNS OF RECOVERY
Cape Coral is located on the southwest coast of Florida in Lee County 10 miles south of Fort Myers and 125 miles south of Tampa. The city enjoys over 400 miles of waterways providing access to the Intercoastal Waterway and Gulf of Mexico making it a popular vacation and retiree community.
Cape Coral experienced a speculative building boom and unsustainable appreciation in home values, and remains among the communities hardest hit by the subsequent housing downturn and recession. Taxable values have dropped by more than $13.1 billion or 60.5% from fiscal 2007-2012. Ad valorem taxes, which still represent approximately 70% of general fund revenues, were $66 million in fiscal 2012 or $36 million less than in fiscal 2007.
Fiscal 2013 tax base estimates show the first year of taxable value growth since the downturn, with 3.8% improvement projected. The most recent Case-Schiller data through the first quarter of 2012 detail similar growth, with four quarters of successive gains in housing prices.
Other aspects of the economic picture also appears to be trending upward, albeit slowly. Since peaking at a very high 12.5% in 2010, the city's unemployment rate is down to 8.8% as of September 2012 from 11.1% in September 2011. Gains in the employment base (4.8% cumulative during this period) relative to the labor force (1.1%) have driven this recovery. Local employment opportunities are focused in the retail trade, leisure & hospitality, and government sectors.
ELEVATED CARRYING COSTS
The city has incurred the bulk of its debt burden since 2006 to fund a variety of projects to keep pace with previous growth and replacement needs. The city's debt burden has risen accordingly, and fiscal 2011 debt service consumed a moderate 10.8% of spending. Debt ratios ($2,077 per capita and 2.8% of market value) have also increased due to the decline in property value. Lack of additional borrowing plans and limited capital needs temper this risk. The city does not have any exposure to variable-rate products or derivatives.
One concern is the high burden placed on the budget from debt service and contributions for employee benefits, which total $37.7 million or one-third of spending in fiscal 2011. The city administers three pension plans, with weak funding ratios, for which the aggregate unfunded liability totals $198 million or an elevated 1.7% of market value. Funding of less than the actuarial required contribution (ARC) in some years heightens Fitch's concerns about the burden post-employment benefit costs will place on future budgets. In addition, the city provides group health and life insurance benefits to its retired employees. The plan's unfunded liability equaled $191.4 million or an elevated 1.6% of market value. In fiscal 2011, the city contributed $5.9 million (5.3% of spending) in pay-go toward its $17.8 million ARC - full funding of which would equal 16% of spending.
DEBT SERVICE COVERAGE FOR REVENUE BONDS
Non-ad valorem revenues are sizeable in absolute terms and diverse, budget at $63.7 million in fiscal 2013, including $20.7 million in intergovernmental revenues and $13.9 million in sales and use taxes. MADS on all special obligation bonds is $17.9 million. The city's ability to leverage its non-ad valorem revenues is limited by an anti-dilution test which requires that the city's non-ad valorem revenues for the prior two fiscal periods shall not be less than 1.5x projected MADS, and projected MADS shall not equal more than 20% of governmental fund revenues.
Coverage remains strong for the capital improvement revenue bonds at 2.5x MADS from fiscal 2012 pledged revenue (unaudited). Collections in fiscal 2012 were slightly negative year-over-year (-0.1%) following growth of 4.2% in fiscal 2011.
Gas tax coverage is much tighter, at 1.18x from fiscal 2012 collections (coverage improves to 1.35x including the federal subsidy for series 2010 bonds issued as BABs). Gas tax revenues continue to trend negatively, declining 3.6% in fiscal 2012 and 16% since fiscal 2007. The city reports no additional leveraging plans for either security, and the debt service reserve fund provides a $4 million cushion.
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, National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
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