Fitch Affirms New Smyrna Beach, FL's GOs at 'AA'; Outlook Stable
Fitch Ratings affirms the following New Smyrna Beach, Florida (the city) bonds:
--$13.8 million general obligation (GO) bonds, series 2005 at 'AA';
--$6.5 million capital improvement refunding revenue bonds, series 2005 at 'AA-'.
The Rating Outlook is Stable.
The GO bonds are secured by the city's full faith and credit and unlimited taxing power.
The capital improvement revenue bonds are secured by the city's covenant to budget and appropriate (CB&A), by amendment if necessary, sufficient amounts of non-ad valorem revenues for the payment of debt service on the bonds. Such covenant is cumulative and shall continue until all payments of principal and interest on the bonds shall have been budgeted, appropriated, and actually paid.
KEY RATING DRIVERS
TOURISM-DRIVEN ECONOMY: Tourism drives the local economy, which is therefore subject to a greater degree of economic cyclicality. Yet the city's favorable location along the Atlantic coastline should serve to promote future economic growth.
MIXED ECONOMIC INDICATORS: Unemployment remains elevated relative to state and national averages. Wealth levels are comparable to those of the state and nation.
MAINTENANCE OF SOUND RESERVES: Comprehensive spending cuts over the last few years have offset substantially diminished tax revenues due to declines in the tax base coupled with the maintenance of a flat millage rate. Despite this pressured operating environment, reserve levels remain strong and liquidity ample.
MODERATE DEBT LEVELS: New Smyrna Beach's debt burden remains affordable, and retirement benefits do not pressure financial operations. Amortization of outstanding principal is moderate, and future debt plans are modest.
APPROPRIATION RISK: The 'AA-' rating on the capital improvement bonds is based on the general credit characteristics of the city, as well as the city's covenant to budget and appropriate its diverse mix of non-ad-valorem revenues. Legal provisions for the bonds are adequate.
LESSENED FINANCIAL FLEXIBILITY: Any notable deterioration in financial reserves could lead to a negative rating action due to the weak and vulnerable nature of the underlying economy reflected in protracted tax base declines and heightened unemployment levels.
NON-AD VALOREM REVENUE SOFTENING: Should revenues available for debt service decline materially and thus significantly reduce coverage for the city's capital improvement and sales tax bonds, downward rating pressure would result.
New Smyrna Beach lies on Florida's central Atlantic coast in Volusia County (implied GO rated 'AA' with a Stable Outlook by Fitch), approximately 15 miles south of Daytona Beach.
LIMITED LOCAL ECONOMY
The region remains a popular leisure destination, with tourists drawn to the area beaches and the Daytona International Speedway, which hosts the Daytona 500 and other popular races. New Smyrna Beach is predominantly residential, including a fair number of seasonal properties, and home to a large retiree population.
Healthcare services, retail trade, and leisure and hospitality industries also have a presence in the local economy.
Economic indicators for Volusia County are mixed. Wealth levels approximate national averages, while the unemployment rate as of December 2012 (8.1%) exceeds the nation's (7.6%). Fitch notes that the county's unemployment rate has improved over the past year, dropping from 10%; however, a shrinking labor force drove this change, more than gains in the employment base.
SUBSTANTIAL TAX BASE LOSSES, SIGNIFICANT SPENDING CUTS
The city's tax base, like those of many municipalities in Florida, has been severely affected by the housing crisis. Total assessed value (TAV) has fallen over 35% since fiscal 2009. The housing market appears to be stabilizing with moderation of annual losses through fiscal 2012 and slight growth (2%) in fiscal 2013.
City officials moderately increased the millage in fiscal 2010 (to a very low 35 cents per $100 AV) but have held it constant since, resulting in $5 million (-32.7%) of lost tax revenues to the general fund over the past five years. Management has sought to offset this revenue reduction through comprehensive spending cuts, which have included a 20% reduction in work force.
MAINTENANCE OF SOUND RESERVE LEVELS
Despite these operational pressures, the city has kept its reserves above policy levels of 25% of spending (the sum of total expenditures and transfers out), which Fitch considers prudent. Fund balance in excess of the policy is often used to finance capital projects or one-time expenditures, as was done in the prior two fiscal years.
Fiscal 2011 unrestricted fund balance totaled $7.4 million (a strong 33% of spending), following a $3.3 million draw on reserves. The city spent the majority of this appropriation ($2.7 million) on acquisition of the golf course's assets in an effort to reduce an outstanding intra-governmental loan.
The intra-governmental loan reflects an accumulation of annual support to the golf course from the general fund. Now that the advance has been significantly reduced, the golf course anticipates that it will eventually be able to retire the remaining $600,000 of the loan through $50,000 annual installments. No support from the general fund was given in fiscal 2012, nor is any expected in fiscal 2013.
FISCAL 2012 AND 2013 BUDGET AND ESTIMATES
Fiscal 2012 unaudited results show a $238,000 (1% of spending) draw on fund balance for capital. Unrestricted reserves are expected to be $7.4 million at year end, representing a slight year-over-year increase as a percentage of spending from 33% to 36.4% due to a reduction in spending.
The adopted budget for fiscal 2013 shows a $620,000 (3.3% of spending) use of fund balance for capital expenditures, including $450,000 in funds for a sports complex. Labor concessions for the year included a reduction in pensionable benefits for police and fire employees, resulting in a $33,000 and $175,000 reduction in annual contributions for police and fire employees, respectively.
MANAGEABLE DEBT BURDEN, CARRYING COSTS
Overall debt levels are moderate on per capita ($3,610) and percentage of market value (2.5%) bases. Amortization of outstanding principal is rapid, with approximately 69% retired within ten years. The city's future debt plans are limited to a potential $4-5 million loan for capital projects in fiscal 2014.
Annual carrying costs related to debt service and retirement benefits totaled $4.8 million in fiscal 2011 or a moderate 17.7% of governmental fund spending. Of this amount, debt service represents the lion's share at $3 million or an affordable 11.4% of spending. Contributions to the state-administered pension plan, the Florida Retirement System, as well as the city's self-administered plan for police and fire employees totaled $1.7 million (6.2% of spending) for the year and toward other post-employment benefits were $21,000.
SOUND COVERAGE PROVIDED BY CB&A
Non-ad valorem revenues are significant relative to debt service and are diverse in nature. Though available non-ad-valorem revenues have been variable over the past few years, they posted an annual gain of 4% in fiscal 2011. Fitch considers the city's anti-dilution test to be moderate.
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).
Applicable Criteria and Related Research
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
Ginny Glenn, +1-212-908-9130
Fitch Ratings, Inc.
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