NEW YORK -- Fitch Ratings has upgraded the following ratings for the city of Deltona, Florida (the city):
--$13.8 million transportation capital improvement revenue (TCIR) bonds, series 2007 to 'AA-' from 'A+';
--Implied unlimited tax general obligation (ULTGO) to 'AA' from 'AA-'.
The Rating Outlook is Stable.
The TCIR bonds are secured by five-cent and six-cent local option gas taxes distributed by the county, applicable interest and transportation impact fees.
The bonds are additionally secured by a cash-funded debt service reserve fund (DSRF) equal to maximum annual debt service (MADS) on the bonds. The city covenants to budget and appropriate (CB&A), by amendment if necessary, a sufficient amount of non-ad valorem revenue to make up any deficiency in the DSRF.
Appropriation is mandatory subject to the availability of non-ad valorem revenues, after funding essential government services and obligations with a specific lien on non-ad valorem revenues. The city's covenant obligation is cumulative and continues until the bonds have been fully paid.
KEY RATING DRIVERS
STRONG FISCAL TRACK RECORD: The rating upgrade is based on the city's sustained and continuing prudent management of financial operations, positive general fund results maintained amidst the recent recession, and adherence to strong reserve policies.
FAVORABLE DEBT PROFILE: The overall debt burden is low to moderate and future financing requirements are manageable. Pension and other post-employment benefit (OPEB) liabilities are not significant. The cost of funding debt and retiree benefit liabilities consume a modest share of the operating budget.
LIMITED ECONOMY WITH SIGNS OF IMPROVEMENT: Proximity to regional job markets somewhat offsets the limited nature of economic activity within the city. After several years of steep declines, assessed value (AV) has returned to moderate growth. Unemployment continues to recover and is now only slightly above state and national averages.
RESERVE COVENANT AS BASIS FOR RATING: The rating on the TCIR bonds is based on the city's reserve fund deficiency covenant, which is notched down from the city's implied ULTGO rating. Pledged revenues (gas taxes, interest earnings, and impact fees) more than sufficiently covers MADS at 1.5 times (x) in fiscal 2013.
CONTINUED SOUND FINANCIAL OPERATIONS: The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices, conservative budgeting, and ample reserves.
The city is a predominately residential community located in the southwest corner of Volusia County, in the east central part of the Florida Peninsula. The city is approximately 25 miles northeast of Orlando, and a similar distance southwest of Daytona Beach. Population growth is sound, increasing 24% since 2000 to 86,290 residents in 2013.
VERY STRONG RESERVES PROVIDES SIGNIFICANT FLEXIBILITY
The rating upgrade recognizes that the city has maintained a high level of reserves and balance sheet liquidity for an extended period of time. Unrestricted general fund reserves totaled $21 million in fiscal 2013, equivalent to a very strong 70% of spending. The city's fund balance policies are viewed as conservative, requiring a minimum operating reserve equal to two months of general fund operating expenditures, and a $6 million natural disaster reserve, cumulatively equaling over 30% of current general fund spending.
Fitch expects the city to maintain compliance with its reserve policies and a high level of reserves given its history of conservative budgeting. Additionally, the city retains ample financial flexibility as management has made minimal spending reductions to date, instead controlling expenditure growth by delaying planned capital projects and implementing a hiring freeze.
TREND OF POSITIVE OPERATIONS
The city's consistently well managed finances is another positive rating consideration with operating surpluses (after transfers) recorded in five straight years since fiscal 2009 (including a $1.9 million or 6.5% addition to fund balance in fiscal 2013). Management indicates fiscal 2014 results will again add to the general fund balance because of positive budgetary variances; the total general fund balance is projected to increase by about $1.5 million at year-end.
The fiscal 2015 proposed general fund budget is balanced. General fund expenditures are budgeted to increase by $1.9 million or 6.2% over the prior year's budget, primarily as a result of increases in pension, medical and liability insurance costs, and an increase in the Volusia County Sheriff's Office contract. These increases were offset through overall growth in general fund revenues totaling roughly $2.6 million, driven by tax base growth and a general economic improvement.
The budget allocates $500,000 for funding of sidewalk construction, a $500,000 transfer out of the general fund for road resurfacing, and a $250,000 additional contribution to pay down the unfunded liability of the firefighters' pension fund. The ending total general fund reserve balance is budgeted to remain flat with the prior year.
LIMITED BUT IMPROVING ECONOMY
The city is a largely residential and mostly built-out community with only a small commercial sector. Daytona State College (1,256 employees) serves as the city's largest employer, followed by Publix Supermarkets (558), and Wal-Mart (350).
The city's unemployment rate continues to improve, dropping from a peak of 12% in 2010 to the June 2014 rate of 6.4%, hovering just above the 6.3% state and national averages. Income metrics are mixed, with median household income on par with the state, and 92% of the U.S. average, while per capita money income levels are almost one-quarter less than those of the state and nation.
RECOVERY IN TAX BASE
The city's tax base is predominantly residential and volatile historically. AV fell 61% from fiscal 2007 through fiscal 2012, followed by growth of 4.9% and 8.1% in fiscal years 2013 and 2014, respectively. Current home prices are up close to 20% on the year according to Zillow and Trulia, but median sales prices (roughly $100,000) remain considerably below pre-recession highs.
Concerns associated with tax base volatility are somewhat tempered by the city's historical practice of increasing the millage rate to stabilize property tax revenues, which account for approximately 36% of general fund revenues. The city did reduce the tax rate to 7.9 mills from 8.3 mills in fiscal 2012, and it has remained at that level since, preserving some cushion within the statutory 10 mill limitation. The proposed fiscal 2015 budget keeps the tax rate flat again, despite the increase in AV, generating an additional $940,000 in revenue.
AFFORDABLE DEBT BURDEN
Overall debt on a per capita basis is low at $1,442 and moderate as a percentage of market value at 4.5%. Amortization of debt is rapid, with approximately 64% of principal retired within 10 years. Total carrying costs (including debt service, pension and OPEB costs) consume only 5.2% of governmental spending in fiscal 2013 which Fitch views as important credit strength.
Future capital needs are manageable. The fiscal 2015-2019 capital improvement plan (CIP) totals $24 million. Stormwater ($8.4 million) and transportation ($4.7 million) projects represent the bulk of the CIP, and are funded primarily through general fund pay-go and transfers, excess gas tax revenue, grants, and impact fees. Management indicated the city has no future tax-supported debt plans.
LIMITED PRESSURE FROM OTHER LONG-TERM LIABILITIES
The city participates in the Florida Retirement System (FRS) and manages two single-employer pension plans (a defined benefit plan for firefighters and a defined contribution plan for general employees). The majority of city employees participate in the FRS plan as the city's defined contribution plan was closed to new hires as of December 2006. The funded ratio for the firefighters plan was 75.8% as of the most recent Oct. 1, 2012 actuarial report, or 68% when adjusted using Fitch's more conservative 7% rate of return. The Fitch-adjusted unfunded accrued actuarial liability is modest at approximately $7 million or 0.2% of market value.
The city provides an implicit subsidy for its OPEB plan, and funds this liability on a pay-as-you-go basis. As of Oct. 1, 2012, the unfunded liability was only $1.7 million.
SOUND COVERAGE FOR TCIR BONDS; CB&A PROVIDES SUPPORT
The city's non-ad valorem revenues returned to growth in fiscal 2013, increasing $1.2 million or 4.6% after several years of declines. Fiscal 2013 non-ad valorem revenues net of essential services cover MADS on all obligations backed by the city's non-ad valorem revenue a healthy 3.1x. In addition, the city's substantial reserves are available to cover any potential shortfalls in revenues.
Coverage of MADS on the TCIR bonds ($1.5 million in fiscal 2017) from pledged revenues was a sound 1.5x in fiscal 2013. Fitch notes that pledged revenues could decline over 30% and still provide 1.0x MADS coverage. Legal provisions are considered moderate, with additional leveraging requiring 1.35x MADS coverage of gas taxes or 1.50x MADS coverage of gas taxes and transportation impact fee revenue.
Both portions of the gas tax revenue are distributed between Deltona, Volusia County and the other incorporated municipalities within the county pursuant to an interlocal agreement and distribution formula that considers each municipality's AV, population, and the number of its current lane road miles. The interlocal agreement, slated to sunset in 2013, was renewed for an additional five years.
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, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, and the 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