Fitch Ratings has assigned a rating of ‘BBB+’ to the following non-ad valorem revenue bonds of the City of Miami, Florida (the city):
-$47,385,000 special obligation non-ad valorem revenue refunding bonds, series 2012 (Port of Miami Tunnel project).
The bonds will be sold by negotiation the week of December 3. Proceeds will refinance an outstanding note in the principal amount of $45 million scheduled to mature Jan. 5, 2013. Proceeds of the note were used to fund the city’s required contribution to the acquisition and construction of the Port of Miami Tunnel and Access Improvement Project.
In addition, Fitch affirms the following ratings:
–$41.5 million general obligation (GO) bonds, series 2002A, 2002B and 2003B at ‘A-‘;
–$137.4 million special obligation non-ad valorem revenue bonds (street and sidewalk improvement program), series 2007 and 2009 at ‘A-‘;
–$70.6 million special obligation revenue bonds, series 2011A at ‘BBB+’;
–$101.3 million special obligation parking revenue bonds (Marlins Stadium project), series 2010A and 2010B at ‘BBB+’;
–$198.5 million limited ad valorem tax bonds at ‘BBB+’.
The Rating Outlook is revised to Stable from Negative for the GO and special obligation bonds, and remains Stable for the limited ad valorem tax bonds.
All special obligation revenue bonds, including the proposed issuance, are backed by the city’s covenant to budget and appropriate legally available non-ad valorem revenues, by amendment if necessary, in an amount sufficient to pay debt service on the bonds. The availability of non-ad valorem revenues to pay debt service is subject to the funding of essential government services and obligations, but does not create a specific pledge of or lien upon non-ad valorem revenues. The city’s non-ad valorem covenant is cumulative and continues until the bonds have been fully paid.
The special obligation parking revenue bonds are secured in the first instance by the city’s portion of the county’s 3% transient rental accommodations tax (the convention development tax, or CDT), a percentage of city parking surcharges on baseball stadium garages, and certain other parking revenues related to Marlins Park.
The special obligation street and sidewalk improvement bonds are secured in the first instance by the city’s portion of the county’s 6th cent and 3rd cent local option fuel taxes, the city’s portion of the county’s transportation surtax (sales tax), and a portion of certain city parking surcharges.
The GO bonds are secured by the city’s full faith and credit and unlimited ad valorem taxing power.
The limited ad valorem tax bonds are secured by a pledge of ad valorem taxes not to exceed 1.218 mills, as well as the city’s covenant to budget and appropriate non-ad valorem revenue in an amount not to exceed 10% of maximum annual debt service (MADS).
KEY RATING DRIVERS
OUTLOOK REVISED TO STABLE: Fiscal pressures remain, but risk to near-term negative rating action is lessened following strong results in fiscal 2012 that boost the city’s reserve levels. Fitch also considers as positive recent efforts to control spending, largely through labor-related savings.
RECURRENT MANAGERIAL CHANGES: Frequent turnover in key city management raises concerns with respect to budgetary management and oversight, recordkeeping, financial reporting, internal controls, and institutional knowledge.
SOUND ECONOMIC FUNDAMENTALS: Miami retains favorable long-term prospects that will leverage its role as a premier international trade center and tourist destination. Fitch anticipates intermediate-term stabilization in the recent economic weakening, particularly as it relates to joblessness and housing declines.
WEAK DEBT POSITION: Key debt metrics are on the high side and the city’s pension funded ratios are considered somewhat low; however, future capital needs have been scaled back, additional issuance plans are manageable, and Fitch views recently negotiated pension savings as a positive.
STREETS AND SIDEWALK BONDS: The ‘A-‘ rating for the special obligation streets and sidewalks revenue bonds reflects the solid 2.2x coverage of MADS in fiscal 2012 from the primary pledged revenue sources and absence of additional leveraging plans. The rating on these bonds is capped at the city’s GO rating.
NON-AD VALOREM REVENUE BONDS: The ‘BBB+’ rating of the special obligation non-ad valorem revenue bonds and parking revenue bonds is notched down from the GO rating on the city, which reflects risk to the absence of a specific lien on revenue, and inability to compel the city to generate sufficient non-ad valorem revenue to pay bondholders.
NARROW LIMITED AD VALOREM COVERAGE: The maximum millage rate pledged to bondholders results in a narrow 1.36x debt service coverage ratio, which serves as the basis for the ‘BBB+’ rating. Risk to significant decline in housing prices appears to have tapered off, and the city’s tax base registered positive annual growth for the first time in four years in fiscal 2013.
FISCAL 2012 OFFERS INJECTION TO GENERAL FUND RESERVES
The city is currently projecting an operating surplus after transfers of approximately $37.7 million or the equivalent of 7.9% of operating expenditures and transfers out. The impressive year-end surplus would largely fall to the assigned and unassigned fund balance, which would increase the city’s unrestricted resources (the sum of the unassigned, assigned, and committed fund balance under GASB 54) to more than $54 million or 11% of spending.
Fiscal 2012 would mark the second consecutive year the city has been able to add to reserves, and follows a four-year period during which a total of $112.8 million was drawn from general fund balance largely driven by actual revenues that failed to meet original budget expectations, rising pension costs, and consistent over-spending, particularly with respect to public safety.
Though improved, the city’s reserves remain below its financial integrity policies, which call for an unassigned balance equal to 10% of the prior 3-years’ average general fund revenue, and an additional 10% to fund long-term liabilities.
BALANCED BUDGET ADOPTED FOR FISCAL 2013
The city adopted a balanced budget for fiscal 2013 that does not appropriate existing reserves. Budgeted revenues total $503.2 million which is approximately $9.3 million below projected fiscal 2012 revenues. The budget does not rely on non-recurring sources to fund operations, and maintains a tax rate at 7.57 mills (an adequate cushion under the statutory cap of 10 mills).
The city was able to reduce its recurring labor costs by more than $34 million for fiscal 2013 to help close a budget gap of approximately $40 million or 8% of spending. Labor savings include $12 million in pension plan reforms and $16.8 million in actuarial modifications, chief among which was extending the amortization period of its pension plans to 20 years (which remains fairly conservative compared to most local governments) from the current 15 years. The city’s annual pension cost in fiscal 2013 is budgeted at $66.3 million (or about 13% of general fund spending) compared to $84.8 million (or 16% of spending) in fiscal 2010.
The budget also includes a $10.9 million appropriation for revenue shortfalls, which the city has established in the last several years to mitigate risk to appeals and tax collections that declined to a very low 87% in fiscal 2010 (collections have since improved to a still below-average 92%-93%; by state law, the city is required to budget at a 95% collection rate). An additional $5 million is set aside to fund unanticipated expenses as required pursuant to city ordinance.
FINANCIAL URGENCY DECLARATION
The city has declared financial urgency pursuant to Florida law in each of the prior three years. The city was ultimately able to negotiate contracts with labor effective for fiscal years 2012-2014; however, the city unilaterally imposed $76.9 million in reductions for fiscal 2011 through various modifications to the existing collective bargaining agreements.
These savings were instrumental in the city’s narrowly positive operating results for the year. Nonetheless Fitch believes the ability to foster a constructive relationship with labor is a more productive long-term management strategy, and is hopeful that the city’s recently negotiated labor contracts represents a step in that direction.
One of the risks to financial urgency is the potential for legal challenge. The police and fire unions are seeking reimbursement of the budget savings imposed in fiscal 2011. To date the city has successfully defended its ability to declare financial urgency before both the Florida courts and the Public Employees Relations Commission (PERC). Fitch’s rating assumes that an adverse outcome, if rendered, would be addressed in a manner that does not have a meaningful impact on the city’s budget or reserves.
BROAD NON-AD VALOREM BASE
All of the city’s special obligation bonds are backed by the city’s covenant to budget and appropriate non-ad valorem revenues to pay debt service. Non-ad valorem revenues are sizeable in absolute terms and diverse, budgeted at $276.1 million in fiscal 2013 including $88.4 million in franchise and utility taxes, $40.3 million from license and permits, $88 million in service charges, and $26.1 million in local government half-cent sales tax receipts. MADS on all special obligation bonds is $41.7 million, including the proposed issuance.
Fitch notes that annual debt service on the parking revenue bonds and street and sidewalk improvement bonds are self-supported from their respective primary pledged sources at a coverage ratio of approximately 1.2x and 2.2x, respectively. The rating on the parking revenue bonds reflects the city’s non-ad valorem covenant, whereas the solid coverage and diversity inherent in the revenues pledged to the street and sidewalk improvement bonds support the higher ‘A-‘ rating.
ADEQUATE COVERAGE ON LIMITED AD VALOREM BONDS
The limited ad valorem bonds millage is set at 0.9 mills for fiscal 2013, providing an adequate margin for a ‘BBB+’ rating against the 1.218 millage cap. The maximum levy would generate approximately 1.36x coverage of MADS based on fiscal 2013 taxable assessed value (TAV) of $31.3 billion and a 93% collection rate.
Fitch calculates the fiscal 2013 TAV could decline by 26.7% before the maximum pledged millage rate would fail to cover MADS by at least 1.0x. In contrast TAV declined by less than 20% in aggregate from its peak value in fiscal 2009 through fiscal 2012, and has improved by 3.2% on the year in fiscal 2013.
ELEVATED DEBT LEVELS TEMPERED BY ABSENCE OF MAJOR BORROWING PLANS
The city’s debt metrics are on the high side, largely owing to overlapping debt of the county and the school district. This concern is somewhat offset by the manageable scale of the capital improvement plan, which totals approximately $350 million through 2017 (or less than 1% of market value) for all general government projects. The city does not presently have any new money issuance plans.
The city’s tax-supported debt service budget for fiscal 2013 is $65.9 million or 12% of general fund and debt service spending. Combined with pension costs, the burden of servicing the city’s long-term liabilities approximates a sizable 25% of spending.
The city administers single-employer pension plans for police and fire, and for general employees and sanitation. Funded ratios are somewhat weak, at approximately 71% on a combined basis assuming a Fitch-adjusted 7% investment rate of return. The city pays the actuarial required contribution (ARC) annually. Recent reform efforts should help control the rate of growth in the pension liability going forward. The city funds retiree health care costs on a pay-go basis, at a cost of less than $10 million in fiscal 2013 which is about one-quarter of the ARC.
DIVERSE ECONOMIC BASE FEATURING SOUND GROWTH PROSPECTS
The area economy is diverse with a large international component, and the presence of healthcare, higher education, and professional and business services balance the tourism component of the city’s economy for which it is so well known. Wealth levels are below average, and the poverty index is double that of the nation.
The city’s unemployment rate has consistently been higher than that of the state and U.S. for at least the past decade despite a track record of favorable job growth largely due to its strong in-migration patterns. Miami’s unemployment rate remains elevated at 10.5% in August despite 4% growth in August employment year-over-year, which compares favorably to the 2.2% rate of improvement in Florida and growth of 1.6% nationally.
The city’s employment base also increased by 4.1% in calendar year 2011 following a significant 15.7% contraction between 2007-2010 due to several losses in the construction and real estate sectors. Global Insight forecasts non-farm employment growth will average 2.4% per year through 2014 within the Miami-Fort Lauderdale-Miami Beach metropolitan statistical area.
As noted earlier the city’s TAV increased by 3.2% in fiscal 2013, and the August Case-Shiller Home Price Index for Miami indicates a 6.6% increase in prices from one year ago.
In addition to the sources of information identified in the 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, Zillow.com, and National Association of
Applicable Criteria and Related Research:
‘Tax-Supported Rating Criteria’, dated Aug. 14, 2012.
‘U.S. Local Government Tax-Supported Rating Criteria’, dated Aug. 14,
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria