Fitch Affirms Martin County, FLs Gas Tax Revenue Bonds at AA-; Outlook Stable

Fitch Ratings has taken the following rating actions on martin County Florida (the county):

–$31.92 million gas tax revenue bonds series 2006, affirmed at ‘AA-‘;

–Implied unlimited tax general obligation bonds, affirmed at ‘AA’;

The Rating Outlook is Stable.

SECURITY

The gas tax revenue bonds are secured by a first lien on revenues derived from a basket of state and locally imposed gas taxes. The bonds are additionally secured by a debt service reserve fund surety provided by Ambac.

KEY RATING DRIVERS

ADEQUATE DEBT SERVICE COVERAGE: Debt service coverage on the gas tax revenue bonds was strong at 2.93x in fiscal 2011. There are no immediate plans to issue additional gas tax bonds.

SOUND FISCAL MANAGEMENT: The county’s history of prudent financial stewardship combined with a sound level of reserves ample financial flexibility.

LIMITED LOCAL ECONOMY: The local economy is primarily residential and somewhat limited. Wealth levels are above average; however, unemployment rates are higher than both the state and national levels.

LOW DEBT BURDEN AND CARRYING COSTS ARE MANAGEABLE: the county’s overall debt levels are below average and carrying costs including debt service, pension, and other post-employment (OPEB) benefits are moderate.

WHAT COULD TRIGGER A RATING ACTION

DIMINISHED FINANCIAL PERFORMANCE: Maintenance of adequate reserves and balanced operations will be instrumental in preserving the current rating level given the county’s limited economy.

CREDIT PROFILE

Martin County is located on the eastern coast of Florida approximately 45 miles north of Palm Beach. The county covers 556 square miles and has a population of approximately 150,000. The county includes the cities of Palm City and Stuart, the county seat. The area is primarily residential with a somewhat limited economy concentrated in agriculture, health care and tourism.

FUEL TAX REVENUES ARE STABLE

Pledged gas tax revenues have remained relatively stable with minimal declines over the past three years. Some volatility is to be expected with regard to relative economic factors; however, the essential nature of the commodity partially mitigates this concern. Fiscal 2011 revenues declined 1.4% from a year prior although coverage remained strong at 2.93x maximum annual debt service (MADS).

Portions of the pledged gas tax levies expire prior to final maturity of the bonds; assuming no further leverage, MADS coverage would decline no lower than 2.19x through final maturity based on fiscal 2011 collections adjusted for the expired levies. Unaudited 2012 results indicate a minimal decline; however, management has budgeted for a small increase in 2013; the county does not have plans for additional gas tax debt.

AMPLE FINANCIAL FLEXIBILITY

Financial operations have historically been strong, highlighted by conservative budgeting policies, generally positive year-end results, and healthy reserves. The county’s fiscal policy establishes an emergency reserve equal to 10% of the general fund operating budget and the county has consistently exceeded this benchmark with reserves in the 14% to 19% range.

Property tax revenues are the largest general fund revenue source generating approximately 74% of revenues in fiscal 2011. In response to assessed value (AV) declines in recent years, a combination of expenditure reductions and revenue neutral property tax rate increases has enabled the county to improve its reserves throughout the recession and housing market correction.

A net operating surplus after transfers of over $4 million in 2011 improved the unrestricted general fund balance to a robust $24 million or 19% of total spending. The county expects to add to the already ample unrestricted general fund balance in fiscal 2012, as unaudited results show most major revenue sources outperforming the budget. The fiscal 2013 budget is balanced without the use of reserves and as such no material changes to fund balance are expected in the immediate future.

LIMITED LOCAL ECONOMY

The local economy is based mainly in agriculture, health care and tourism. The largest private sector employers in the county include Martin Memorial Health Systems (2,825), Publix (1,276), IVOX Solutions (532), and TurboCombuster Technologies (420). The 9.4% unemployment rate recorded in September 2012 was down from 11.2% a year prior due to a combination of job growth and labor force contraction. However the unemployment rate remains higher than both the state (8.6%) and the nation (7.6%) during the same month.

A wealthier retiree population accounts for per capita income metrics 30%-35% above state and national norms. Population growth has moderated after experiencing large gains in the earlier part of the prior decade.

The county experienced large declines in assessed values in fiscals 2009 through 2011, like much of the state, and posted more moderate declines of 2.2% and 0.6% in fiscal 2012 and 2013, respectively. The most recent Case-Shiller Quarterly Index available for the county (first quarter 2012) depicts single-family home prices increasing a modest 0.5% year-over-year. Residential building permits are on the rise, which may indicate the beginning of a recovery.

MANAGEABLE CARRYING COSTS

The county’s overall debt burden is low at $1,107 per capita and 0.6% of full market value. Amortization is rapid with 77% of principal retired within 10 years and the county has minimal plans for additional debt in the near future.

Pension benefits are provided through the Florida Retirement System (FRS), which Fitch considers to be a well-funded pension plan. FRS covers nearly all employees of the county. The county is required to make contributions in accordance with rates established by the Florida Legislature and has annually met the annual required contribution; contributions represent a somewhat high 12% of general fund expenditures.

Other post-employment benefits are provided by the county on a pay-go basis and the unfunded liability is a low 0.6% of market value. Total carrying costs including debt service, pension, and OPEB contributions are a moderate 20% of general fund expenditures.

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 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