Fitch Ratings has assigned an ‘AA-‘ rating to the following Bradenton, FL (the city) revenue bonds:
–$14.62 million special obligation revenue refunding bonds, series 2016.
The bonds are being issued to advance refund the callable maturities of the series 2007 special obligation revenue bonds for annual debt service savings. The bonds will be sold via competitive bid on June 13, 2016.
In addition, Fitch has affirmed the city’s Issuer Default Rating (IDR) at ‘AA’ and the following ratings:
–$15.62 million special obligation revenue bonds, series 2007 at ‘AA-‘;
–$5.29 million increment tax revenue bonds, series 2011 (downtown redevelopment area riverwalk project) issued by the Bradenton Community Redevelopment Agency at ‘AA-‘.
The Rating Outlook is Stable.
The series 2016 bonds are payable from state sales tax rebate grants distributed under the retained spring training franchise incentive program (the pledged revenue). In addition, the city has covenanted to budget and appropriate (CB&A) non-ad valorem revenues (non-AV) in an amount sufficient to pay debt service on the bonds and fund any debt service reserve fund (DSRF) deficiency, after taking into account the pledged revenue.
The tax increment bonds are secured by a junior lien on tax increment revenues in the downtown redevelopment area. As additional security for this obligation, the city has included its CB&A from non-AV resources pledge in the event that tax increment revenues are insufficient. As such the bonds are rated one notch below the city’s IDR.
KEY RATING DRIVERS
Bradenton’s IDR of ‘AA’ reflects the city’s low long-term liability burden and sizable financial cushion that offset elevated fixed carrying costs and narrow economy. Through the recent recession, the city’s strong control over revenues and spending sustained a healthy financial performance that maintained substantial reserves.
The CB&A debt is rated ‘AA-‘, one notch off the city’s IDR, due to the absence of a specific pledge and the inability to compel the city to generate non-AV revenues sufficient to pay debt service.
Economic Resource Base
The city is located on the west coast of Florida, in Manatee County (GO bonds rated ‘AAA’, Stable Outlook), approximately 40 miles south of Tampa. Encompassing approximately 15 square miles, the city is relatively mature with a 2015 census estimated population of 54,437.
Revenue Framework: ‘aa’ factor assessment
Strong growth in general fund revenue above the pace of U.S. economic expansion reflects a mix of tax base gains and growing tourism industry as well as policy action by the city to increase property tax rates. The city retains considerable flexibility to raise additional revenues under the 10-mill property tax cap.
Expenditure Framework: ‘a’ factor assessment
Fixed carrying costs account for a quarter of governmental spending, a majority of which are the city’s pension contributions (the city makes the full actuarially determined contribution). The majority of the city’s general fund spending is for public safety, a service that management indicated would maintain a high service level and creates a practical limit on the otherwise flexible work force spending environment.
Long-Term Liability Burden: ‘aaa’ factor assessment
The long-term liability burden is modest at less than 10% of personal income, most of which is outstanding debt obligations from overlapping governments. The city’s capital needs are largely funded by pay-go spending and there is no governmental borrowing currently planned.
Operating Performance: ‘aaa’ factor assessment
The city’s finances are characterized by sizable reserves maintained well above the formal reserve policy (10% of spending reserved for emergencies). Management’s willingness to raise property taxes and cut expenditures highlights the ability and willingness to offset tax base constriction during periods of economic decline.
HIGH CARRYING COSTS & NARROW ECONOMY: The rating is sensitive to movement in the city’s high fixed cost burden and ability to grow its revenue base.
The city’s economy is reliant on agriculture and tourism. However, other sectors including education, health care, retail and manufacturing provide some diversity. Tropicana Products, Inc.’s orange juice bottling and distribution plant is the largest taxpayer in the city at an elevated 5.6% of the tax base. The leading employer is the Manatee County school board with 5,500 employees (representing nearly 25% of total city employment). Population growth has been static and the percentage of residents over 65 years old is higher than the Florida norm.
After a period of rapid growth the city’s economy was hard hit by the recession, experiencing significant job losses and precipitous declines in housing values. The city’s unemployment rate rose to 12% in 2010 and housing values fell by over 50% from peak levels in 2006. Post-recession recovery, beginning in 2011, had been modest at first but has been accelerating in recent years. The unemployment rate in March 2016 was down to 4.2%. Tourism continues to strengthen and the number of visitors increased by 7% in 2014 and 8% in 2015 to all-time highs according to statistics from the county’s convention and visitor’s bureau. The taxable assessed value (AV) for fiscal 2016 (now in its third consecutive year of recovery) has reached 70% of the pre-recession peak value in fiscal 2008.
Property taxes are the largest general fund revenue source at two-thirds of total revenue. The volatile tax base experienced a 40% decline during the recession during which the city raised property taxes five times from 2009-2014 (a 43% increase in total). The current rate is 5.9 mills and is unchanged since fiscal 2014; the rate is comparable to Bradenton’s peers and remains well below the statutory cap. Recently released assessed values for fiscal 2016 show a third consecutive year of solid growth based on annual reassessments and new construction in the city.
Historically, the city’s revenues have shown erratic growth patterns due to the volatile nature of the revenue system, and Fitch expects this trend unlikely to change due to the stagnant population growth and a tax base reliant on housing prices.
Property taxes are subject to a statutory limit of 10 mills (excluding voter millage for debt service). The city’s non-voted tax rate of 5.9 mills allows for additional taxing flexibility. On an annual basis the maximum millage rate that may be levied is limited to a revenue neutral rate, adjusted for inflation. This maximum may be exceeded (up to the cap) by the vote of the city council.
Over 60% of the city’s general fund spending is for public safety expenditure. The city’s flexible work force environment allowed for a significant decrease in head count from pre-recession levels (currently there are 7% fewer employees than in 2005), but police staffing remained unchanged. The city’s stable population over the last decade is not expected to significantly pressure this expenditure.
As with most local governments, Fitch expects the city’s pace of spending will generally match or slightly exceed revenue growth.
Historical carrying costs, including debt service, pension and OPEB, fall just within the ‘a’ category at 25% of spending as of the city’s fiscal 2015 results. These fixed costs are primarily driven by pension contributions, which the city has a long history of paying at, or above, their full actuarial requirement.
Long-Term Liability Burden
The city’s long-term liability burden is low at 8.5% of personal income including the direct and overlapping debt and net pension liability. The most significant piece of the burden is due to overlapping debt issued by the county and school district. All of the city’s debt is backed by non-ad valorem revenues and is amortized at 43% within the next 10 years. Aside from planned borrowing by the city’s self-supporting utility system, there are no plans for additional bonding for the foreseeable future as capital needs are modest and generally funded on a pay-go basis.
The city’s net pension liability is a moderate $44.4 million or 2.7% of personal income, using Fitch’s adjusted 7% investment return assumption. General employees of the city participate in the Florida Retirement System (FRS), a multiple-employer cost-sharing plan administered by the state. The city’s portion of the net pension liability is 86% funded at the 7% discount rate. The city also maintains pensions for firefighters and police officers funded at 79% and 72%, respectively, at Fitch’s 7% discount rate assumption.
Other post-employment benefit (OPEB) changes have decreased the relatively large liability from $60 million in fiscal 2008 to less than $20 million in fiscal 2015 (1% of personal income).
The city’s financial profile is exceptionally strong and characterized by substantial reserves and high levels of liquidity. The city has historically maintained large fund balances to account for the risk of storm damage stemming from its location along the Gulf of Mexico. Unreserved general fund balance averaged about 50% of expenditures between fiscals 2008 and 2010. After the city merged many of its special revenue funds into the general fund (to comply with GASB 54 in fiscal 2011) unrestricted fund balance has consistently exceeded 100% of spending, which Fitch believes would be sufficient cushion to manage potential revenue declines associated with a moderate recession.
Management has been able to maintain ample reserves despite the effects of the recession through the implementation of a series of property tax increases and spending adjustments, including position reductions and across-the-board budget cuts. As a result, general fund operating expenditures contracted by 12% between fiscals 2008 and 2011, enabling the city to report relatively balanced operations over that period without postponing actuarially required contributions to pensions.
The ratings on the CRA tax increment bonds and special obligation bonds are based on the city’s covenant to budget and appropriate non-ad valorem revenue. Legally available non-AV revenues in fiscal 2015 are estimated at $10.9 million relative to $2.3 million in debt service backed by the city’s non-ad valorem covenant. CB&A debt is rated one notch below the city’s IDR due to the absence of a specific pledge and the inability to compel the city to generate non-AV revenues sufficient to pay debt service.
The primary source of repayment on the tax increment bonds is the CRA tax increment revenues. Increment revenues levied by the city and county are derived from a 536-acre special district of the downtown section of the city. The city’s non-AV pledge is triggered only if tax increment revenues are insufficient to pay debt service in any year. Fiscal 2015 tax increment revenues provided over 5x coverage of MADS. However, Fitch’s assessment of the tax increment revenue streams’ volatility to a moderate national economic decline and the resultant coverage cushion assuming issuance up to the legal 1.5x MADS additional bonds test is consistent with the ‘a’ category level of financial resilience. Furthermore, the tax increment project area is relatively small in geographic size and features a high level of taxpayer concentration.
The special obligation bonds are payable from a first lien on state sales tax rebate grants and the CB&A. The grants are distributed by the state to certified local governments for the purpose of constructing or renovating spring training facilities. Distributions consist of monthly payments of $41,667 ($500,000 annually) for 30 years, equal to the life of the bonds. The sales tax covers only about 45% of debt service on the special obligation bonds, with the CB&A covering remaining annual debt service requirements. A cash-funded debt service reserve further secures the bonds.
In addition to the sources of information identified in Fitch’s applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
Dodd-Frank Rating Information Disclosure Form