Fitch Rates Miami-Dade County, FL's $200MM GO's at 'AA'; Outlook Stable.
--$200 million GO bonds (public health trust program) series 2016A.
The bonds were originally issued in September 2016 (not rated by Fitch) in the aggregate principal amount of $200 million and are currently outstanding in the same amount, all of which are being converted to a fixed interest rate mode and remarketed on or about August 21. The bonds were originally issued to pay for a portion of the cost to modernize, improve and equip facilities of the Jackson Health System.
Fitch has also affirmed the following Miami-Dade County, FL ratings:
-- Issuer Default Rating (IDR) at 'AA';
-- Public facilities revenue bonds (Jackson Health System) at 'AA-';
-- Professional sports franchise facilities tax revenue and revenue refunding bonds at 'A+'.
The Rating Outlook is Stable.
GO bonds: the bonds are a general obligation of the county backed by its full faith, credit, and unlimited ad valorem taxing power.
Public Facilities Revenue Bonds: The bonds are backed by revenue generated from the operation of a number of county-owned public health care facilities operated by the Public Health Trust (PHT), which includes the proceeds of a voter-approved half-cent sales tax. The county covenants to appropriate in its annual budget sufficient amounts of legally available non ad valorem revenues (NAV) to replenish any deficiency in the debt service reserve fund (DSRF) for the bonds. The DSRF is funded from cash in an amount equal to maximum annual debt service (MADS) on the bonds.
Professional Sports Franchise Facilities Tax (PSFFT) Revenue Bonds: The bonds are backed by a first lien on a 1% PSFFT and a 2% tourist development tax (TDT). The PSFFT and TDT (the pledged dedicated taxes) each constitute a tax on the rental of facilities such as hotels, motels and other transient accommodations countywide (excluding facilities within the municipal limits of the cities of Miami Beach, Bal Harbour and Surfside). In addition, the county has covenanted to budget and appropriate sufficient NAV revenues to make up any deficiency in PSFFT and TDT revenue to pay debt service. The county can be released from the NAV covenant if the combined PSFFT and TDT equal at least 150% of MADS in each of the preceding two fiscal periods.
The 'AA' GO rating and IDR reflect the combination of the county's high revenue raising authority relative to potential revenue declines under a moderate economic downturn scenario, and more moderate capacity to adjust spending from both a legal and practical perspective. Budget management practices have improved and support an expectation for maintenance of an adequate financial position through economic cycles. Long-term liabilities are expected to remain moderate at less than 20% of personal income despite pressures from a significant capital plan.
The 'AA-' on the public facilities revenue bonds (Jackson Health System) reflects the county's NAV covenant and is one notch below the IDR. The 'A+' rating on the PSFFT revenue bonds is also based on the NAV covenant. However, a two-notch rating distinction from the IDR reflects the potential release of the NAV covenant under the terms of the bond resolution. Fitch views this as an additional risk factor, albeit one with a low likelihood of occurrence until near final maturity of the bonds based on our revenue analysis. For more information on the PSFFT revenue bonds, see "Fitch Rates Miami-Dade County, FL's Sports Facilities Franchise Tax Revs 'A+'; Outlook Stable" dated July 19, 2018 on Fitchratings.com.
Economic Resource Base
Miami-Dade is the 7th largest county in the U.S. by population and the anchor of the Miami-Fort Lauderdale-West Palm Beach metropolitan statistical area (MSA), which is one of the U.S.'s largest economic centers. Trade and transportation is the leading sector by employment reflecting the county's position as a gateway for trade with Latin American countries. Miami's tourism and real estate markets are also key drivers of economic activity, but susceptible to periods of high volatility through economic cycles. A high incidence of poverty is another economic vulnerability.
KEY RATING DRIVERS
Revenue Framework: 'aa'
Flat general fund revenue performance over the 10-year period ending fiscal year 2017 (September 30) reflects a combination of severe economic and housing stress during the Great Recession and policy actions. Fitch believes the county's organic revenue growth prospects are more favorable than prior revenue performance suggests, given the severity of the prior recession, and expectations for ongoing business investment and population growth, and the strong performance of key trade and tourism markets. The county also retains considerable independent legal ability to raise revenue supporting the 'aa' revenue framework assessment.
Expenditure Framework: 'a'
The expenditure framework assessment of 'a' reflects an expectation for ongoing spending pressures from rising service demands and labor costs which are subject to collective bargaining. Growth in contributions to health and transit operations within maintenance-of-effort formulas temper an otherwise manageable level of fixed costs associated with debt and pension payments. Fitch believes an adequate level of flexibility exists through legal control over staffing.
Long-Term Liability Burden: 'aa'
Debt and pension liabilities are expected to remain comfortably within the range for an 'aa' long-term liability burden assessment. Growth in the county's economic resource base will help accommodate a likely increase in debt to fund the county's considerable capital plan. Pension liabilities are mostly driven by the county's participation in the state-administered Florida Retirement System (FRS) and are not expected to pressure the assessment.
Operating Performance: 'aa'
The county maintains an adequate level of unrestricted reserves and high legal authority to raise revenue, which together underpin its very strong capacity to manage risks inherent in a cyclical downturn. The 'aa' operating performance assessment assumes the county will maintain unrestricted resources at or near the county's policy requirement of 7% of the general fund budget, and avoid budget management practices that resulted in a weakening of financial resources to as low as 4% of spending during the Great Recession.
Financial Flexibility: Fitch expects the county will address future budgetary gaps largely through recurring actions and limited reliance on reserves and other one-time actions. A decline in unrestricted financial reserves or diminishment of budgetary flexibility could pressure the operating performance assessment and GO bond, IDR, and NAV-supported bond ratings.
Miami-Dade continues to experience solid population and economic growth. The county's 2017 population is estimated at 2.75 million, up almost 20% from 2.3 million in 2000. County employment continues to increase at a healthy pace driven by a strong tourism and construction market, in addition to trade and transportation. The countywide taxable assessed value (TAV) for fiscal 2017 was $250.4 billion, an increase of almost 8.5% from the prior year, which also surpassed the prior peak year value recorded in fiscal 2008. The median home value in Miami-Dade County is reported by Zillow Group at nearly $295,000, surpassing the peak mark reported in June 2008. The Zillow one-year forecast projects an additional increase in home values of 5.3%.
Property taxes accounted for 56% of general fund revenue in fiscal 2017 followed by various service charges at nearly 14%, intergovernmental revenues at 12%, and license and permits at just over 4%. Intergovernmental revenue largely represents the county's portion of the local government sales tax (LGST). The LGST is remitted to the state by sales tax dealers within the county and that sum (less a collection fee) is earmarked for distribution back to the county and each of its municipalities pursuant to a population-based formula.
General fund revenues are essentially unchanged over the 10-year period ending fiscal 2017. The county's stagnant revenue performance reflects a period of dramatic decline in housing and taxable value in the county associated with the Great Recession. The median value of homes in Miami-Dade County fell more than 50% from 2007-2011 based on information reported by Zillow Group, and the county's tax base declined 25% in fiscal years 2009-2012. Historical general fund revenue results also capture a lowering of county millage rates and statewide property tax reforms.
Looking forward Fitch would expect general fund revenue growth, absent policy action, to be slightly above the level of inflation given forecasts for population, employment, and income growth in the Miami-Fort Lauderdale-West Palm Beach MSA. General fund revenue performance has been healthier as the economy continues to perform well, registering annual growth of 3.7% in fiscal 2014, 5.9% in fiscal 2015, 4.5% in fiscal 2016, and 6.0% in fiscal 2017.
There are some concerns in regard to revenues over the near term, including a pending amendment to the state constitution that would increase the homestead exemption (if approved by voters this fall). The county estimates a general fund revenue loss of $37 million (less than 2% of budget) from a successful referendum; the county has established various reserves in this year's budget and freezing certain positions to account for this potential revenue loss. The county is also beginning to forecast lower revenues associated with non-property tax sources related to several factors, including pressure on disposable personal incomes given the increase pressure on home prices and residential rental rates.
The county retains a high level of legal authority to increase revenues in relation to the potential revenue volatility it may experience through economic cycles. The non-voted general operating millage rate adopted for fiscal 2017 was 7.37 mills compared to a statutory limit of 10 mills. Annual changes in the millage rate are determined using a rolled-back or revenue neutral rate adjusted for changes in Florida per capita personal income; however, this limitation may be overridden by vote of the county governing body.
The county also has a separate 10-mill limitation applicable to the unincorporated municipal service area (UMSA). Approximately 43% of the county's population resides within the UMSA; these residents pay a separate property tax for 'municipal' services provided by the county. The county estimates it can generate approximately $680 million in additional property tax revenue from the countywide tax rate millage capacity and $550 million of additional revenue for UMSA services (compared to general fund revenues of approximately $2.2 billion in fiscal 2017). The county also retains an independent legal authority to increase certain fee and service charge revenues, which account for a smaller percentage of total revenue.
The general fund supports a broad range of governmental activities including general administration and oversight, police and fire rescue, recreation, transportation, and public health, among other functions. Public safety is the largest single expense category consuming slightly more than 45% of total general fund spending (operating expenditures and transfers out) in fiscal 2017.
Spending levels are expected to track changes in population and inflation and expand at a pace that is in line with to marginally above the pace of revenue change over time in the absence of policy actions.
The county retains an adequate to solid capacity to adjust spending levels throughout the economic cycle. Employee wages and benefits are subject to collective bargaining; as of earlier this month the county is no longer at impasse with any of its bargaining units. Three-year contracts were agreed upon ending fiscal 2020. The county has experienced mixed success achieving employee concessions in the past, most recently imposing, then retracting, higher contribution amounts for healthcare coverage.
The county retains control to adjust the size of the workforce which it amply demonstrated during the last recession achieving considerable cost savings through workforce reduction. Fitch believes there are some practical limits to the county's ability to achieve additional cost savings absent cuts to core services, however, recent budgets have increased funding allocations for a variety of services and programs that were reduced in prior years, effectively restoring capacity for cost saving actions in the future, if necessary.
Funding commitments for the operation of the Miami-Dade Transportation Department (MDT) and Jackson Memorial Hospital (JMH) are subject to separate maintenance-of-effort (MOE) formulas. In fiscal 2017 general fund transfers out to the MDT and JMH were approximately $184 million and $175 million, respectively, or approximately 10% of governmental spending. The healthcare MOE is based on a millage equivalent of 0.6667 mills and a percentage of certain general fund revenues per state law. The transfer to MDT escalates at 3.5% annually pursuant to the MOE (however, the county has adjusted the MDT beyond the 3.5% requirement in its five-year financial forecast to fund system operations and maintenance and increased debt service requirements). Fitch views the transfers to JMH and MDT as effectively restricting the county's overall expenditure flexibility. Furthermore, the cost of funding debt service and retiree pension and health benefits are moderate, estimated by Fitch at approximately 16% of governmental spending, but with MOEs the fixed-cost burden is fairly high.
Long-Term Liability Burden
Long-term liabilities associated with direct and overlapping debt and retiree pension benefits are estimated by Fitch at a moderate 12% of the county's total personal income, which is at the low end of the range for a 'aa' long-term liability assessment. Direct debt is the largest single component of the long-term liability burden, approximating $5.7 billion (general obligation and other governmental obligations) or close to 4.5% of personal income.
In Fitch's view a material portion of Miami-Dade County's resource base is excluded from its total personal income given the degree of economic activity driven by non-residents. Fitch measures the county's long-term liabilities relative to market value as slightly more favorable than the 'aa' assessment. However, Fitch expects the county's long-term liabilities to increase in the intermediate term as the county continues to advance a sizable capital improvement plan and repay its outstanding debt at a slow pace (roughly 30% within 10 years). General government capital needs identified through 2023 total $4.7 billion (excluding aviation, water and sewer, solid waste and other enterprise supported activities). The capital plan is expected to be financed mostly through the issuance of additional debt and lease obligations; however, Fitch believes the county will likely modify the timing and execution of its capital plan to align closely with available resources.
Approximately 30% of the county's long-term liability burden is derived from its participation in the state-administered Florida Retirement System (FRS). The Fitch-adjusted ratio of fiduciary net position (FNP) to total pension liability (TPL) for FRS is 84% as of the July 1, 2017 valuation date. The county makes an actuarially-based required contribution to FRS as established by the state legislature. The county also administers a separate single employer defined benefit plan for employees of the Public Health Trust (PHT) (Jackson Memorial Hospital). The county fully funds the actuarial determined contribution to the PHT plan, which has a Fitch-adjusted net pension liability and ratio of FNP to TPL of approximately $151 million and 83%, respectively, at September 30, 2017.
The Fitch Analytical Sensitivity Tool or FAST depicts a less than 3% drop in general fund revenue in a moderate economic downturn. Fitch believes the county has a high level of inherent budget flexibility to offset such revenue sensitivity and still retain an adequate level of financial flexibility, primarily through its legal authority to increase property tax and other service charges and fee revenues. Furthermore, the county demonstrated during the last recession the ability and willingness to realign spending in response to revenue declines.
The county annually updates a five-year financial plan which has been balanced without the inclusion of any one-time revenues and continues to make contributions to the emergency contingency reserve that is recorded within the unassigned fund balance. The county has routinely extended the timeframe for funding the emergency contingency reserve, which is recorded as part of the assigned general fund balance, to its policy requirement of 7% of the general fund budget. However, total unrestricted reserves, inclusive of the emergency contingency reserve, have remained very steady at 10% to 12% of spending since fiscal 2011; this level of reserves positions the county well for the next downturn and supports the current operating performance assessment of 'aa'.
The county anticipates weakening revenue due to the pending homestead exemption and other factors and is forecasting deficit operations in the general fund beginning in fiscal 2021 (currently estimated at almost $66 million or 3% of budget). Fitch believes the county's commitment to solving future budgetary gaps with recurring revenue and expenditure actions are important factors in the evaluation of the county's operating performance.
The county achieved an operating surplus in the general fund for the third consecutive year in fiscal 2017, reporting a modest gain of $1.7 million or 0.1% of spending. General fund revenues were about $27 million above the original budget of $2.2 billion, continuing the trend of more conservative revenue forecasting of the last several years. The unrestricted fund balance was $259.2 million or 11.4% of spending. The unassigned portion of the unrestricted fund balance was $64.2 million; the remaining portion of the unrestricted fund balance is typically allocated for subsequent year spending (this reserve classification reflects, in part, Florida law which stipulates that counties budget only 95% of expected revenue in each year).
Hurricane Irma is not expected to impact Fitch's view of the county's operating performance assessment. The estimated cost of the hurricane to the county is approximately $450 million, with the most significant expenses related to waste and debris removal incurred by the waste management enterprise fund. The county expects to be substantially reimbursed by the federal and state governments, and does not have an estimate of impact on year-end general fund results for fiscal 2018 as it is still finalizing its expense reporting to FEMA.
|Printer friendly Cite/link Email Feedback|
|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||Nov 5, 2018|
|Previous Article:||Fitch Assigns SF's USD Notes Final 'A-'.|
|Next Article:||Fitch Rates World Omni Auto Receivables Trust 2018-C.|