Fitch Affirms Orlando, FL's State Sales Tax Payments Bonds at 'AA+'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed its rating on the following Orlando, Florida (the city) revenue bonds:

--$27.3 million state sales tax payments revenue bonds at 'AA+'.

In addition, Fitch affirms the city's implied unlimited tax general obligation (ULTGO) rating at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an annual $2 million statutory distribution to the city of sales taxes from the state's 6% sales tax for the purpose of maintaining a professional sports franchise.

KEY RATING DRIVERS

SALES TAX BONDS RATING CAP: The Florida sales tax payments bonds are capped at the lower of the city's 'AAA' ULTGO rating or one notch below the state GO rating. The State of Florida's GO bonds are 'AAA' with a Stable Outlook (see 'Fitch Rates Florida's $308MM GO Refunding Bonds 'AAA'; Outlook Stable', dated Aug. 11, 2015).

REMOTE RISK FOR PAYMENT ALTERATIONS: State sales tax payments are derived from state sales tax collections, the allocation of which is determined by state statute. The rating incorporates the risk, albeit remote, that the state could alter the statute that provides for the allocation of state sales tax payments to the city.

STRONG CITY CREDIT FEATURES: The city's superior credit profile reflects its solid finances, high but manageable debt levels, and an expanding and diversifying economic base.

FLORIDA GO RATING: The state's 'AAA' GO rating is based on strong financial management practices, moderate debt burden, an adequately funded pension system, solid long-term economic prospects, and satisfactory reserve levels.

WORLD-RENOWNED TOURIST DESTINATION: The city and surrounding area include Disney World, Universal Theme Park and numerous other attractions that make it one of the top tourist destinations in the world. Large and ongoing investments by Disney and Universal in their respective theme parks promote continued high visitor traffic.

RATING SENSITIVITIES

NEGATIVE RATING ACTION ON THE STATE: A downgrade of the state's rating, a multiple notch downgrade of the city's rating or material diminution of the statutory sales tax payment would result in negative rating action on the state sales tax payments bonds.

CREDIT PROFILE

FIXED STATE SALES TAX PAYMENTS

State sales tax payments consist of distributions from the Florida Department of Revenue to eligible state and local governments to assist in the payment of professional sports franchise facilities. The city receives set monthly payments that aggregate to $2 million annually. Distributions are derived from proceeds of the 6% state sales tax, and the order of distributions is determined by state statute. The distribution to the city commenced in February 2008 and continues for 30 years through January 2038, coinciding with final maturity of the bonds.

The current position of sports franchise distributions in the flow of funds from state sales taxes leaves substantial sales tax revenues available to cover all of the state's sports franchise obligations. The rating on the state sales tax payments bonds incorporates the remote risk that the state could alter the statute to adversely affect sport franchise distributions.

State sales tax payments provide sum sufficient debt service coverage of the bonds. This level of coverage is typical of debt secured by this revenue source, and the sum sufficient coverage prevents any further leveraging of the security. A debt service reserve fund (DSRF) cash-funded to 50% of maximum annual debt service (MADS) is provided for the bonds.

STRONG FINANCIAL MANAGEMENT

City finances are well-maintained, characterized by sizable reserve levels, tight controls over spending, and favorable actual performance to budget. In fiscals 2013 and 2014, officials utilized a portion of the city's reserves to supplement operations. Operating deficits of $22.2 million and $18.8 million were reported for fiscals 2013 and 2014, respectively. Despite the deficits, the fiscal 2014 total general fund balance of $88 million represented a still-healthy 23.1% of spending. The unrestricted general fund balance was also strong at 21.6% of spending. Reserve levels remain well within the city's target range of 15% to 25% of next year's budget.

For fiscal 2015, the city implemented a one mill increase in the property tax rate, the first increase in six years. Combined with a 6.4% rise in taxable values, property tax revenues are projected to grow by about $25 million over fiscal 2014 levels. In addition, management implemented a 4.5% across-the-board spending reduction, estimated to save approximately $15 million without reducing service levels. As a result, the fiscal 2015 budget was balanced and management projects fiscal 2015 general fund operations to end either breakeven or with a small surplus.

HIGH DEBT MITIGATED BY SUBSTANTIAL TDT SUPPORT

City debt levels are moderate as a percentage of market value (4.3%) but high on a per capita basis at $6,220. Fitch notes that nearly half of outstanding direct debt is secured by TDT revenues, which are mostly paid by visitors. Carrying costs comprised of debt, pensions and other post-employment benefits (OPEB) for fiscal 2014 were moderate at 22.6% of general government spending. Principal amortization of city debt is slow, with only 30% of principal retired within the next 10 years. Capital needs are manageable. Possible debt issuance plans over the next five years include bonds for the performing arts center, new roads and a new dispatch system.

ADEQUATELY FUNDED RETIREMENT OBLIGATIONS

The city's three separate single-employer defined benefit (DB) pension plans (police officers, firefighters and general employees) are adequately maintained. The general employees DB plan was replaced with a defined contribution (DC) plan for employees hired after 1998. OPEBs consist of city sponsored DB and DC OPEB plans. Management has established an OPEB trust to fund the DB plan, which is 20% funded based on Fitch's assumed 7% discount rate.

CENTRAL FLORIDA ECONOMY STRENGTHENS

The local economy continues to expand, with the May 2015 1.2% employment gain reducing the city's unemployment rate to 4.8%, below the state (5.7%) and national (5.5%) averages. The leisure and hospitality sector continues to be the major component of the local economy, making up about 21% of total employment. Disney is the dominant player, employing about 69,000 or over 10% of total county employment. Universal Orlando reports 17,300 employees, while SeaWorld of Orlando's workforce totals approximately 7,000. In addition to growing theme park attendance and TDT collections, expanding occupancy and hotel room rates are further evidence of the strong recovery in this sector.

Economic diversification has occurred most notably in the education and health services sectors. A growing biotechnology and life sciences cluster is anchored by the University of Central Florida's (UCF) Health Sciences Campus, which is home to its College of Medicine and the Burnett College of Biomedical Sciences, the M.D. Anderson Cancer Center and the Sanford-Burnham Medical Research Institute. Other notable medical facilities are the recently opened Nemours Children's Hospital and a new Veteran's Administration hospital.

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, National Association of Realtors, Zillow Group.

Applicable Criteria

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=990037

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990037

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20150827006031/en/

Fitch Ratings
Primary Analyst
Larry Levitz
Director
+1 212-908-9174
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi
Senior Director
+1 212-908-0833
or
Committee Chairperson
Steve Murray
Senior Director
+1 512-215-3729
or
Media Relations, New York
Sandro Scenga, +1 212-908-0278
[email protected]

Source: Fitch Ratings

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