Fitch Rates Orange County, FL's TDT Revs 'AA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'AA' rating to the following Orange County, Florida (the county) bonds:

--$61.255 million tourist development tax (TDT) refunding revenue bonds, series 2016.

The bonds are scheduled for competitive sale on June 16. Proceeds will be used to refund outstanding series 2006 TDT bonds for debt service savings.

Fitch affirms the following ratings:

--$673.1 million outstanding TDT revenue bonds at 'AA';

--$19.2 million outstanding capital improvement revenue bonds, series 2009 (CIRB) at 'AA+';

--Issuer Default Rating (IDR) at 'AAA'.

In addition, Fitch upgrades the following ratings:

--$32.4 million outstanding public service tax (PST) refunding revenue bonds, series 2013 to 'AAA' from 'AA+';

--$231.1 million outstanding sales tax revenue bonds to 'AAA' from 'AA+';

The Rating Outlook is Stable.

SECURITY

The TDT revenue bonds are limited obligations of the county payable from pledged 5% TDT collections net of costs for operating, maintenance and promotion of the county's convention center. The pledged TDT support for operating costs is capped at the greater of $0.4 million or 1.74% of the prior year's TDT collections. Additionally pledged are net convention center operating revenues, naming rights revenues, and investment earnings, which have historically been insignificant.

The PST revenue bonds are supported by a pledge of the PST levied and collected by the county on the purchase of electricity, gas, water and fuel oil within the unincorporated areas of the county.

The sales tax revenue bonds are supported by a pledge and lien upon that portion of the local government one-half cent sales tax distributed to the county.

The CIRBs are supported by revenues received by the county from the State Revenue Sharing Trust Fund (the trust fund) in an amount equal to 50% of state revenue sharing moneys received by the county in the immediately preceding year. The State Revenue Sharing Trust Fund for Counties is funded from specified portions of state cigarette taxes and state sales taxes.

KEY RATING DRIVERS

Analytical Conclusions: The 'AAA' IDR on the county reflects its exceptionally strong financial resilience supported by very high reserves and a superior level of revenue and expenditure flexibility, very low long-term liabilities relative to the county's resource base, and its operation within a fast growing central Florida economy that should boost future revenue growth.

The 'AA' rating on the TDT bonds incorporates the current high level of debt service coverage (2.67), the expectation that coverage levels will remain elevated given strong growth prospects, no current debt plans, and substantial reserves that could be used to cover any TDT shortfalls. The TDT can withstand significant additional leverage and still provide adequate coverage although no such bonding plans are contemplated at this time. A large decline in debt service in fiscal 2025 and rapid amortization of existing debt strengthen the bonds' overall resilience.

The upgrade of the PST bonds to 'AAA' incorporates wide debt service coverage, which totaled 10.8x MADS in fiscal 2015, solid resilience during economic downturns and prospects for continued strong growth. The lenient 1.35x MADS additional bonds test is offset by the county's lack of issuance plans and dependence on PST revenues in excess of debt service to fund operations.

The rating upgrade to 'AAA' on the sales tax bonds reflects wide coverage levels that can withstand considerable stress and still adequately cover debt service. Half-cent sales tax revenues have grown for six consecutive years, and expectations are for continued growth consistent with the expansion of the area economy. A weak 1.35x MADS ABT is mitigated by the county's use of these revenues to fund operations and lack of plans to further leverage the security.

The 'AA+' rating on the CIRB bonds considers very wide debt service coverage that mitigates a highly volatile pledged revenue stream, good prospects for continued growth and relatively strong resiliency at current coverage levels. The 1.35x ABT is weak, but Fitch considers it unlikely that the county will leverage down to the ABT as revenue sharing revenues in excess of debt service are integral to operations.

Economic Resource Base

The growing health and education sector, underpinned by high-wage medical research and biotechnology, has broadened an economy that was traditionally based in tourism. Fitch expects the above-average growth rate of area employment to lift county income indicators, which are currently below national levels.

Revenue Framework: 'aaa' factor assessment

The county's revenues, especially property taxes, are projected to grow rapidly over time fueled by burgeoning population growth and extensive development. Management has significant legal property tax revenue raising capabilities under the 10 mill property tax millage cap.

Expenditure Framework: 'aaa' factor assessment

Fitch expects spending pressures due to current and projected population growth to be matched by growth in the county's revenue base. Management retains a strong ability to control spending due to low carrying costs and significant pay-go capital spending.

Long-Term Liability Burden: 'aaa' factor assessment

Combined debt and pension liabilities are low relative to personal income and are expected to remain modest given limited debt plans, rapid amortization of the county's direct debt and modest unfunded liability of the state-run pension plan.

Operating Performance: 'aaa' factor assessment

Strong operating performance and demonstrated budgetary flexibility are expected to continue given conservative management practices and ample ability to control spending. Maintenance of robust reserves offset general revenue volatility.

RATING SENSITIVITIES

PRECIPITOUS DECLINES IN REVENUES: Sharp and sustained declines in pledged revenues could lead to negative rating action on dedicated tax bonds.

DETERIORATION OF FINANCIAL RESERVES: While not expected, a significant drop-off in financial performance coupled with reduced levels of reserves could pressure the IDR and ratings on the PST bonds, sales tax bonds, and CIRBs, which are capped by the IDR.

STATE MODIFICATION OF REVENUE ALLOCATION FORMULA: Revenues supporting both the sales tax bonds and CIRB bonds are derived from state revenues of which a certain percentage as set by state statute is distributed to localities. While those distribution percentages can be reduced by state action, Fitch considers it unlikely that any such reduction would materially affect ultimate bond repayment.

CREDIT PROFILE

The county's economy anchors the central portion of the state. Professional and business services, education, health care, and biotechnology augment the historically strong tourism sector. The Medical City at Lake Nona embodies the recent growth in the biomedical field, and recent opening of facilities for a medical innovation center at Lake Nona are intended to serve as a breeding ground for new ideas in the biosciences.

Tourism remains a considerable economic force. Walt Disney World (Disney) is the county's largest taxpayer at 8.3% of taxable assessed value and the largest employer (70,000 employees) (Fitch's long-term IDR on The Walt Disney Company is 'A'). In 2015, the county received a record 66 million visitors. New investments by Disney and Universal Studios in their Florida theme parks such as the Star Wars themed land at DisneyWorld and a new hotel and water park at Universal are expected to maintain strong visitor counts.

County population growth has well exceeded state and national population gains. Substantial residential development is expected to accommodate a further influx of new residents over the near term. The county's March 2016 unemployment rate of 4.2% is well below that of the state and nation. Continued economic diversification, particularly within biotechnology and medical research, could provide a boost to area incomes that are slightly below the state and national benchmarks.

Revenue Framework

Property taxes are the county's largest general fund revenue source, accounting for nearly half of fiscal 2015 revenues and transfers in. Property taxes experienced severe declines between fiscals 2008 and 2013, reflective of the drop in taxable values and state law change. With resumption of tax base growth beginning in fiscal 2014, property taxes have correspondingly increased. Other major sources of general fund revenue include transfers in of property taxes levied to provide services to unincorporated areas of the county, state half-cent sales tax receipts, and charges for the provision of various county services.

Despite sluggish revenue growth relative to GDP over the past 10 years, Fitch expects revenues going forward to grow at a pace which exceeds both GDP growth and inflation. Rapid population gains and a plethora of new projects currently underway should spur rapid expansion of the county's taxable resources, particularly the tax base.

The county's current property tax rate of 4.4 mills is less than half of the statutory 10 mill limit, affording the county ample ability to generate substantial additional revenues, if needed.

Property tax revenues were negatively influenced by state-wide property tax reform which became effective in fiscal 2008 in addition to housing market weakness. Reform measures included a required rollback of property tax rates, which required the county to reduce its general property tax by 14.5%; additional exemptions; and the ability of in-state homeowners to apply a portion of their existing homestead exemption to the purchase of a new permanent residence within the state.

Expenditure Framework

The county provides a full array of services including police, fire, parks, transportation, water, sewer and solid waste. Public safety is the county's largest general fund spending item, accounting for 50% of fiscal 2015 general fund spending. Public safety costs declined after fiscal 2008 as the county trimmed personnel but have been more recently rising in conjunction with the recovery of the county's revenue base.

The pressures of a rapidly growing population are expected to drive future spending needs. Over the past three fiscal years, the rate of expenditure growth has been accelerating with fiscal 2015 general fund expenditures up 5.3% from the prior year. Nevertheless, these pressures should be accommodated within the county's fast-growing revenue base.

Fixed costs of required pension contributions, debt service requirements and OPEB payments are low relative to governmental spending at less than 10%. Management's contracts with the unions do not typically go beyond three years with some having annual wage re-openers so the county can react relatively quickly during a downturn. In addition, management retains the right to adjust headcount in times of budgetary constraints.

The county cut spending by 10% following the recession but has since increased both spending and full time positions. This allows for some ability to make spending cuts during the next economic downturn. Low carrying costs, management's strong control over head count and the county's ability to delay spending on capital projects if necessary afford the county ample flexibility in managing expenditures.

Long-Term Liability Burden

The long term debt and pension liability burden is very affordable at 6.8% of personal income. Direct debt consists mostly of tourist development tax-secured bonds and is not expected to increase given limited issuance plans and rapid amortization of direct debt. Fitch is not aware of additional issuance plans by Orange County Schools, a key driver of the county's overlapping debt and overall liability metric. County employees participate in the state-administered Florida Retirement System (FRS), which is adequately funded. FRS actions taken in 2011 to require employee contributions and reduced benefits for new employees should mitigate required increases in employer contributions in the future. The county's share of FRS net pension liability of approximately $274 million represents less than 1% of personal income. The county has established a trust to fund its OPEB liabilities. Over the last few years, the county has been funding its OPEB obligations in excess of annual required contributions. As of Sept. 30, 2015, the OPEB plan was 51% funded. The unfunded OPEB liability is minimal relative to personal income.

Operating Performance

Management has been proactive in reducing spending in the face of revenue declines, maintaining unrestricted reserves in its general fund between 14% and 20% of spending, well above the county's minimum target range of 7% of revenues. The county also retains significant unrestricted resources within its sales tax trust fund, totaling $179 million in 2015 (equivalent to 24% of general fund spending). Between fiscals 2009 and 2012 as general fund revenues declined by over $100 million or 20%, management cut spending by over 10% and utilized approximately $40 million or 25% of fund balance. In response to future revenue downturns, Fitch expects management would behave similarly, using its ample spending flexibility and reserves to balance operations.

The county has maintained what Fitch considers an adequate level of reserves during the recovery given significant historical revenue volatility and strong inherent budget flexibility. Recently management has incurred some planned modest deficits due to one-time spending items.

Solid TDT Growth Prospects

Solid growth prospects for the central Florida economy and continued large investments by Disney and Universal in their world-renown theme parks are expected to bolster TDT collections in the future. Ongoing efforts by both Disney and Universal to update and expand their offerings should boost attendance at both parks, one of the chief drivers of TDT growth.

The bonds are backed by a lien on revenues that meet the definition of 'special revenue' within Section 902(2)(B) of Chapter 9 of the Bankruptcy Code. Fitch believes a lien on special revenues would be preserved in the event of a municipal bankruptcy filing and be exempt from the automatic stay provisions of the Code. Therefore the TDT bond rating would not be capped by the county's IDR.

Fiscal 2015 TDT collections cover MADS by 2.7x, which results in an expectation of a 'aaa' level of coverage cushion. FAST output indicates significant volatility; a scenario in which national GDP declines by 1% yields a 7% pledged revenue decline. However, given strong coverage, pledged revenues could withstand 8.3x this decline and still cover MADS. The largest consecutive decline since fiscal 1999 was 15.7%, in fiscal 2009. This drop could recur 3.7x before pledged revenues became insufficient to cover MADS. If the same scenarios were measured assuming leverage at the 1.33x ABT, the level of margin declines to 'a' financial resilience assessment under the 1% GDP decline scenario and to the 'bbb' level when reduced by the largest TDT decrease.

Fitch's rating does not assume the county will fully leverage this pledged revenue stream. The county has indicated that it has no plans for additional issuance of TDT bonds at this time. The convention center is currently undergoing significant renovation, but the work is funded on a pay-go basis by TDT revenues in excess of debt service. The five-year capital plan for the convention center, inclusive of fiscal 2016, totals $192 million or about $38.4 million annually on average. After payment of debt service, over $100 million of excess TDT is available for other tourist-related uses including pay-go capital.

The county could potentially issue a substantial amount of additional TDT-secured bonds and still retain adequate coverage supported by the scheduled retirement of over $200 million of outstanding TDT bond principal during the next five years and a large decline in debt service beginning in fiscal 2025. Fitch expects coverage will remain consistent with a 'aa' assessment.

Finally, substantial reserves are maintained and are available to cover any shortfalls. These include $59 million of funds in the convention center renewal and replacement fund (equal to county's targeted level of 4% of the value of convention center plant and equipment) and $19 million of additional reserves. Combined reserves above the DSRF total $78 million or over 1.0x TDT MADS.

Elevated PST Bond Coverage

Over 80% of PST revenues are derived from electrical purchases so changes in the price and use of electricity will have an outsize impact on revenues. However, PST revenue trends will benefit from the fast-growing Florida economy.

PST Revenue Stream Sensitivity

Debt service coverage is wide at 10.8x MADS for fiscal 2015. This is indicative of a 'aaa' coverage cushion. FAST results indicate that the PST is less volatile than the TDT as PST revenues show a 3% decline when national GDP drops by 1%. However, with exceptional coverage, the PST can withstand 31x a decline of this magnitude and still cover MADS. The largest consecutive decline in PST revenues was 8.6% between fiscals 2010 and 2012. This magnitude of decline could recur 10.9x without pledged revenues dropping below MADS. When the same scenarios were run assuming leverage to the 1.35x ABT, the financial resilience assessment remained at the 'aaa' level for both.

Consistent Growth for Pledged Sales Tax Revenues

Pledged half cent sales tax revenues are projected to maintain their current upward trend as the local economy continues to expand.

Sales Tax Revenue Stream Sensitivity

FAST results indicate that a 1% decline in national GDP would generate a 4% scenario decline in pledged half cent sales tax revenues. Pledged sales tax revenues could tolerate 21x such a decline and while still covering MADS. The largest actual cumulative decline in historical pledged sales tax revenues is 12% between fiscals 2006 and 2009. This drop could be multiplied by 7x and pledged sales tax revenues would still cover MADS. Both are consistent with a 'aaa' range of coverage cushion. When the same scenarios are run assuming leverage to the 1.35x ABT, the level of coverage margin remains at the 'aaa' financial resilience assessment level under the 1% GDP decline scenario and declines to the 'a' level when reduced by the largest sales tax decrease. However, the county is unlikely to leverage this revenue stream extensively due to the county's need to utilize sales tax revenues in excess of debt service to fund general operations.

CIRB Revenue Volatility

Pledged revenues are expected to expand rapidly due to strong projected growth in population and tax revenues, two of the main factors that determine how state revenue sharing is distributed.

CIRB Revenue Stream Sensitivity

Coverage of CIRB debt service is ample with fiscal 2015 dedicated revenue sharing funds covering MADS by 5.5x. However, CIRB revenues display considerable volatility with results under FAST's 1% national GDP decline scenario indicating an 8% decline in CIRB revenues. Nevertheless, with ample levels of debt service coverage, CIRB revenues could withstand over 10x such a decline and still cover MADS. Assuming the largest consecutive decline of 16%, such a decline could recur nearly 7x without dropping coverage below MADS. Under both scenarios, the CIRB revenues demonstrate 'aaa' financial resilience.

When these scenarios are run assuming coverage at the 1.35x ABT, the cushion declines to a 'bbb' financial resilience assessment under both the 1% national GDP decline test as well the largest consecutive decline assumption. Fitch regards it as unlikely that the CIRB bonds will be fully leveraged down to the ABT as they are also used for operations.

Additional information is available at 'www.fitchratings.com'.

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.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478

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Fitch Ratings
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Fitch Ratings, Inc.
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or
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Source: Fitch Ratings

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