TAMPA, Fla. - (Business Wire) Fitch Ratings has assigned an 'A-' rating to Miami, Florida's approximately $65 million special obligation bonds (Street and Sidewalk Improvement Program), series 2009. The Rating Outlook for the Special Obligation bonds is Stable. The bonds are expected to price via negotiation on Nov. 17, 2009. Bond proceeds will fund the construction of various street and sidewalk related projects including roadways, curbs, gutters, sidewalks and landscaping. Fitch also affirms the 'A' rating on the city's outstanding GO bonds and 'A-' rating on the city's outstanding limited ad valorem bonds. The Outlook for the GO and limited ad valorem bonds is revised to Negative from Stable.
The 'A-' rating on the special obligation bonds reflects sound coverage of maximum annual debt service (MADS) by pledged revenues despite recent declines, weak legal provisions, and the general credit characteristics of the city. The latter include an adequate but volatile financial profile, a diverse economic base with below-average wealth indicators that has weakened substantially, and moderate direct debt levels that should remain manageable even with additional debt plans.
The Outlook revision to Negative from Stable for the GO and limited ad valorem bonds reflects Fitch's concern that the city will be unable to maintain satisfactory financial flexibility over the next several years given sizeable cost pressures in an exceptionally weak revenue environment with uncertain prospects for recovery. Despite reducing operating expenditures for FY 10, Fitch expects that the city will continue to struggle to manage its fixed cost base, driven largely by generous union contracts and retirement benefits. In addition, financial flexibility is limited under the state's statutory millage cap which restricts the city's ability to offset substantial taxbase declines, which Fitch believes is likely, with millage rate increases. The city's real estate market has been profoundly affected by the larger economic recession; although TAV declines to date have been relatively small, Fitch expects more dramatic reductions given the large drop in median home values and sharp increase in foreclosure activity. A reversal of recent years' operating deficits and maintenance of adequate reserves is critical to retaining credit quality at the city's current rating level.
The city's TAV more than doubled between FY 2004 and FY 2008, increasing at an annual average rate of 19%. The construction boom that drove tax base growth over the last six years slowed substantially in Miami, and growth was 5.1% in FY 09. Fitch expects the manageable 6.5% decline in FY 10 to be followed by more severe declines as sharply lower real estate values are incorporated into the taxrolls. Housing data obtained by Fitch suggests that the city's residential real estate market is heavily exposed to non-traditional mortgage products, and that the foreclosure problem is severe and worsening. Foreclosure activity in Miami is nearly three times the national average for the most recent quarter. Property taxes provide 50% of budgeted general fund revenue in FY 10.
Financial results, while adequate, are volatile and operations are severely pressured. Financial performance improved notably in the early part of this decade following persistent fiscal imbalances that plagued Miami during the 1980s and early 90s. In recent years the city has addressed midyear operating imbalances with reserves and efforts to close a $12 million mid-year budgetary gap in fiscal 2009 were unsuccessful; officials expect to utilize $22 million of general fund reserves. While the expected unreserved general fund balance for FY 09 (unaudited) is sound at approximately $67 million equal to 13% of spending and other uses, it is down substantially from the balance of $125 million (25% of spending) in fiscal year 2006. The city adopted a structurally balanced budget for FY 10 without the use of appropriated fund balance. TAV decline coupled with a flat millage rate and weakened economically sensitive general fund revenues required that the city reduce expenditures by roughly $96 million. Approximately $65 million of savings were realized by eliminating 376 positions, less than half of which were filled, as well as forced salary reductions for all city staff. Capital expenditure reductions generated $21 million of savings with general operational expenditures providing $10 million in savings.
Salary and benefit costs continue to be a challenge. The city has been unable to reduce police and fire pension costs to a targeted cap of 37% of covered payroll, still a very high level. Fire employee contributions to the pension fund were increased 1% to 8% and will increase an additional 1% in March 2010 if the 37% goal is not met. The city disclosed a sizeable Other Post Employment Benefits (OPEB) unfunded accrued actuarial liability of $480 million, resulting in an annual required cost (ARC) of $37.4 million, well in excess of the current pay-go amount of approximately $10 million. City officials recently adjusted some benefits and expect to realize a small annual operating savings.
Direct debt levels are moderate and should remain so as the city finances the $737 million portion of the capital improvement plan for which funding has been identified; the overall plan totals $1.64 billion. Overall debt levels are above average. Plans for tax-supported debt in the near-term include $120 million to construct parking facilities associated with the new Florida Marlins stadium which will be secured by a residual portion of the County levied Community Development Tax (a hotel tax) and several stadium related revenues with a back-up pledge of the city's covenant to budget and appropriate non ad valorem revenue.
The special obligation bonds are secured by a pledge of two county-levied local option fuel taxes, a portion of a county-levied transportation sales surtax, and a portion of a city-levied parking surcharge. A portion of the pledged revenues expires in 2023, prior to bond maturity, but coverage should remain adequate even with no growth in pledged revenues. The additional bonds test requires that revenues received during a 12-consecutive-month period in the 18 months preceding a new issue must equal at least 1.35 times (x) MADS on existing and proposed bonds. The test, which is based on historical revenues, provides limited protection to bondholders since the portion of the pledged revenue that expires in 2023 could be included in the test prior to its expiration. Coverage of maximum annual debt service remains sound at 2.0x through FY 2023 and 1.7x thereafter despite pledged revenue declines of 1.8% and 5.2% in FY 2008 and 2009, respectively, assuming no change in pledged revenue thereafter except for the expiration noted above. City officials budgeted slight declines in each of the pledged revenue streams for FY 10, and no parity debt is currently planned.
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