NEW YORK--()--Fitch Ratings has affirmed the following ratings of Tamarac, FL (the city):
--$1.3 million general obligation (GO) bonds, series 1992 and 1998 at 'AA';
--$13.9 million capital improvement bonds, series 2005 at 'AA-';
--$4.5 million sales tax revenue bonds, series 2009 at 'AA-'.
The Rating Outlook is Stable.
In addition, Fitch has withdrawn its 'AA-' rating on the city's capital improvement bonds, series 2004, as these bonds have been prefunded or escrowed.
The GO bonds are general obligations of the city for the payment of which the city's full faith and credit and unlimited taxing power are irrevocably pledged.
The capital improvement revenue bonds are secured by the city's covenant to budget and appropriate available non-ad valorem revenues in its annual budget. Such covenant is cumulative and shall continue until all payments of principal and interest on the bonds shall have been budgeted, appropriated, and actually paid.
The sales tax revenue bonds are secured by the half-cent local option sales tax with a secondary pledge to covenant to budget and appropriate non ad-valorem revenues to pay debt service. The bonds are also secured by an FGIC surety.
KEY RATING DRIVERS
STRONG FINANCIAL MANAGEMENT: The 'AA' GO rating reflects the city's strong financial management, robust reserves and manageable carrying costs, which help to offset the limited local economy.
BELOW-AVERAGE ECONOMIC PROFILE: The city's local economy is limited, as it functions predominately as a residential community with modest economic development opportunities. Wealth levels and other economic indicators compare unfavorably to state and national averages.
MODERATE DEBT; WEAK PENSION: Overall debt levels are expected to remain manageable despite the recent increase in the city's variable-rate debt profile. Pension funding levels are on the weaker side.
APPROPRIATION RISK: The 'AA-' rating on the capital improvement bonds is based on the general credit characteristics of the city, as well as the city's covenant to budget and appropriate (CB&A) its diverse mix of non ad-valorem revenues. Legal provisions for the bonds are adequate.
DOUBLE-BARREL: The 'AA-' rating on the sales tax bonds reflects the pledge of sales tax revenues and the secondary CB&A pledge of non-ad valorem revenues in an amount sufficient to satisfy debt service. Given the sales tax bonds' double-barrel pledge, if at any point in the future the creditworthiness of either security diverges, the rating on the bonds should always reflect the higher of the two securities.
LESSENED FINANCIAL FLEXIBILITY: Any notable deterioration in financial reserves could lead to a negative rating action due to the weak and vulnerable nature of the underlying economy reflected in protracted tax base declines and heightened unemployment levels.
PLEDGED REVENUE SOFTENING: Should pledged revenues decline materially and thus significantly reduce coverage for the city's capital improvement and sales tax bonds, downward rating pressure would result.
Tamarac, with an approximate population of 61,540, is located in northwest Broward County (GO bonds rated 'AAA' by Fitch).
PREDOMINATELY RESIDENTIAL ECONOMY
The city was created in 1963 as a residential retirement community. While it remains primarily residential, recent economic developments have begun to diversify the tax base. Convergys Customer Management CP (950 employees), University Hospital (680), and City Furniture (550) represent some of the city's largest employers. Fitch does not consider the tax base concentrated, as top taxpayers, including an electric utility and a shopping center, represent a moderate 9.9% of total assessed value (TAV).
Tamarac's unemployment rate (8.1% as of November 2012) has fallen notably from that of the year prior (10.8%), but remains elevated relative to the nation's (7.4%). Favorably, this improvement can be attributed to a growing employment base (2.3% year-over-year) coupled with a shrinking labor force (-0.7%). Wealth indicators for the city compare unfavorably to state and national averages; the city's median household income equals 88% of the state's and 79% of the nation's.
SIGNIFICANT TAX BASE LOSSES
Tax base losses suffered as a result of the housing crisis have been substantial in Tamarac. Since the housing market's peak in fiscal 2008, the city's TAV has declined by 43%, dropping from $4.4 billion to $2.5 billion as of fiscal 2012. Though declines appear to be moderating, they will continue through fiscal 2013, with an annual loss of 2.3%.
City management has sought to mitigate the impact of these declines through tax rate hikes; however, these increases have remained below the revenue-neutral rates. As a result, property taxes, which represent approximately 40% of general fund revenues, have declined by $5 million or almost one-quarter since fiscal 2008. As of fiscal 2013, the city's tax rate of 7.3 mills is comfortably below the state's statutory 10-mill cap and competitive for the region.
MAINTENANCE OF FINANCIAL FLEXIBILITY
The city has augmented its general fund reserves for at least the past six fiscal years, building unreserved / unrestricted fund balance from $15.7 million (34.7% of spending) to $26.1 million (61.5% of spending). Liquidity also increased during this time, with cash and investments covering liabilities a strong 27.6x at the end of fiscal 2011.
These positive results have been achieved through a combination of revenue enhancements and expenditure reductions. Tamarac has shown a willingness to increase its millage rate in the face of declining housing values, and in fiscal 2011, the city implemented a public service tax for electricity (at the maximum rate), generating an additional $3.1 million in annual revenues. Comprehensive spending cuts have also been made over the past several years, including layoffs and an elimination of temporary staff. The city reports no layoffs in fiscal 2012 or 2013.
Unaudited fiscal 2012 results show a $2.6 million (5.4% of spending) draw on fund balance for capital expenditures and the purchase of green space. Fitch notes that this represents a modest improvement to budget, as a $3.1 million fund balance appropriation was budgeted. The adopted fiscal 2013 budget includes a $700,000 fund balance appropriation for contingency. Fitch does not believe these planned reductions will materially reduce the city's financial flexibility.
MANAGEABLE CARRYING COSTS, ELEVATED VARIABLE-RATE EXPOSURE
Overall debt levels are moderate at $2,580 per capita and 4.3% of market value (MV). Amortization of outstanding principal is moderate, with 63% retired within 10 years. As is common in Florida, where GO bonds require voter approval, the majority of the city's outstanding debt is in the form of revenue bonds.
Debt service and retirement benefit contributions total $11.7 million or a manageable 16.9% of fiscal 2011 governmental (less capital) fund spending. Pension contributions to the city's four plans represent the bulk of these annual costs, with aggregate annual required contributions (ARC) totaling $7.6 million. Debt service represented $4 million or an affordable 5.8% of governmental spending.
The city's elevated variable-rate profile is related to the recent issuance of a variable-rate redevelopment revenue note. With a fiscal 2011 par of $13.7 million, the note represents one-third of the city's direct debt burden; Fitch considers a variable rate exposure greater than 25% of direct debt to be high. The city initially issued the note as a variable-rate line of credit with RBC Bank. The line of credit will either be paid down or will convert to a variable-rate term loan in March 2014 going through 2021; no principal amount is due prior to conversion.
WEAK PENSION FUNDING LEVELS
The city administers four separate single-employer defined benefit pension plans, for which the aggregate unfunded liability totaled $49.5 million or a moderate 1.3% of MV. On a combined basis, the city's four plans have a weak funded ratio of 64% (using a 7% investment rate of return). Favorably, the city reduced its long-term liability for the firefighters plan in fiscal 2012 through increases in employee contributions and reductions in benefits. These changes are expected to reduce the fiscal 2013 ARC by $400,000.
The city provides an implicit subsidy for other post-employment benefits, which it funds on a pay-as-you-go basis. As of fiscal 2010, the unfunded liability was $2 million or a modest 0.1% of MV.
SALES TAX GROWTH ENHANCES DEBT SERVICE COVERAGE
Sales tax revenues grew 10% from fiscal 2010 through 2012, increasing coverage from an adequate 1.8x to a sound 2.2x. Projections for fiscal 2013 show a 2.4% decrease, reducing coverage to 2.1x. Pledged sales tax revenues proved resilient under Fitch's different stress scenarios, as they could decline by over 50% and still provide 1x coverage. The ABT requires 1.25x coverage, and the city has no plans for additional leverage.
BROAD REVENUE BASE AVAILABLE FOR CB&A DEBT SERVICE
Non-ad valorem revenues are significant relative to debt service and are diverse in nature. Available NAV revenues have posted consecutive annual gains of 5% since fiscal 2010. Additional issuance is restricted by a fairly strict anti-dilution test. Moreover, Fitch notes that ample general fund reserve levels provide further debt service cushion for these bonds.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria