Fitch Ratings has assigned a rating of 'AA' to the following special
revenue bonds of the city of Jacksonville, Florida (the city):
--$34,175,000 special revenue refunding bonds, series 2013A;
--$36,605,000 taxable special revenue refunding bonds, series 2013B.
The bonds will be sold via negotiation the week of July 22. Proceeds
will refund outstanding special revenue bonds for an estimated net
present value savings of $4.5 million or 7.4% of refunded par. Proceeds
of the series 2013B bonds in the amount of $14,545,000 will finance the
acquisition of a building that currently houses the public defender.
In addition, Fitch affirms the 'AA' rating on approximately $703 million
of outstanding special revenue bonds and the 'AA+' implied ULTGO rating
on the city.
The Rating Outlook is Stable.
The special revenue bonds are secured by the city's covenant to budget
and appropriate non-ad valorem revenues, by amendment if necessary. The
availability of non-ad valorem revenues to pay debt service is subject
to the funding of essential government services and obligations with a
specific lien on non-ad valorem revenues. The issuer's non-ad valorem
covenant is cumulative and continues until the bonds have been fully
KEY RATING DRIVERS
COVENANT DEBT NOTCHING: A one-notch distinction between the special
revenue bond rating and the implied ULTGO rating reflects the absence of
a pledge of specific revenue and inability to compel the city to raise
non-ad valorem revenue sufficient to pay debt service.
EXCELLENT FISCAL TRACK RECORD: General fund operations have been
prudently managed with surplus results recorded in each of the last
seven audited fiscal years despite recession-driven revenue pressures
and rising costs associated with employee pension benefits.
SOLID FINANCIAL POSITION: Recent operating surpluses have built up a
healthy unrestricted general fund balance that provides a cushion
against emergencies or unanticipated spending needs.
STABLE ECONOMY: Jacksonville serves as the economic center for northeast
Florida. The considerable operations of the U.S. Navy, trade and
transportation activity at the Port of Jacksonville, and a sizable
health care and financial services presence promote expectations for
WEAK PENSION PICTURE: A large unfunded pension liability and rapidly
rising pension contributions remain a key credit concern. Tentative
agreements on pension reform have been reached that, pending city
council approval, are expected to stabilize the city's pension burden
over the long term.
MANAGEABLE DEBT BURDEN: Key debt ratios are considered moderate by Fitch
and should remain so based on the city's limited future capital needs
and borrowing plans.
CONTROL PENSION COSTS: Concerns remain as to the strain placed on the
credit profile of the city given its high pension liability, although
the current rating and Stable Outlook assume implementation of recent
agreements on pension reform in the context of continued prudent fiscal
management. Delay in implementing reforms could pressure the rating.
COVENANT REVENUES OFFER DIVERSITY AND SATISFACTORY COVERAGE
Non-ad valorem revenue in fiscal 2012 totaled $504 million (a 0.5%
year-over-year increase) compared to special revenue bond maximum annual
debt service (MADS) of $145.7 million. Fitch adjusts non-ad valorem
revenue to consider the prior obligation to fund essential governmental
services, resulting in available non-ad valorem revenue of $322.6
Non-ad valorem revenues are very diverse and include utility taxes
($123.1 million), contributions from the electric and water and sewer
utility operations of the Jacksonville Electric Authority (JEA) ($104.2
million), the city's share of one-half-cent local government sales tax
($72.6 million), and franchise fees ($40.6 million) among other sources.
TREND OF POSITIVE OPERATIONS
Audited financial results for fiscal 2012 (ending September 30) show a
$21.2 million operating surplus (after transfers) in the general fund,
marking an impressive seven consecutive years of positive year-end
results. Spending prudence continues to play a critical role in the
city's financial performance; in fiscal 2012, operating expenditures
finished 10% or $87.5 million below the original general fund budget.
The sum of unrestricted general fund reserves improved to $145 million
or 15.3% of spending in fiscal 2012. The city has a goal of maintaining
a 5% to 7% emergency reserve and a 5% to 7% operating reserve, which
Fitch considers a comfortable cushion against unanticipated budgetary
A balanced budget was adopted for fiscal 2013 after closing a
preliminary gap of $68.7 million. Personnel savings are expected to
offset modest revenue underperformance, and a surplus of approximately
$5 million is estimated at year-end. A fiscal 2014 budget will be
formulated in the coming weeks.
SIGNIFICANT PENSION LIABILITIES A RISK TO CREDIT QUALITY
The city's pension burden is considered high, particularly for the 'AA+'
implied ULTGO rating. For all city plans, the Fitch-adjusted funded
ratio (which assumes a 7% investment rate of return) is very weak at
50.5%, and the unfunded actuarial accrued liability (UAAL) a significant
$2.7 billion or 3.5% of market value.
Furthermore, the city's pension costs more than doubled from $65.3
million in fiscal 2006 to approximately $150 million in fiscal 2013. In
fiscal 2012 the city's actual pension contribution, which was
actuarially determined based on a percent of payroll, was $10.4 million
less than the actuarial required contribution (ARC) due to a decline in
payroll during the year. The total cost associated with funding pension
and other long-term liabilities, including debt service and other
post-employment benefits (OPEB), consumed a high 27% of non-capital
governmental fund spending in fiscal 2012.
TENTATIVE AGREEMENTS REACHED ON REFORM ARE A POSITIVE
In May the city announced a series of tentative agreements on pension
reform with various collective bargaining units, including police and
fire, which account for the bulk of its pension UAAL and annual funding
requirement. In Fitch's view these agreements create a more sustainable
pension situation for the city over the long term, although pension
contributions will remain an ongoing challenge. The agreements are
subject to the approval of city council (a simple majority vote, or 10
out of 19 councilmembers). Council is expected to vote on the agreements
no later than September in conjunction with the fiscal 2014 budget
The city's actuary estimates a cumulative saving of $1.2 billion over
the next 30 years from the police and fire agreement alone if approved.
An additional $600 million in savings is estimated if all four of the
city's general employee unions agree to the reforms (two of the unions
representing 686 employees or about 8% of the city's workforce remain at
Pension reform will largely affect new hires. Plan design changes
include an increase in the required years of service, adding a
collection age of 62 years for vested employees rather than the normal
retirement age, and reducing the cap on annual cost of living
adjustments (COLA), accrual rates, and the benefit cap. Both new hires
and existing employees will pay higher contributions. Existing employees
also agreed to a one-time transfer of $20 million from an enhanced
benefits reserve to base benefits which effectively lowers the city's
fiscal 2014 contribution.
Pension costs will continue to rise and pressure the budget even if the
agreements are approved, but to a lesser extent. Absent the police and
fire pension reforms the city would pay approximately $72 million more
in pension contributions over the ensuing five fiscal years (excluding
the one-time reserve transfer).
FISCAL 2014 BUDGET GAP COULD NECESSITATE SEVERE CUTS
After closing budget gaps aggregating approximately $170 million from
fiscal 2011-2013, the preliminary fiscal 2014 budget deficit totals $64
million without pension reform or $18.9 million with pension reform.
Absent pension reform the city would be faced with a significant 13.9%
reduction in controllable costs that would likely necessitate furloughs
and layoffs (750-850 employees) and the closure of libraries, fire
stations, and recreational facilities.
In Fitch's view limitations on spending flexibility combined with the
city's steadfast opposition to raise taxes or other local revenue could
pressure future operations absent a more robust level of tax base or
economic growth. The proposed fiscal 2014 budget maintains a constant
tax rate for the fourth consecutive year at 10.04 mills. The tax rate is
well below Jacksonville's statutory limit of 20 mills and considered by
Fitch competitive with the combined city/county tax rate of other major
Florida metro areas. Property taxes, which account for roughly 50% of
general fund revenue, have fallen significantly from $482.7 million in
fiscal 2011 to $423 million in fiscal 2014 (budgeted).
Taxable assessed value (TAV) declines in Jacksonville have been slightly
more moderate than most other major Florida metro areas, but significant
nonetheless, with TAV down 21% between fiscal years 2009-2013. The
estimated valuation for fiscal 2014 is down 1% following a 4.8% loss in
fiscal 2013. Available housing statistics show single-family home prices
appear to be on the rebound through the first six months of 2013 which
should reflect favorably on the fiscal 2015 tax roll.
MODERATE DEBT BURDEN
Overall debt metrics remain moderate at 4% of market value or $3,673 per
capita. Fitch does not anticipate a major change in the city's debt
profile, as future borrowing is expected to vary from $30 million to $65
million annually during the 2013-2017 capital improvement plan (CIP)
period. The amount of debt to be issued is notably lower than the amount
of outstanding debt scheduled to amortize over the same period.
ECONOMIC CENTER FOR NORTHEAST FLORIDA
The Jacksonville job market continues to rebound from the recession.
Unemployment spiked to 11.3% in 2010 following the loss of close to
29,000 jobs (a 7.2% decline) during the prior three-year period. The
city recorded job growth of 1.3% in 2011 and 2.5% in 2012, and April
2013 employment is 3.7% ahead of the same month figure in 2012.
Unemployment currently stands at 6.7%, which is slightly favorable
compared to the state and national jobless rates. Global Insight
forecasts non-farm employment to expand a solid 2.2% per year through
The city's economy and tax base remain diverse but there is a moderate
degree of concentration to the U.S. Navy. Naval Air Station (NAS)
Jacksonville and NAS Mayport combine to employ 37,910 or 5.8% of the
Jacksonville metropolitan statistical area labor force. The Port of
Jacksonville continues with major expansion projects that should serve
to boost the metro area's sizable trade and transportation sectors.
Growth in the healthcare sector has helped diversify the economy, with
major employers including Baptist Health (8,270), the Mayo Clinic
(4,970), St. Vincent's Health (4,000), and Shands Jacksonville (3,500).
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, and 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
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS
OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES
AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF
THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE
RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR
RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY
CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH
Copyright Business Wire 2013