Fitch Affirms Volusia County, FL's Tourist Tax Revs at 'A'; Outlook Stable

Fitch Ratings has affirmed the ratings for Volusia County, Florida's (the county) revenue bonds as follows:

--$7.3 million outstanding tourist development tax revenue bonds series 2004 at 'A'.

In addition, Fitch affirms the county's implied unlimited tax GO (ULTGO) rating at 'AA'.

The Rating Outlook is Stable.

SECURITY

The tourist development tax (TDT) revenue bonds are secured by a pledge of a 3% countywide tax on hotel rooms, mobile homes, and other short-stay residences. The bonds are additionally secured by a surety-funded DSRF.

KEY RATING DRIVERS

SOLID TOURISM TAX COVERAGE: Pledged revenues have seen growth over the past three years as tourism related spending has rebounded following the recession. Coverage of maximum annual debt service has improved to 2.01x from approximately 1.65x coverage in fiscal 2013 and was helped by a partial refunding of outstanding debt for savings. Coverage levels are exposed to the volatile nature of discretionary travel and high degree of competition for tourism spending.

SOUND FINANCIAL MANAGMENT: Volusia County has an extended history of sound financial operations with prudent management practices that contribute to its strong reserves and liquidity.

MANAGEABLE DEBT AND LONG TERM LIABILITIES: Debt levels are low and future capital needs manageable. Overall carrying costs for debt, pension and other post-employment benefits (OPEB) are manageable.

TOURISM BASED ECONOMY: The local economy is heavily influenced by tourism and retail activity, and has seen improvement in the economy following a severe downturn in its housing market. Income levels are slightly below state and national averages.

RATING SENSITIVITIES

ADEQUACY OF PLEDGED TAX COVERAGE: The TDT revenue bond rating is sensitive to changes in debt service coverage from revenues. Fitch expects TDT revenues to provide sound debt service coverage as new economic and tourist related development occurs within the county.

CHANGE IN FINANCIAL PROFILE: The implied ULTGO rating is sensitive to changes in fundamental credit characteristics including the county's strong financial management practices and maintenance of sound reserves.

CREDIT PROFILE

Volusia County is located on Florida's central Atlantic coast and includes the cities of Daytona Beach, New Smyrna Beach, and Port Orange. The 2014 population was an estimated 498,981 and experienced growth of 12.5% since 2000.

GROWTH IN TDT REVENUES IMPROVES DEBT SERVICE COVERAGE

Pledged TDT revenues have experienced positive growth leading to improvement in debt service coverage. Revenues grew 6.9%, 5.6%, and 11.7% in fiscal 2012, 2013 and 2014, respectively. Revenues were flat for three years prior to fiscal 2012. A notable rebound in travel and spending after the recession has supported this growth. Coverage on MADS of $4.3 million, occurring in fiscal 2035, was 2.01x based on fiscal 2014 revenues of $8.67 million. Annual debt service costs were lowered as a result of a refunding in 2014 of a majority of the county's TDT backed revenue debt. Annual debt service coverage was 1.65x in fiscal 2013. Management reports that unaudited TDT revenues for fiscal 2015 were approximately $9.6 million continuing the growth trend. Additional debt is subject to a 1.4x MADS coverage test and no near term debt is planned at this time.

SOUND GENERAL FUND OPERATIONS

The county continues to operate with conservative assumptions and moderate periodic revenue increases leading to historically sound reserve levels. The fiscal 2014 budget reflected 2.6% growth in the tax base and included a modest tax millage increase resulting in $14.2 million in additional ad valorem revenues. Expenditure increases were seen primarily in public safety and for state pension system contributions. The county ended fiscal 2014 with a $6.7 million net operating general fund surplus. Unrestricted fund balance improved to $63 million or a sound 32% of general fund spending.

The county's formal reserve policy sets aside 5% to 10% of current revenue for emergency purposes (this reserve is not available for recurring spending). Similar reserve policies are established for other governmental fund types (library, fire services, etc.) providing a safety net to respond to unanticipated changes in revenue or expenses.

The fiscal 2015 general fund budget was $244.3 million, up $17.1 million or 7.5% compared to the prior year. Tax base growth of 6.2% to $25.6 billion in fiscal 2015 led to an $11 million increase in property tax revenues compared to the prior year. The tax rate was kept flat. The fiscal 2015 general fund budget included increases in pension, healthcare, public safety and economic development costs. A 3.5% cost of living increase was also included. Results for the Sept. 30 fiscal year-end are still being audited but management projects a slight surplus in operations leading to a small increase in fund balance.

The adopted fiscal 2016 general fund budget totals $248.2 million, an increase of $3.9 million or 1.6% over fiscal 2015. There was no change in the tax millage rate. The primary revenue source is property taxes which represent 66% of total general fund revenues. Taxable values increased by 5.8%. Expenditure drivers include higher pension costs and increases in employee salaries and health insurance. Capital outlay and improvements of $12 million are included in the budget, an increase of $3.8 million over fiscal 2015. Management reports that results are in line with budget expectations.

ECONOMY BENEFITS FROM TOURISM

Volusia County's economy has historically centered on tourism, serving as the home of several popular leisure destinations including Daytona Beach. The economy has diversified into the health care and education sectors providing new employment opportunities. The county is home to four major health care employers including Halifax Community Health System, the second largest employer in the county following the district, and three higher education institutions.

ECONOMIC GROWTH EXPECTED

A number of new economic development projects centered on tourism and retail are underway or in the works including the county-approved One Daytona entertainment/retail complex project. Construction is projected to start in spring of 2016 and Bass Pro Shops has signed a lease to anchor the development. A new Westin Hotel is under construction and a potential Hard Rock Hotel in Daytona Beach as well as other future planned beach front condo developments are close to starting construction. Additionally, the Daytona International Speedway has recently completed $400 million in planned renovations. These projects and others are expected to boost sales and tourist tax growth and improve employment opportunities in the county.

Home prices continue to improve and are up 8.4% through December 2015 year over year, according to the Zillow Group. The county's market values are up 3%, 9%, and 8% for 2013, 2014 and 2015, respectively, reflective of housing value growth in these years. This growth follows a period of decline in market values of 36% from fiscal 2008 through 2013 due primarily to a stressed housing market.

IMPROVED UNEMPLOYMENT LEVELS; BELOW AVERAGE WEALTH

Unemployment rates have improved, declining to 5.1% in November 2015 from 6.2% a year prior, and are just above state and national averages of 4.9% and 5.0% respectively. The improvement is a result of sound job growth that exceeded labor force growth. Wealth levels are moderately below state and national levels.

LOW DEBT AND MANAGEABLE LONG TERM LIABILITIES

Overall debt ratios which include overlapping debt remain very low at 1.35% of fiscal 2015 market value of $42.6 billion and $1,156 per capita. The fiscal 2014 general government tax-supported debt service of $22.5 million is equal to a modest 6% of total governmental spending, despite the rapid pace at which the county repays its outstanding debt (approximately 70% within 10 years) No significant new debt is contemplated in the near term.

Long-term liabilities related to pension and OPEB are manageable. The county participates in the Florida Retirement System, and the county's fiscal 2014 contribution was $17.7 million. Total county carrying costs (debt service, pensions and OPEB) are a moderate 11% of total fiscal 2014 governmental expenditures.

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

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by the end of the first quarter of 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, IHS Global Insight, and Lumesis.

Applicable Criteria

Exposure Draft: Incorporating Enhanced Recovery Prospects into US Local Tax-Supported Ratings (pub. 02 Feb 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=875108

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

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

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999494

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

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