Tallahassee Takes a Dive

Fitch Ratings last Friday downgraded Tallahassee’s $5.2 million of Series 2001 outstanding capital bonds and $78 million of Series 2004 capital bonds to AA-minus from AA.

Fitch also revised the rating outlook to negative from stable.

“The downgrade to AA-minus is based on the deterioration of the city’s financial profile, including multiple years of operating deficits and declining fund balance levels,” the agency said in a report.

The new rating also incorporated sound debt service coverage on the bonds, the city’s stable economy, and low debt levels.

“The negative outlook reflects Fitch’s concerns regarding the city’s ability to resolve the current structural imbalance given its recently limited revenue flexibility and the current economic downturn,” Fitch said.

Financial results for Tallahassee, the state capital, have been weak, with general fund operating deficits in nine of the last 10 years, Fitch said, noting that fiscal 2007 ended with a $2.1 million drawdown, reducing the unreserved fund balance to a relatively low 6.1% of spending, and unaudited fiscal 2008 results show an additional $2 million drawdown lowering the unreserved fund balance to approximately 4.5%.

The outstanding debt is secured by the city’s share of a local government half-cent sales tax, guaranteed entitlement revenues, and the local communications services tax. Pledged revenues have been stable over the past five years with 2.5% average annual growth. Unaudited fiscal 2008 revenues declined slightly due to the recent economic downturn but coverage remains sound at 2.5 times, Fitch said.

Tallahassee’s economy is anchored by the state government and two major universities. Unemployment rates remain well below state and national averages, at 5.1% for October 2008. Per capita income is slightly below state and national levels, reflecting the large proportion of student residents.

“The current downturn in the housing market has so far had a manageable effect on the city with foreclosures remaining well under national averages,” Fitch said.

The city’s capital improvement plan for fiscal 2009 through 2013 totals $900 million, although more than two-thirds of the plan is for self-supporting utilities and most of the remaining CIP will not be financed with debt, Fitch said.

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