South Florida's Hot Economy Boosts Miami Rating

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BRADENTON, Fla. – Miami's credit rating has soared to its highest level ever on the back of its booming economy, in the face of litigation that could trigger costly fines and higher pension payments.

Things are looking up for the city in south Florida, where property values and business prospects are firing on all cylinders.

However, the Securities and Exchange Commission's federal suit charging Miami with an unprecedented second case of fraud is still hanging over the city, and the SEC is seeking civil penalties this time.

A federal trial begins Aug. 22.

The city is also waiting to learn the outcome of two long-running union lawsuits challenging the propriety of the city's use of a state law in 2010 to adjust pension benefits and reduce payments amid the recession.

The union cases are now before the Florida Supreme Court, after the city won a series of lower court rulings.

If those rulings are overturned, pension costs could rise for Miami, which already has above-average annual pension and health care costs, according to analysts.

Although rating agencies cite concern about the litigation, such concerns are outweighed by south Florida's hot, rebounding tax base, tourism and business climate.

Miami's "dramatically improving and diverse economy" was a major driver behind Moody's Investors Service's decision last week to raise the city's non-insured general obligation bonds to a record Aa3 from A1.

"The city's financial position has improved significantly and surplus operations will likely continue in large part due to the expanding economy," said analyst Valentina Gomez. "The city has run five consecutive surpluses since 2011 due to improved fiscal management as well as significant expenditure reductions and a resurgent economy."

The local economy continues to exhibit strong post-recession growth and city management projects additional growth in the near term, she said.

Last year, assessed property values reached $39.9 billion, exceeding the pre-recession peak of $37.8 billion set in 2008.

Although the upgrade to Aa3 incorporates Miami's improving economy and financial position, Moody's said it also recognizes that the city's credit is "weighed down by weak socioeconomic indices, growing pension pressures, and protracted legal disputes."

Moody's also revised the city's outlook to positive from stable, reflecting projections for further improvement in the city's financial position and the tax base.

Translation: the city's ratings could be upgraded again in a year or two.

City manager Daniel J. Alfonso said Miami has been diligently improving its finances.

"I'm very pleased Moody's Investors Service has recognized the work of city leaders and the administration," he said in a statement. "Going forward, it's important to continue to manage the city with fiscal prudence while working to improve the quality of life for all who live and work in Miami."

For most of the years Miami's credit has been rated by Moody's, it has never risen above single-A category, according to a review of the city's rating history.

In February 2015, S&P Global Ratings raised Miami's GOs to A-plus from BBB.

S&P said its four-notch upgrade was due to the city's improved management score and reflected "adherence to robust policies and practices, as well as improved budgetary flexibility."

Fitch Ratings bumped the GOs to A-plus from A-minus in November 2014.

Both assign stable outlooks.

Despite factors underpinning the upgrades, analysts said lingering legal challenges warrant close attention.

Miami still faces adjudication of the SEC suit filed in 2013, after an investigation that examined the city's financial practices and bond disclosures.

Similar to a prior SEC case, city officials vowed to fight regulators.

The SEC has charged the city and its former budget director, Michael Boudreaux, with securities fraud for making "materially false and misleading statements and omissions about certain interfund transfers."

Those omissions, in three bond offerings in 2009 totaling $153.5 million and in the city's financial statements, allegedly were designed to "mask" a deficit in the city's general fund.

Last week, discovery in the federal suit neared conclusion with the depositions of expert witnesses who will appear at trial in August, according to court records.

William Holder is expected to testify on behalf of Miami.

Holder is the dean of the Leventhal School of Accounting at the University of Southern California's Marshall School of Business. He is an expert on financial accounting and reporting, and auditing, according to his faculty profile.

The SEC deposed Joseph Gardemal as its expert.

Gardemal is a managing director with Alvarez & Marsal Global Forensic and Dispute Services in Washington, D.C. He specializes in consulting and expert witness services regarding damages, forensic accounting and fraud investigations, the firm's website said.

The federal case against Miami also charges the city with violating an SEC cease-and-desist order that was entered against the city in 2003 based on similar misconduct: the movement of funds within the city's budget to cover deficits in the 1990s.

The commission's 2003 judgment was based on an administrative law judge's ruling that found Miami misled investors about the city's deteriorating financial condition in the disclosure documents of three bond issues totaling $112 million that were sold in 1995 and in secondary market disclosure documents.

Miami spent years appealing the SEC's ruling until new elected officials leading the city decided to end the legal challenge, consenting to the first cease-and-desist charge.

At the time, the SEC did not seek a financial penalty in the case.

It was not brought in federal court, as the current suit was.

And the SEC is now seeking civil penalties from the city and Boudreaux, the former budget director.

If convicted, Miami would become the first city ever found to violate a prior cease-and-desist order.

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