Juan Zapata

BRADENTON, Fla. - Since Juan Zapata became a Miami-Dade County Commissioner in late 2012, he's seen a series of downgrades and negative outlook revisions to the county's bonds.

Those ratings actions represent red flags for Zapata, the first Colombian-American commissioner in Florida's largest county.

He fears they will cost the county and its 2.6 million residents more to borrow for capital needs especially in the unincorporated area he represents, he said in an interview Tuesday, adding that he and other commissioners recognized that Miami-Dade has a structural problem that is politically difficult to resolve.

Moody's recognized the county's "budgetary structural challenges" when revising the outlook to negative in November on the county's Aa3 rated $1.9 billion in non-ad valorem obligations, its Aa2 rated $1.5 billion of general obligation bonds, and its Aa3 rated $128.6 million of public service tax bonds.

"The negative outlook recognizes the county's narrow financial condition, despite officials' implementation of significant budget cuts in recent years, and political challenges in raising additional revenues," Moody's analyst John Incorvaia said in the November report, which mentions "political challenges" five times.

Fitch Ratings lowered its ratings to A-plus from AA-minus on the county's $1.9 billion of senior-lien water and sewer revenue bonds in February 2013 ahead of the county's implementation of a $12.6 billion, 15-year capital plan that includes $1.6 billion for a federal consent decree to resolve state environmental issues and federal Clean Water Act violations.

Fitch said the outlook was stable at the lower rating but noted that financial margins declined for the sewer debt because there had been no rate increases in recent years, and the system faced increasing debt service costs.

Standard & Poor's rates the water and sewer bonds A-plus while Moody's assigns an Aa3 rating to that debt after a downgrade from Aa2 in June.

Negative outlooks, split ratings, and credits in volatile areas are red flags for some traders, and they will shy away from buying those bonds or demand higher prices, according to a trader familiar with Miami-Dade County's credits.

"As far as I am concerned having a negative outlook definitely affects the marketability of bonds," the trader said. "As a trader, I no longer bid on anything that has a lower rating, A2 or lower, with a negative outlook."

If bonds have split ratings most traders will look at the lowest rating, she said.

"Sometimes, bond issuers will only get one rating if this is the case," the trader said, "and that makes it easier to trade in a way, but then again certain accounts must have two ratings to buy the credit."

Zapata, a Republican who served four terms in the Florida House, said it is important for Miami-Dade County commissioners to understand the budget decisions that led to structural problems and negative actions on the county's debt.

"What's happened in Detroit and other communities is all the structural problems were just ignored," he said. "It's not like people couldn't predict these issues or they weren't foreseen."

Commissioner Dennis Moss acknowledged that the county has a structural problem during a discussion of the rating changes and negative outlooks at a finance committee meeting on Tuesday.

"We haven't cut enough from the budget and politically we don't want to raise revenues," he said. "That's the structural problem we basically have."

He did not envision commissioners raising revenues "any time soon," but said "something's got to happen."

Moss also said that Miami-Dade has cut a lot from the budget and taken steps to increase efficiencies but it's not been enough to "keep up with the needs of this community and politically we're not willing to raise revenue.

"We can't continue going down that road," he added.

In March 2011, local voters removed Mayor Carlos Alvarez and Commissioner Natacha Seijas from office.

The recall vote, passed with 88% in favor, came about because the two voted to increase property taxes and give employees salary increases.

Incorvaia mentioned the recall in Moody's November report and said it has proven to be a "material obstacle" to raising revenue.

Though the county has some additional room to raise the tax rate and some other minor county fees, that flexibility is limited due to the "negative political implications" as evidenced by county officials being removed from office, he said.

Moody's said that county financial operations, which had stabilized since fiscal 2010 with officials taking "appropriate" actions to reduce costs, also remain challenged by rising service costs and revenue shortfalls have been recouped, in part, by using reserves.

Unaudited fiscal 2013 financials project an unexpected $23.4 million operating deficit caused by lost property tax revenues associated with tax appeals and refunds, and using reserves to shore up shortfalls in fire districts.

The fiscal 2014 budget was initially balanced with the help of $26 million in one-time revenues, and expectations were that the contingency fund would at least remain at the $52 million level but that is now uncertain, the rating agency said, adding that the county also needs to make additional budget cuts to offset $25 million in fiscal 2013 lost property tax revenue, and resolve uncertainty about employee health care contributions among unions, said Moody's.

Commissioners recently voted to restore some benefits to unions.

"From where I sit, I have no idea when I take a position whether it will impact our bond rating," said Zapata, who is also a member of the finance committee and is chairman of water and sewer and public works committees. He wants more guidance from staff.

At Tuesday's finance meeting, he led a discussion about considering rating outlook changes and rating downgrades when making budget decisions because they will cause borrowing rates to go up.

"I've been there a year," he said after the meeting. "We have ambitions here and major infrastructure needs we need to address over time and even an outlook change to negative is a problem."

The commission needs to know what policies impact ratings negatively, and what policies can be adopted that will improve ratings, Zapata said.

In budget discussions last year when the millage rate was set for property tax collections, Zapata said no one suggested that the rate was too low or that it would hurt the county's bond ratings.

"We need to rework our whole budget process and have a better reporting system, maybe on a quarterly basis, of our bonds," he said. "For us to do what's in the best interest of the community, we need to see how people perceive us from the outside."

He also said the budget process needs to start sooner than mid-year, and address wasteful spending before asking taxpayers for more money.

The process of adopting the annual budget needs to include benchmarks to show that operational efficiencies have been created over time.

"I'm going to have budget discussions in January, and talk about establishing benchmarks," Zapata said.

When asked if zero-based budgeting had been considered by the 13-member commission, he said, "The problem is I'm the new guy."

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