Fitch Affirms Hollywood, FL's GO at 'A'; Outlook Revised to Positive

Fitch Ratings has affirmed the 'A' rating on the following general obligation (GO) bonds of the city of Hollywood (FL):

--$50,870,000 GO bonds series 2005.

The Rating Outlook for the GO bonds has been revised to Positive from Stable.

In addition Fitch affirms the 'A-' rating on the following redevelopment revenue bonds of the Hollywood Community Redevelopment Agency (CRA):

--$15,300,000 redevelopment revenue bonds (beach CRA) series 2004

-- $28,000,000 redevelopment revenue bonds (beach CRA) series 2007.

The Rating Outlook for the redevelopment revenue bonds is Stable.

SECURITY

The GO bonds are a general obligation of the city backed by its full faith and credit and unlimited taxing power. The redevelopment revenue bonds are limited obligations of the CRA. Each of the taxing units within the beach redevelopment area are required to pay 95% of the amount of ad valorem taxes levied less the amount of ad valorem taxes which would have been produced by the then current millage rate applied to the taxable assessed value (TAV) of the beach redevelopment area as of Jan. 1, 1997 (the tax increment revenue). The taxing units include the city, Broward County, the South Broward Hospital District and the Children's Services Council of Broward County.

KEY RATING DRIVERS

FAVORABLE FINANCIAL TRAJECTORY: The revision of the Rating Outlook to Positive from Stable reflects the city's vastly improved financial position following a series of critical management decisions that helped lower its operating costs, preserve revenue stability, and rebuild reserves. Fitch will monitor the city's ability to sustain this progress over the one- to two-year outlook period while managing challenges associated with its high retiree costs.

HIGH RETIREE COSTS: Liabilities related to pension and other post-employment benefits (OPEB) are high as is the annual cost of funding these commitments which limits the city's overall budget flexibility. Conversely, the city's debt burden is affordable and future general government capital needs are very manageable.

TAX BASE VOLATILITY: The city's tax base has proven volatile to shifts in the housing market, and the economy exhibits a good degree of dependence on tourism. Healthcare is a stabilizing presence and broader employment opportunities are available to residents in nearby Miami and Fort Lauderdale. Residents' income characteristics are average relative to the state with unemployment typically registering at a healthier rate.

STRONG TAX INCREMENT COVERAGE: The 'A-' rating on the redevelopment revenue bonds reflects the strong coverage of maximum annual debt service (MADS) from pledged tax increment revenue at 3.4x in fiscal 2014 and 4.3x based on budgeted fiscal 2015 revenue. Credit risks center on the project area's small size at less than 300 acres, its coastal location, which makes it vulnerable to natural disasters, and moderately high taxpayer concentration.

RATING SENSITIVITIES

FINANCIAL STABILITY & PENSION: The direction of the city's GO rating in the near term is most closely linked to its ability to maintain a general level of fiscal balance, and to improve the funding health and sustainability of its pension plans and OPEB obligations over time.

CRA DEBT SERVICE COVERAGE: The rating on the redevelopment revenue bonds is sensitive to shifts in the level of debt service coverage influenced by changes in the TAV of the beach redevelopment area and/or additional leveraging.

CREDIT PROFILE

The city of Hollywood is located in southeast Florida in Broward County, about 10 miles south of Fort Lauderdale and 20 miles north of Miami. The city is near full build out with an estimated 2013 population of 146,526.

IMPROVED FINANCIAL MANAGEMENT DRIVES OUTLOOK REVISION

The Outlook revision to Positive reflects Fitch's view of the city's improved operating stability and financial reserves following significant management actions taken to ease budgetary stress related to rising labor costs and a soft revenue environment. Fitch also notes enhanced financial policies, in particular a strengthening of the city's fund balance policy to 10% of spending with a stated target of 17%. Absent a reversal of the city's recent financial progress, Fitch would expect to upgrade the GO rating by at least a notch over the next 1 - 2 years.

Entering fiscal 2014 the general fund unrestricted balance stood at $33.7 million or a healthy 22% of spending. For the better part of the last decade the city maintained modest but adequate general fund reserves from 5%-10% of spending. Consecutive operating deficits (after transfers) in excess of $5 million in fiscal 2010 and 2011 lowered the unrestricted general fund balance to a thin $4.3 million or 2.7%. The city's subsequently added $33.6 million to reserves over fiscal 2012 and 2013, enabled in large part by the city's declaration of financial urgency which, under Florida law, allowed it to unilaterally modify existing collective bargaining agreements. Considerable savings were also realized through reductions in pension contributions following a successful referendum in 2011 to amend benefits.

The city also took the important step of increasing its operating tax rate almost 31% from fiscal 2009 - 2012 to minimize revenue losses stemming from a decline in housing prices and taxable assessed value (TAV). Property taxes are the city's largest revenue stream, accounting for 44% of budgeted fiscal 2015 revenue. The tax rate has since been held flat at 7.448 mills, which is consistent with similarly sized cities in south Florida and adequately within the statutory 10 mill limit. Favorably the city's TAV is on the upswing, increasing 3.3% in fiscal 2014 and 8.1% in fiscal 2015 to $11.27 billion.

Residential sales prices are up 5 - 13% on year-over-year based on recent data from Zillow and Trulia boding well for next year's valuation. The budgets for both fiscal 2014 and 2015 were balanced without reliance on reserves or one-time actions. Audited financial statements for fiscal 2014 are not yet available, but management is projecting a $2 million increase in the general fund balance.

HIGH RETIREE LIABILITIES A LINGERING CREDIT WEAKNESS

Large liabilities associated with retiree pension and OPEB obligations remain a significant negative rating factor. The city administers separate single-employer benefit plans for general employees, police, and fire. The plans have an aggregate funding level of 53% based on 2013 actuarial reports and an unfunded actuarial accrued liability (UAAL) of $492 million, equal to a high 4.4% of market value (MV). Fitch assumes a lower 7% investment rate of return for each plan which reduces the funding ratio to approximately 48.5% with a UAAL of almost $594 million or 5.3% of MV. These figures consider the impact of reforms approved by voter referendum in 2011 that modified cost of living adjustments and increased retirement age, among other changes, for both current and future employees. The city also provides an explicit subsidy for healthcare coverage for retirees and eligible dependents beyond the requirements of state law, contributing to a high OPEB liability of $388.3 million or 3.4% of market value.

The cost of funding pension and OPEB has steadily consumed a higher portion of available resources despite voter-approved changes. Fitch estimates the cost of funding pension, OPEB, and debt accounts for approximately 25% of governmental spending, with pension the largest component at $32.4 million for fiscal 2015 or a high 14%. The city has, historically, funded the actuarial required contribution (ARC) for pension and funded OPEB on a pay-as-you-go basis (resulting in a funded ratio of 0%). However, the city is underfunding the pension ARC by $2.1 million in fiscal 2015. The city claims this cost is associated with the payment of a supplemental distribution to retirees in violation of Florida law, and is weighing filing legal action against the pension board to recoup payments made to date totaling $6.2 million. A prolonged dispute and additional pension funding deficits would be viewed as contrary to the goal of improving the funded status of the pension plans, and could have a negative impact on the city's credit quality.

MODERATE DEBT LEVELS

The city's overall debt burden inclusive of overlapping governments is estimated by Fitch at a moderate 3.1% of market value or $2,361 per capita. Debt service on the city's outstanding GO bonds and other governmental loans is budget at $8.8 million or a low 4% of fiscal 2015 spending. General government capital needs are minimal -- the city's fiscal 2015 -2018 capital program totals $171 million, of which $151 million is for water and sewer utility improvements. The city intends to finance its general capital needs via short and intermediate-term loans totaling $20.4 million.

MATURE COMMUNITY IN CLOSE PROXIMITY TO MIAMI AND FORT LAUDERDALE

The city is near fully developed with a tax base comprised of a mix of residential property (approximately 73% of TAV) complemented by several mixed use developments and hotels. Taxpayer concentration is presently low - the largest taxpayers are the storied Diplomat hotel and Florida Power & Light (FP&L) each with a TAV of roughly $250 million or 2.5% of the total; the top 10 taxpayers are less than 10%. Several large commercial projects are under construction that will increase tax revenue but also taxpayer concentration to a level viewed as high by Fitch. FP&L is constructing a new natural gas-fired power plant in the city at a reported cost of $1 billion. The Margaritaville Resort is scheduled to open this summer with a reported construction cost of close to $150 million ranking it among the top 5 taxpayers in the city. The Margaritaville and The Diplomat are located in the CRA's beach redevelopment area, thus tax revenues generated from these properties are not available to the general fund budget.

The city's participation in the Miami-Fort Lauderdale-West Palm Beach metropolitan statistical area (MSA) is viewed positively by Fitch, broadening employment and economic opportunities for city residents and businesses. The MSA ranks as the 10th largest MSA in the nation measured by total nonfarm employment (2.48 million) and 12th largest by real gross metro product ($280.3 billion). The city's location also affords good access to several key transportation infrastructure assets including Fort Lauderdale-Hollywood International Airport, Port Everglades, and Interstate 95. Memorial Healthcare System lends stability to city employment figures, operating Memorial Regional Hospital and the Joe DiMaggio Children's Hospital with a combined 10,000 employees. Unemployment tracked very close to the national average during the recession, proving less volatile than the state. The city's November 2014 unemployment rate of 5.0% is below both the U.S. and Florida rate of 5.5% and 5.6%, respectively. Income metrics for city residents are equal to those of the state.

STRONG TAX INCREMENT COVERAGE TEMPERS RISK TO SIZE & CONCENTRATION

The beach redevelopment area (or the project area) encompasses 293 acres along the Atlantic Ocean within the southeast area of the city. The project area is fairly mature with a fiscal 2014 TAV of $2.1 billion compared to the base year (fiscal 1998) value of $545.9 million. The tax base is dominated by residential condominiums and hotel/motel properties. The Diplomat is the largest taxpayer at nearly $260 million or a high 16.6% of incremental TAV. The property was sold in 2014 to Thayer Lodging Group which also announced plans to invest $100 million on improvements to the nearly 1,000-room resort. The Margaritaville Resort would likely push the level of concentration from the redevelopment area's ten largest taxpayers to roughly 30% of incremental value, which Fitch views as moderately high.

Strong debt service coverage combined with the redevelopment area's moderate maturity (measured by evaluating the size of the incremental TAV relative to the base year) mitigates risk to the loss of a large taxpayer or another downturn in the housing market. Audited pledged revenues totaled $18.1 million in fiscal 2013 covering MADS of $5.3 million by 3.4x. Interim financial results for fiscal 2014 show revenues increasing to $20.1 million and the budget for fiscal 2015 depict revenue of $22.6 million or 4.3x MADS coverage. Fitch estimates the redevelopment area can experience a decline in TAV of more than 58% before MADS coverage would fall below 1.0x. Fitch views this as a safe cushion considering the size of the largest taxpayers and the performance of the tax base during the recession, when TAV fell 5.7% in fiscal 2009 and 22.4% in fiscal 2010 before returning to growth.

Fitch considers the additional bonds test adequate, requiring revenue received within any consecutive 12 months of the last 18 months to cover MADS by at least 1.5x. The outstanding bonds are fully repaid by 2024. The CRA is contemplating the issuance of up to $15 million in new money bonds which is not expected to materially weaken coverage levels or stress test performance.

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, and IHS Global Insight.

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=973735

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