BUSINESS WIRE

Business Wire

PRESS RELEASE

Fitch Downgrades South Florida Water Management District COPs to 'AA-'; Outlook Stable

http://www.marketwatch.com/story/fitch-downgrades-south-florida-water-management-district-cops-to-aa-outlook-stable-2012-01-10

NEW YORK, Jan 10, 2012 (BUSINESS WIRE) -- Fitch Ratings has taken the following rating actions on South Florida Water Management District, Florida's (the district, or SFWMD) outstanding bonds:

--$500.2 million certificates of participation (COPs) downgraded to 'AA-' from 'AA';

--$25.1 million special obligation land acquisition refunding bonds affirmed at 'A'.

In addition, Fitch assigns the following rating:

--Implied general obligation (GO) bond rated 'AA'.

The Rating Outlook is Stable.

SECURITY

The COPs evidence undivided proportionate interests in lease payments made by the district to the district from legally available funds budgeted and appropriated for such purpose. In the event of non-appropriation, the district must surrender all facilities lease purchased under the master lease agreement to the trustee who may re-let or sell the facilities for the benefit of certificate owners.

The district's special obligation bonds are secured by a first lien on pledged revenues, which include all payments received by the district from a water management lands fund trust (the trust fund) and the generated interest. The payments consist of a designated portion of revenues derived from excise taxes on documents (the documentary stamp tax) imposed by the state on certain document filings including mortgages, original issues of stock, bonds and debentures, promissory notes or other written obligations to pay money.

KEY RATING DRIVERS

REDUCED FINANCIAL AUTONOMY: The downgrade of the COPs reflects the district's inability to implement revenue raising measures as a result of the state's newly implemented limitation on ad valorem collections. Substantial declines in this revenue source have necessitated steep expenditure reductions and the planned use of reserves to achieve budgetary balance in fiscal 2012 and 2013.

PLANNED DIMINISHMENT OF RESERVES: The district has begun to implement a five-year draw-down of reserves, primarily to fund one-time capital expenditures, minimizing a once considerable short-term financial cushion. Pay-as-you-go capital financing, a mark of financial flexibility, will ebb in future years.

STRONG AND DIVERSE SERVICE AREA: The service area, encompassing 16 south and central Florida counties, is an important commercial center with a broad and deep employment base. The area's centrality in Latin America commerce buttresses its economic growth prospects.

DEBT POSITION CREDIT POSITIVE: Debt levels are moderately low, supported by a vast tax base. No future debt is currently planned.

COMPLEX INTERLOCAL EFFORT: Everglades restoration is a highly politicized undertaking necessitating substantial intergovernmental cooperation and financial commitment.

COPs SUBJECT TO APPROPRIATION: The COPS are payable from lease payments subject to annual appropriation by the district. Fitch believes the highly essential nature of the lease purchased assets for the restoration of the Everglades ecosystem and the potential financial and operational consequences of a lease default provide sufficient incentive to appropriate.

DOCUMENTARY STAMP TAX BONDS - ADEQUATE COVERAGE OF VOLATILE REVENUES: The rating incorporates the legislature's history of altering the tax rate and distribution formula of a pledged revenue stream that is already narrow and economically sensitive. Coverage remains adequate, statutory restrictions prohibit the issuance of additional bonds, and the current issue reaches final maturity in 2015.

CREDIT PROFILE

COMPLEX MANDATE

The district is the largest of five regional water districts created by the state in 1972 to provide regional flood control, water supply and water quality protection, ecosystem restoration, and to operate and maintain Lake Okeechobee and the Everglades. The governing board of the district is composed of nine members appointed by the governor and confirmed by the state senate for staggered four-year terms.

The district is the local sponsor of the Comprehensive Everglades Restoration Plan (CERP), a series of projects designed to protect and enhance the Everglades ecosystem. The cost of the CERP, presently estimated at approximately $12.5 billion over a 30-year time period, is divided between the federal government (50%), the state (25%) and the district (25%). Through June 30, 2010, the state and SFWMD have invested approximately $2.4 billion toward this effort, including approximately $315 million in construction, with the remaining primarily funding asset acquisition. In 2004 the district entered into a memorandum of agreement (MOA) with the state to accelerate development of eight critical components of the CERP largely by leveraging future taxpayer dollars through the issuance of up to $1.8 billion in COPs.

NARROWING REVENUE RAISING CAPACITY

The downgrade of the district's COPs reflects the district's loss of significant revenue raising capacity due to recently enacted legislation that authorizes the state legislature to determine annually the district's ad valorem revenues. Fitch also notes that state law subjects the district's annual budget to approval, in whole or in part, by the governor of the state. Though not legally pledged, ad valorem collections are the primary source for lease payments and, at a combined $270.7 million in fiscal 2012, represent an extremely concentrated 94% of revenues available for debt service. The 32% legislatively imposed ad valorem revenue decline in the fiscal 2012 budget follows several years of revenue weakening attributable to deterioration in the housing market, resulting in a sharp 50.8% drop in collections from audited fiscal 2007. Revenues currently remain considerable relative to $35.5 million maximum annual debt service (MADS) on the 2006 COPs.

In response to the revenue reductions, the district reduced fiscal 2012 budgeted operational expenditures by about $104.5 million by streamlining non-mandated activities, most notably through the elimination of around 286 positions (about 16% of staff), as well as by benefit and programmatic cut-backs. The district stated it has the room to reduce other expenditures, including recreational programs, additional administrative costs, and some monitoring and scientific studies. Fitch will monitor the district's ability to adjust spending without reducing core functions in coming years.

POTENTIAL EXPOSURE FROM PENDING LAWSUITS

Fitch notes that the risk inherent in revenue raising restrictions may well be amplified were the district to receive unfavorable rulings in on-going lawsuits regarding water quality and condemnation procedures. The district cannot quantify its potential financial exposure.

PLANNED USE OF RESERVES

The district has developed a five-year plan to spend down about $350 million in fund balance accumulated in all funds. The district will reduce the anticipated $146 million total operational fund balance by approximately $23.8 million in fiscal 2012 and nearly $12 million in fiscal 2013 in an effort to prop up recurring expenses while the district attempts to obtain less onerous monitoring requirements. Fitch is cautious concerning the district's ability to achieve the proposed changes, but notes that even so, strong fiscal management could allow the district to return to structural balance.

The remainder of the accumulated fund balance will primarily finance capital projects. Although a significant portion of the reserves are booked in capital funds and had largely been designated for subsequent years' capital expenditures, these reserves had traditionally provided a considerable source of near-term flexibility.

At the end of fiscal 2010, the $158.5 million unreserved fund balance in the two primary operating funds, the general fund and the Okeechobee Basin fund (OBF), equaled an ample 40.4% of spending. An additional $203.7 million in unreserved fund balance was available in the CERP fund, a capital projects fund which receives transfers from the general fund and OBF to carry out the pay-go portion of the district's CERP program. Preliminary fiscal 2011 results indicate that total fund balance in the two operational funds will decline by $30 million. The total fund balance in the CERP fund will decrease by $155 million, as the fund was the primary source for a $194 million cash purchase of land from U.S. Sugar, in lieu of a previously planned debt issuance. The district anticipates that by fiscal 2016 reserve levels will be $54 million for general needs and emergencies, which coupled with a $10 million capital reserve would equal around 19.6% of fiscal 2012 revenues.

STRONG ECONOMY WEAKENED BY HOUSING DETERIORATION

The district covers all or parts of 16 south and central Florida counties and a total land area of 17,930 square miles. The counties of Miami-Dade (rated 'AA', with a Negative Outlook by Fitch), Broward (rated 'AAA', Stable Outlook) and Palm Beach (rated 'AAA', Stable Outlook) account for approximately 66% of the district's tax base. Major employers encompass a wide variety of sectors, including education and health services, tourism, retail, and finance and the MSA is home to more than 1,000 multinational corporations. Future economic growth prospects are strong, underscored by the $900 million Port of Miami Tunnel and increased trade possibilities with Latin America and China following the completion of the Panama Canal expansion in 2014.

Taxable assessed value (TAV) has declined around 29% since fiscal 2008 to $665 billion in fiscal 2010. The district expects mild tax base decline of 3.8% in fiscal 2013. Further tax base deterioration, if not severe, will not necessarily translate into a major credit concern due to the state's control over the tax levy. The combined population of the district's service area increased over 16% since 2000 to nearly 7.7 million people in 2010. The ability to grow population over the near term will be challenged by the area's high unemployment rate and lowered property values.

MODERATELY LOW DEBT BURDEN

Debt ratios remain moderately low at $2,241 per capita and 2.6% of AV reflecting the district's substantial tax base and population. The district has suspended all future debt plans. It will fund its restoration projects through fiscal 2016 by utilizing reserves and state revenues and its capital operating and maintenance projects from recurring ad valorem revenues. Fitch does not anticipate that subsequently there will be sufficient ad valorem revenues to maintain the historically high level of pay-as-you-go capital financing. Pension and OPEB requirements do not pressure the credit.

COPs: INCENTIVE TO APPROPRIATE

The master lease structure provides appropriation incentive for the district because non-appropriation would force the district to surrender all leased assets to the trustee. Leased assets include lands beneath Compartments B and C (storm water treatment areas). Further, if as a result of a default or non-appropriation the trustee does not use the facilities sites for purposes consistent with the restoration of the Everglades, the district would be required to provide replacement land of at least equal fair market value pursuant to certain land grant agreements with the U.S. Department of the Interior (DOI).

SPECIAL OBLIGATION BONDS: HISTORICAL RATE AND DISTRIBUTION ALTERATIONS

Pledged documentary stamp tax revenues are collected by the Florida Department of Revenue (DOR) and distributed pursuant to state law. The first 7% collected is distributed to the state's general fund; DOR then deducts administrative costs. The Florida Department of Environmental Protection (FDEP) trust fund receives 4.2% of the remaining revenue for the benefit of the state's five water management districts, of which SFWMD's share is 30%. FDEP is required in each year to set aside and escrow from the first money available from the trust fund an amount sufficient to meet debt service.

The rating reflects credit risk associated with the legislature's ability and past history of altering the tax rates and distribution formulas. The legislature has imposed a $60.5 million cap on the distribution of documentary stamp tax revenue to the trust fund, effectively limiting the district's allotment to $18.15 million and more recently diverted $3 million that would otherwise be available to the district for pay-as-you-go capital financing. While there exists an implied contract with the state to allocate sufficient documentary stamp revenues to cover debt service, any additional legislative action that creates uncertainty as to the availability of sufficient resources to pay bondholders would place downward pressure on the rating.

Documentary stamp tax revenues stabilized in fiscal 2010 and provided MADS coverage of 2.0 times (x), an increase from the 1.6x of fiscal 2009 but well below the high 5.8x at the peak of the housing market. Interest and penalty distributions were minimal, raising MADS coverage to 2.1x. Documentary stamp tax distributions to the district could decline by as much as 49.7% and still cover MADS by at least 1.0x. The Florida Legislature's Office of Economic & Demographic Research estimates continued documentary stamp tax growth through bond maturity in 2015, which Fitch believes reduces the possibility of a diminishment of the distribution cap. Bondholders receive additional protection from the state law that effectively prohibits the issuance of additional new money bonds.

Additional information is available at ' www.fitchratings.com '. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

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, IHS Global Insight, Zillow.com, and the National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 15, 2011);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE ' WWW.FITCHRATINGS.COM '. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

SOURCE: Fitch Ratings

Fitch Ratings

Primary Analyst

Barbara Ruth Rosenberg, +1-212-908-0731

Director

Fitch, Inc.

One State Street Plaza

New York, NY 10004

Secondary Analyst

Michael Rinaldi, +1-212-908-0833

Senior Director

Committee Chairperson

Amy Laskey, +1-212-908-0568

Managing Director

Media Relations:

Sandro Scenga, +1-212-908-0278

Email: sandro.scenga@fitchratings.com