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LTC 585-2017 Stormwater System Bond Credit RatingsMIAMI BEACH OFFICE OF THE CITY MANAGER LTC# 585-2017 TO: Dan Gelber and Members of the Cit FROM: Jimmy L. Morales, City Manager DATE: December 7, 2017 SUBJECT: Stormwater System Bond Credit tings LEITER TO COMMISSION The purpose of this L TC is to advise the Mayor · and City Commission of recent credit ratings by Standard & Poor's ("S&P") and Moody's for the City's current stormwater system bonds and bonds anticipated to be sold in December, 2017. S&P Credit Rating S&P has assigned its "AA-" rating to the City of Miami Beach's series 2017 stormwater revenue and revenue refunding bonds. At the same time, S&P affirmed its "AA-" rating on the City's previously issued stormwater bonds. The rating reflects the combination of a very strong enterprise risk profile and a very strong financial risk profile. The outlook is stable and reflects expectations that the stability within the customer base will continue and overall economic conditions will not fluctuate significantly. Additionally, the outlook reflects the expectation for the stormwater funds' financial performance to remain strong, evidenced by strong annual debt service coverage levels and a stable liquidity position. Factors that could lead to an upgrade would be dependent on the City maintaining a very strong financial position as expenditure increases related to the capital plan are realized. Conversely, a lower rating could be warranted should the city's financial position deteriorate. This could be due to unexpected economic challenges, or a rapid rise in expenditures related to additional capital needs. Moody's Credit Rating Moody's has assigned a "Aa3" rating to the City of Miami Beach's $154.7 million Stormwater Revenue and Revenue Refunding Bonds, Series 2017. Moody's maintains a "Aa3" rating on $180 million in outstanding Stormwater Revenue Bonds. The "Aa3" rating is based on the system's healthy liquidity position , adequate debt service, mature service area, and high leverage. The outlook is stable and reflects an expectation that the City will manage significant additional debt of the system, which provides an essential service given the City's location on a barrier island, with timely rate increases, maintaining coverage, and cash levels. Factors that could lead to an upgrade would be significant increase in debt service coverage and significant reduction in debt burden. Factors that could lead to a downgrade would be additional debt without timely rate increases resulting in weakened debt service coverage and significant declines in liquidity. On the next page you will find a rating agency credit scale for your information. The S&P and Moody's credit rating reports are attached. If you have any questions or need additional information, please feel free to contact John Woodruff at x6116. JLM/JW @ Letter to Commission Stormwat er System Bond Cred it Ratings Page 2 of 2 Rating Agency Credit Scale M ood y's S&P Fitch Aaa AAA AAA Aal AA + AA+ Aa2 AA AA Aa3 AA-AA- Al A+ A+ A2 A A A3 A-A- Baal BBB+ BBB+ Baa2 BBB BBB Baa3 BBB-BBB- Bal BB+ BB+ Ba2 BB BB Ba3 BB-BB- Bl B+ B+ B2 B B 83 B-B- * National A ociation oflnsurance Commissioners NA I C * 1 I l I ) Investment 1 Grade l 2 2 2 t 3 • 3 on-Inve tment 3 Grade 3 3 3 S&PGlobal Ratings RatingsDirect® Summary: Miami Beach, Florida Primary Credit Analyst: James M Breeding, Dallas (1) 214-871-1407 ;james.breeding@spglobal.com Secondary Contact: Erin Boeke Burke, New York 212-438-1515; Erin .Boeke-Burke@spglobal.com Table Of Contents Rationale Outlook WWWSTANDARDANOPOORS.COM/RATINGSDIRECT DECEMBER 4, 2017 1 Summary: Miami Beach, Florida Credit Profile US$154.745 mil stormwtr rev and rev rfdg bnds ser 20 11 d ue09/01/2047 Long Term Rating AA-/Stable Miami Beach stormwtr Long Term Rating Rationale AA-I Stable New Affirmed S&P Global Ratings assigned its 'AA-' long-term rating to Miami Beach, Fla.'s series 2017 stormwater revenue and revenue refunding bonds. At the same time, S&P Global Ratings has affirmed its 'AA-' rating on the city's previously issued stormwater bonds. The outlook is stable. The rating reflects the combination of a very strong e nterprise risk profile and a very strong financial risk profile . The enterprise risk profile reflects our view of the system 's: • Service area participation in the broad and dive r:se Miami-Fort Lauderdale-West Palm Beach metropolitan statistical area economy; • Adequate market position, reflective of above-average utility rates and stormwater rates ; • Very low industry risk as a monopolistic service :p r ovider of an essential public utility; and • Overall good operational management practices and policies, though the city has experienced severe tidal flooding in recent years. The financial risk profile reflects our view of the system's: • Strong debt service coverage and liquidity, • Relatively large capital improvement program (CIP), and • Generally strong financial management practice& and policies. A very strong enterprise risk profile and a very strong fi n ancial risk profile map to an indicative rating in our revenue debt criteria matrix of'aa/aa-', and we have selected the 'aa'-anchor based on the relatively high utility rates and the potential for rates and expenditures to increase du e to the significant CIP associated with the city's system's reliance on Miami-Dade County for water supply and wastewater treatment. While these bonds are not secured by water and wastewater revenues , rate pressures could emerge , as th e stormwater fee is included on the monthly water I sewer bill. Bond proceeds will be used to refinance existing obligati ons and provide funds for capital improvements. Miami Beach's stor mwater system serves a built-ou.t se rvice area of about 90 ,000 residents spanning about 18 square miles . Overall economic indicators appear stable, b11 t weak in some areas. While the unemployment rate is below the national average at less than 4.0%, median househe»l d effective buying income is only at about 84 % of the national average, and the co unty poverty rate is hovering ne ar 20%. WWW ST ANDARDANDPOORS. COM /RA TINGSDIRECT DE C EMBER 4, 201 7 2 Summary: Miami Beach , Florida Given the limited availability of undeveloped land in the city, adding additional customers is unlikely. Therefore, any increases in expenditures will need to be absorbed by the existing customer base. The current monthly charge of $23 .30 is very high relative to neighboring communities' rates, and is projected to increase by an additional $5 .24 in 2019. Financially, the system has performed well . Over the past five years, operating revenues have grown significantly to almost $30.0 million from $12 .0 million . This growth was due almost entirely to sizable rate increases. Over the same period, operating expenditures increased to $7 .3 million from $3 .6 million . The result is net revenues ranging from $7.9 million to almost $22 .0 million . With annual debt service climbing to $11.3 million from $5.9 million , the resultant debt service coverage was no lower than l.3x, and approached 2.0x in 2017 . The system has maintained strong levels of cash in recent years, with unrestricted cash and investments totaling about $15 .0 million at the end of fiscal 2016, representing multiple years of operations. However, a portion of this will likely be used to supplement bond proceeds as the city addresses the CIP. Financial projections indicate a trend of increasing revenues and expenditures. The annual required debt service payment increases to more than $15 .0 million, but coverage is projected to remain near 1. 7x . The CIP through 2022 totals just over $300 million. Funding for the CIP is expected to come from a combination of the series 2017 bonds and the anticipated series 2022 bonds, along with proceeds generated through the local Miami-Dade County tax increment financing district. In terms of financial management, city officials routinely prepare long-term financial and capital forecasts. The city reviews operating results on a monthly basis , has full rate-setting autonomy, and can make budget adjustments at any time. Outlook The stable outlook reflects our expectations that the stability within the customer base will continue, and overall economic conditions will not fluctuate significantly. Additionally, the outlook reflects our expectation for the stormwater fund's financial performance to remain strong, evidenced by strong annual debt service coverage levels and a stable liquidity position. Upside scenario An upgrade would be dependent on the city maintaining a very strong financial position as expenditure increases related to the capital plan are realized. Downside scenario Conversely, a lower rating could be warranted should the city's financial position deteriorate. This could be due to unexpected economic challenges , or a rapid rise in expenditures related to additional capital needs. Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors , have specific meanings ascribed to them in our criteria , and should therefore be read in conjunction with such criteria. WWW ST ANDARDANDPOORS COM/RATINGSDIRECT DECEMBER 4 , 2017 3 Summary: Miami Beach, Florida Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on the S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column. WWWSTANDARDANDPOORS COM/RATINGSDIRECT DECEMBER 4, 2017 4 Copyright© 2017 by Standard & Poor' s Financial Services LLC. All rights reserved . 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WWW.STANDAROANDPOORS COM/RA TINGSDIRECT DECEMBER 4, 2017 5 CREDIT OPINION 5 December 2017 New Issue Rate this Research I )) Contacts Valentina Gomez +1.212.553.4861 Analyst valentina.gomez@moodys.com Leonard Jones MD-Public Finance + 1.212.553.3806 leonard.jones@moodys.com Gregory W. Lipitz + 1.212.553.7782 VP-Sr Credit Officer! Man ager gregory.lipitz@moodys.com CLIENT SERVICES Americas Asia Pacific Japan EMEA 1-212-553-1653 852-3551-3077 81-3-5408-4100 44-20-m2-S454 U .S. PUBLIC FINANCE Miami Beach {City of), FL Stormwater Enterprise New Issue: Moody's assigns Aa3 to Miami Beach, FL's $155M Stormwater Rev . Bonds, Series 2017; outlook stable · Summary Rating Rationale Moody's Investors Service has assigned a Aa3 rating to $154.7 million City of Miami Beach, FL Stormwater Revenue and Revenue Refunding Bonds, Series 2017. We currently maintain a Aa3 rating on $180 million outstanding Stormwater Revenue Bonds. The outlook is stable. The Aa3 rating is based on the system's healthy liquidity position, adequate debt service , mature service area and high leverage. Credit Strengths » Strong cash reserves » Willingness to raise rates in concert with additional debt Credit Challenges » Adequate debt service coverage » Highly leveraged system with significant additional debt expected Rating Outlook The stable outlook reflects our expectation that the city will manage significant additional debt of the system, which provides an essential service given the city's location on a barrier island , with timely rate increases, maintaining coverage and cash levels . Factors that Could Lead to an Upgrade » Significant increase in debt service coverage » Significant reduction in debt burden Factors that Could Lead to a Downgrade » Additional debt without timely rate increases, resulting in weakened debt service coverage » Significant declines in liquidity ..... .. ....... . .......................................................................... ······· ............. . ....... ....... ....... .......... ............... ....... . ...... .......... .......... ............... . ............ . ..... .. ....... ...... .. ....... ...... ........... ......... ....... ...... .. ... ··········· ....................... . z MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE Key Indicators Exhibit 1 MIAMI BEACH (OTYOF) R.STOfNWATSUNTBl'flSE ~&em O'lcr"aderi&ics f>sB. Qmdition (Net Rxed As:B.s/ Annual Depreciation) 96 years ~&em 820-0&M ($000) $5,551 S:lniireArea Wealth: MR% of USmedicn 88.60% Legal A-ovisions Rlt e O:>vencnt (x) 1.10x Debt S:lniire Feserve Alqui rernent No explicit DST; or funded with ~lative g-cde 9.Jrety (Baa end Below) Rite Mcncgement F€gulatoryComplicncecnd ~tal Ranning Rnancial S rengt h 2012 2013 2014 2015 2016 Operating F9/enue ($000) $11,612 $11 ,672 $11,715 $21,258 $21 ,491 ~&em 820-0&M ($000) $4,252 $3,445 $3,722 $5,566 $5,551 Net Fevenues ($000) $7,721 $8,577 $8,240 $15,866 $16,405 Net Funded Debt ($000) $39,099 $49,266 $63,486 $76,313 $112,540 Annual Debt S:lniire ($000) $4,837 $5,848 $5,849 $6,828 $11,237 Annual Debt S:lniire O:>ver<Q3 (x) 1.6x 1.5x 1.4x 2.3x 1.5x Cashon Hcnd 757days 1056days 1083 days 583days 991 days Debt to Operating Fevenues(x) 3.4x 4.2x 5.4x 3.6x 5.2x Source: Moody's Investors Service, Audited Hnancial Statements Recent Developments The projection for fiscal 2017 year end coverage was updated to 1.9 times. The debt section was updated to include th is offering. This report is largely unchanged from the report published on October 4, 2017. Detailed Rating Considerations Service Area and System Characteristics: Mature System on Barrier Island Susceptible to Flooding, Hurricane Risks The large stormwat er system's service area covers 4,200 acres and is co-terminous with Miami Beach. Miami Beach is one of 33 municipalities that is a co-permittee with Miami-Dade County through the National Pollutant Discharge Elimination System . The current permit has expired and an application for a new permit has been submitted. The system is in compliance with all relevant regulatory bodies. Notably, as a barrier island, the city is subject to greater stormwater needs than most US stormwater systems. A significa nt portion of the system lies at an elevation below 2.2-feet. The city's projections in clude increased vulnerability to flooding. The capita l plan addresses mitigating these challenges . The stormwater fee is imposed on properties based on Equivalent Residentia l Units (ERUs) wh ic h currently stands at 109,000 ER Us, representing a population base of 87,779 according to the 2010 Census. The customer base is ex pected to rema in stable in this mature, tourism dependent service area. The stormwater fee is billed as part of the water, sewer and garbage bill, and collection rates have historically been high . Hurricane Irma m ade land fa ll in Florida in September. According to management, the stormwater system performed well and had about $2 00,000 in unexpected expenditures. Management expects most of that amount to be reimbursi ble from FEM A. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history. 5 December 2017 Miami Beach (City of), FL Stormwater Enterprise: New Issue: Moody's assigns Aa3 to Miami Beach, FL's $15SM Stormwater Rev. Bonds. Series 2017; outlook stable 3 MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE Debt Service Coverage and Liquidity: Adequate Debt Service Coverage Mitigated by Strong Liquidity The stormwater system will likely maintain adequate financial operations given healthy liquidity and a history of timely rate increases. Management has typically increased rates prior to significant debt issuances, including a substantial 84% increase in fiscal 2015 and a 36% increase in 2017. Current projections include an additional rate increase in 2019of19% prior to another debt issuance. Debt service coverage has historically been adequate. In fiscal 2016 coverage was 1.55 times. Management projects that coverage will be approximately 1.9 times in 2017. Debt service coverage will likely remain in the 1.4-to 2.0-times range over the near term. This level is relatively weak for the Aa3 rating category, and therefore any inability to maintain coverage at these levels as additional debt is issued could represent a significant weakening of credit quality. LIQUIDITY Fiscal 2016 ended with $15 million in unrestricted cash and investments or a strong 991 days cash on hand. Additionally, the system maintains $6 million in a Rate Stabilization fund. These rate stabilization funds are restricted by designation by the city commission, which can release them as needed. There are no current plans to materially draw on cash, a positive credit factor as the system's strong liquidity is the most meaningful counterweight to the system's below average debt service coverage. Debt and Legal Covenants: Highly Leveraged System With Additional Debt Expected The system is highly leveraged and the capital plan includes significant additional debt. The system's debt will more than double over the next five years with $100 million in new money in the current issuance and another $100 million issuance in 2020. Proceeds will fund a variety of projects including conversion to a pump system from a gravity fed system to address the city's vulnerability to flooding. The system's capital plan includes $500 million of projects, which management expects to address over the next 10 years . Debt to operating revenues was a high 5.2 times in fiscal 2016. As long as revenue increases keep pace with debt issuance, this ratio will not grow. Legal provisions are weak with a rate covenant of 1.1 times annual senior lien debt service; an additional bonds test requiring net revenues for any 12 of the 18 preceding months to be 1.1 times MADS on the current and proposed bonds or 1.1 times MADS on the current and proposed bonds for the future in order to issue parity debt. The flow of funds is liberal in that it allows an open loop structure whereby the system can transfer funds to the city's General Fund if needed. There is no debt service reserve f und for the 201 7, 2015 or 2009 bonds . The 2011 bonds have a debt service reserve funded at MADS. DEBT STRUCTURE All the system's debt is fixed rate . DEBT-RELATED DERIVATIVES The system has no exposure to derivatives. PENSIONS AND OPEB Pensions are not a significant factor in this methodology. Management and Governance System management is generally strong and ha s the legal ability to rai se rates without third party approval. The ut ility has independent rate -setting authority. Management is generally conservative in its projections and budgets for a 1.2 times rate covenant annually. Positively, managem ent has implemented significant rate increases prior to additional debt issuance s. Any inability to pass future rate increases as additional debt is issued will pressure the rating . Legal Security The bonds are secured by the net revenues of the system . Use of Proceeds Approximately $8 7 million of proceeds will be used for various projects throughout the system . The remaining $67.3 million will be used to refund $44.3 million in outstanding Series 2011A and $25 .3 million Series 2011 B bond s for total NPV savi ngs of $3.6 million or 5.2% of refunded principal. 5 December Z017 Miami Beach (City of), FL Stormwater Enterprise: New Issue: Moody's assigns Aa3 to Miami Beach, FL's $155M Stormwater Rev. Bonds, Series Z017; o utlook stable 4 MOODY'S INVESTORS SERVICE U .S. PUBLIC FINANCE Obligor Profile City of Miami Beach Stormwater system covers 4,200 acres and services 109,000 ERUs. Miami Beach had a populat ion of 91,026 in 2014. Methodology The principal methodology used in this rating was US Municipal Utility Revenue Debt published in October 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology. Ratings Exhibit 2 Miami Beach (City of) FL Stormwater Enterp. Issue Rating Stormwater Revenue and Revenue Refunding Bonds, Series 2017 Aa3 Rating Type Sale Amount Expected Sale Date Rating Description Source: Moody's Investors Service 5 December 2017 Underlying LT $154,745,000 12/12/2017 Revenue : Government Enterprise Miami Beach (City of), FL Stormwater Enterprise: New Issue: Moody's ass igns Aa3 to Miami Beach, FL's $1 55M Stormwater Rev. Bonds, Series 2017; outlook stable MOODY'S INVESTORS SERVICE U .S. 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PUBLIC FINANCE CLIENT SERVICES Americas Asia Pacific Japan EMEA Moo DY~ INVESTORS SERVICE 6 S December 2017 1-212-553-1653 852-3551-30n 81-3-5408-4100 44-20-m2-5454 Miami Beach (City of), FL Stormwater Enterprise: New Issue: Moody's assigns Aa3 to Miami Beach, FL's $1SSM Stormwater Rev. Bonds. Series 2017i outlook stable