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LTC 296-2018 Standard & Poor's Affirmation of the City's ParkingMIAMI BEACH OFFICE OF THE CITY MANAGER LTC # 296-2018 TO: Mayor Dan Gelber and Members of the City Coif mission FROM: Jimmy L. Morales, City Manager DATE: May 25, 2018 SUBJECT: Standard & Poor's Affirmation • the City's Parking Bond Ratings LETTER TO COMMISSION The purpose of this LTC is to advise you of the results of a positive annual review by Standard & Poor ("S&P") for the City's parking bonds. Miami Beach has again achieved positive annual rating reviews by S&P. The rating was completed using the "U.S. and Canadian Not -For -Profit Transportation Infrastructure Enterprises" criteria (published March 12, 2018, on RatingsDirect). The new criteria focus emphasizes the City's Enterprise Profile of economic fundamentals, industry risk, market position, and management and governance and a Financial Profile consisting of financial performance, debt & liabilities, and liquidity and financial flexibility. Parking Revenue Bonds, Series 2015 and Series 2010 S&P has affirmed a rating of A+ and a stable outlook to the Series 2015 and 2010 Parking Revenue Bonds. The A+ rating, is based on strong financial performance, very strong debt and liabilities capacity, and very strong liquidity and financial flexibility. In S&P's view, Miami Beach's financial performance has been strong and is a key credit strength. The City's parking facilities have a high demand with a 90% average occupancy rate throughout the year. Operating revenues have increased nearly 11% between fiscal years 2015 and 2017, whereas operating expenses have increased 14.6% over the same period. Miami Beach was able to mitigate the revenue decline caused by Hurricane Irma during fiscal year 2017 by having strong coverage and a rate increase implemented on May 1, 2018 along with a new convention center garage opening in fiscal year 2019. The stable outlook on the Parking Bonds reflects the expectation that the demand for the system will remain generally stable and that the system will maintain at levels that are considered strong by the agency. Although unlikely, S&P could raise the rating if demand for the parking facilities remains strong such that the City's financial performance exceeds forecast levels. Conversely, the rating could be lowered if coverage declines to levels consistently below 1.25x due to deterioration in demand or weakened financial operating system. If you have any questions or need additional information, please feel free to contact me. rnl JLM/JW AW F:\FINA\$FINANCE\Rating Agency Presentation\LTC SP Affirmation Of The City's Parking Bond Ratings.Doc S&P Global Ratings RatingsDirect@ Summary: Miami Beach, Florida; Parking Primary Credit Analyst: Nora G Wittstruck, New York (1) 212-438-8589; nora.wittstruck@spglobal.com Secondary Contact: Joseph J Pezzimenti, New York (1) 212-438-2038; joseph.pezzimenti@spglobal.com Table Of Contents Rationale Outlook WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 14, 2018 1 Summary: Miami Beach, Florida; Parking Credit Profile Miami Beach pkg (BAM) Unenhanced Rating Miami Beach rev Unenhanced Rating Long Term Rating Many issues are enhanced by bond insurance. Rationale A+(SPUR)/Stable A+(SPUR)/Stable A+/Stable Affirmed Affirmed Affirmed S&P Global Ratings affirmed its 'A+' long-term rating and underlying rating (SPUR) on Miami Beach, Fla.'s parking revenue bonds using its "U.S. And Canadian Not -For -Profit Transportation Infrastructure Enterprises" criteria (published March 12, 2018, on RatingsDirect). The outlook is stable. The rating reflects our opinion of the system's strong enterprise risk profile and very strong financial risk profile. Our strong enterprise profile assessment reflects a moderately large parking system exhibiting generally resilient demand characteristics and relatively high usage rates due to its situation within the desirable Miami Beach area, which has extremely strong economic fundamentals and is a popular destination for tourists and those who live in the area. Offsetting these characteristics are: moderate competition from private operators and ride sharing services, potential fluctuation in demand from tourist trends, and temporary disruptions from occasional severe weather events. Our very strong financial risk profile assessment considered the parking system's recent decline in coverage (as per our calculations) resulting from Hurricane Irma during fiscal 2017, which is mitigated by coverage (per our calculations), that we expect will be maintained at levels that we consider strong. Our assessment also considered additional revenues from a recent rate increase implemented on May 1, 2018 and from a convention center garage opening in fiscal 2019, the city reducing the amount of transfers it receives from the system, and no additional debt needs. The strong enterprise risk profile reflects our view of the parking system's: • Strong market position and economically vibrant service area, as well as a moderately diverse system consisting of more than 16,000 spaces distributed among 10 garages and attended lots, and about 9,000 on- and off-street meters. The assessment also reflects moderate competition from private parking operators and ridesharing, and its good rate -setting flexibility; • Extremely strong service area economic fundamentals, which include favorable income levels as measured by GDP per capita, a good population size, above-average expected population growth, and below-average unemployment levels; • Low industry risk relative to that of other industries and sectors; and • Very strong management and governance, reflective of detailed and thorough standards for operational and WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 14, 2018 2 Summary: Miami Beach, Florida; Parking financial goals and a staff that we consider experienced and capable in operating the parking system. The very strong financial risk profile reflects our view of the parking system's: • Strong financial performance that reflects our expectation that coverage (per our calculations) will be maintained at levels that we consider strong due to the additional revenue from a recent parking rate increase and from the opening of the convention center parking garage, and the city reducing the amount of transfers it receives from the parking system; • Very strong debt and liabilities capacity reflecting relatively level annual debt service requirements and a manageable capital plan that requires no additional debt to finance; and • Very strong liquidity and financial flexibility, with available liquidity equal to $56.3 million, representing almost 558 days' cash on hand that we expect may be drawn down to fund a portion of the capital plan, but remain at a level we consider very strong. Securing the parking system revenue bonds outstanding is net revenue from all but three city -owned parking facilities. A debt service reserve funded at maximum annual debt service provides additional liquidity to bondholders. Enterprise profile Our assessment of Miami Beach's enterprise risk profile as strong reflects our view of its extremely strong economic fundaments, low industry risk, strong market position, and very strong management and governance. Our assessment also considers the parking system's history of relatively quick resumption of operations, following severe weather events. However, should demand deteriorate for an extended period due to a decline in tourists or visitors to the Miami Beach area due to increased frequency of severe weather events or other events outside of management's control, we could weaken our assessment of the parking system's enterprise risk profile. Economic fundamentals Miami Beach is on a barrier island surrounded by the Atlantic Ocean and Biscayne Bay off the southern coast of Florida. The parking system serves the city, which we believe has extremely strong economic fundamentals as a result of favorable income levels and economic activity as measured by GDP per capita, below-average unemployment levels, and above-average expected population growth. Miami Beach is largely a tourist destination for beach and cruise vacations with more than $4 billion in direct tourist spending. Furthermore, the city benefits from strong international influences from South America and Cuba, both of which are buoying the sector. Following the Great Recession and substantial declines in coastal property values, the housing market has stabilized and returned to favorable growth trends, including 10% year -over -year increases in housing values and 39% of closed real estate transactions completed in all-cash purchases according to the Miami Assn. of Realtors. In addition, unemployment remains low with payrolls up 2.6% year over year according to IHS Markit, bolstered by construction and leisure and hospitality job growth. Market position We consider the parking system's overall market position strong, reflecting a moderately large system with generally strong demand characteristics from serving the Miami Beach area, a popular destination for tourists and business conventions. The system manages assets between South, Middle, and North Beach, providing the bulk in the South WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 14, 2018 3 Summary: Miami Beach, Florida; Parking Beach community. Although management reports some competitive influences from private operators and ridesharing services, which we have observed across the country as affecting similar systems. Despite these competitive influences, demand has been relatively strong, in our view, with a 90% average occupancy rate throughout the year. We consider the parking system's pricing power good, with the city commission retaining control over the rate -setting methodology. Rates are reviewed annually in conjunction with the budget and strategic planning activities. On May 1, 2018, the city implemented a rate adjustment for parking garage spaces and we believe that, despite this change, rates remain relatively low when compared with those charged by competing facilities. The city implemented on -street and off-street parking lot rate increases in October 2015, which was followed by a modest softening in demand. We do not anticipate a material change in demand following the most recent rate increase, but should demand for the system deteriorate resulting from exogenous events that negatively affect tourism or the city's economy as a whole, we could weaken our assessment of the system's market position. Management and governance The system's managerial and governance is very strong, in our view, reflecting of the system's strategic positioning, risk management and financial management, and organizational effectiveness. The system's management team has detailed and thorough standards for operational and financial goals with inclusion of strategic planning in its annual budget document covering high-priority economic, flooding, or infrastructure shocks (including cybersecurity threats as well as bridge, roadway, or sewer and stormwater failures). We consider management's practice of maintaining consistently strong unrestricted cash reserves that effectively mitigates against unexpected events as a prudent outcome of its planning initiatives. In addition, the system maintains business interruption insurance should facilities become damaged and inoperable due to flooding or severe weather events. The debt profile is conservative and lacks variable-rate or other components that could raise contingent liquidity risks. Furthermore, planning initiatives govern the five-year capital improvement plan (CIP) with the city deprioritizing or identifying alternate funding sources for previous projects. We consider the system's organizational effectiveness very strong, reflecting our view of a very capable management team with a good track record of operating the system. Financial profile Our assessment of system's financial risk profile as very strong reflects our view of its strong financial performance, very strong debt and liabilities capacity, and very strong liquidity and financial flexibility. In our assessment we viewed the parking system's fiscal 2017 coverage (per our calculations) as an anomaly given year-end fluctuations in operating revenue from Hurricane Irma. With the recent rate increase for parking garage spaces and the opening of the convention center garage in fiscal 2019, we believe coverage will return to historical levels that we consider strong. Our financial profile assessment also considered the system's financial policies, which we consider credit neutral. Financial performance We assess the parking system's financial performance as strong, reflecting our expectation that coverage (per our calculations) will remain strong despite a one-year decline in fiscal 2017. The fluctuation in fiscal 2017 resulted from a drop in operating revenue due to Hurricane Irma, which made landfall along the Florida coast on Sept. 10, 2017. The storm negatively affected parking system revenues with tourism dropping off immediately preceding and following the storm as well as during the recovery and cleanup period. Also parking system revenue declined during the month WWW.STANDARDANDP00RS.00M/RATINGSDIRECT MAY 14, 2018 4 Summary: Miami Beach, Florida; Parking because the facilities were closed for three weeks after the storm. We expect coverage, per our calculations, to remain strong in fiscal 2018 following a parking rate increase in May that will generate about $1.8 million annually in additional revenue (about $900,000 for fiscal 2018). Furthermore, we include intergovernmental revenue received from Miami -Dade County, for a portion of countywide parking violations, as operating revenue of the system. We expect this revenue stream will remain at about $3 million annually, as the intergovernmental agreement with the county is not easily renegotiated. We consider the parking system's fiscal 2018 budget balanced and the assumptions that form the basis of it reasonable. Total revenue is conservatively budgeted to decrease by approximately $2.0 million while expenditures (excluding depreciation) are expected to remain flat from fiscal 2017. Management reports that year-to-date revenue and expenditures are on budget and, with the rate increase in May, revenue will likely improve from budgeted amounts. The system supports the city's general fund operations through a transfer out to cover administrative costs as well as pension contributions. Audited fiscal 2017 results show a transfer of $6.4 million (down $2.0 million from the previous year) and the fiscal 2018 budget includes a transfer of $4.4 million. Officials anticipate reducing the transfer to zero, potentially in fiscal 2019. We believe as the transfer declines and as additional revenue is generated from the rate increase implemented in May, coverage will improve for fiscal 2018 (estimated at 1.3x based on our calculations). Our coverage calculations include these transfers as operating expenditures of the system and also includes nonoperating revenues that consist of parking violation revenues that we expect will reoccur on a predictable basis. The system has historically operated with favorable revenue and expenditure trends, with operating revenue increasing nearly 11% between fiscal years 2015 and 2017, while expenditures have grown 14.6% over the same period. When the convention center parking garage opens in fiscal 2019, management anticipates a modest uptick in expenditures for the new facility (about $650,000) while the revenue forecast shows about $1.4 million in additional income. Debt and liabilities We assess the system's debt and liabilities capacity as very strong, reflecting a manageable debt burden of $93.6 million outstanding as of fiscal year-end 2017 and relatively level annual debt service requirements of $6.25 million through to maturity in 2045. Our assessment also reflects the fact that the system has no additional debt needs, with a $99.6 million CIP program that we expect will be funded from a combination of cash from the renewal and replacement fund or from GO bonds. Furthermore, a number of projects were recently deprioritized thereby potentially reducing the system's long-term capital requirements. Liquidity and financial flexibility We assess the system's liquidity and financial flexibility as very strong, reflecting our expectation that the nearly 558 days of cash on hand will continue and may only modestly deteriorate should the city potentially draw on the system's unrestricted cash reserves to fund a portion of the parking system's CIP. As of Feb. 28, 2018, the system reported available cash equal to about 537 days' cash on hand. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 14, 2018 5 Summary: Miami Beach, Florida; Parking Outlook The stable outlook reflects our view that the demand for the system will remain generally stable and that the system will maintain coverage (per our calculations) at levels that we consider strong. Upside scenario Although unlikely, we could raise the rating if coverage (per our calculations) improves to levels that we consider very strong and sustainable. Downside scenario We could lower the rating if coverage (per our calculations) declines to levels consistently below 1.25x due to deterioration in demand or weakened financial operations of the system. 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. 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