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LTC 122-2022 S&P Credit Ratings for Resort Tax Bonds122-2022 M IAMI BEACH OFFICE OF THE CITY MANAGER LTC # LETTER TO COMMISSION TO : FROM : Honorable Mayor Dan Gelber and Members of the City Commission Alina T. Hudak , City Mana~ DATE : April 1 , 2022 (.Jf • . SUBJECT : S&P Credit Ratings for Resort Tax Bonds The purpose of this L TC is to advise the City Commission regarding the results of a recent credit review completed by Standard & Poor's Global Ratings on the City's Resort Tax revenue bonds. • S&P has affirmed the current AA-rating on the C ity of Miami Beach's Series 2015 Resort Tax revenue bonds. The outlook has been revised from negative to stable . Given the significant financial challenges to the City from the impacts of COVID-19 , we are proud that we have been able to successfully maintain our current ratings and improve the outlook for our Resort Tax Bonds. These ratings serve as an independent validation of all the important and often difficult actions taken to date by the Administration and the City Commission to balance the City's budget. As the City's economy continues to improve, the ratings for these bonds may be revised in the near future . Please find attached a rating agency credit scale for your information as well as a copy of the credit rating report . Should you have any inquiries regarding this information, please contact John Woodruff, Chief Financial Officer. /ti/. ATH/JW ,..- Letter to Commission S&P Credit Ratings for Resort Tax Bonds April 1, 2022 Page 2 of 2 Rating Agency Credit Scale S&P Moody's Rating Description AAA Aaa Prime AA+ Aal AA Aa2 High grade AA-Aa3 A+ Al Upper medium Investment-grade A A2 A-A3 grade BBB+ Baal Lower medium BBB Baa2 BBB-Baa3 grade BB+ Bal Non-investment BB Ba2 grade speculative BB-Ba3 B+ Bl B B2 Highly speculative B-B3 Non-investment CCC+ Caal Substantial risks grade CCC Caa2 Extremely AKA high -yield bonds speculative AKA junk bonds CCC-Caa3 Default imminent cc Ca with little prospect C for recovery C D I In default S&P Global Ratings RatingsDirect ® Summary: Miami Beach, Florida; Miscellaneous Tax Primary Credit Analyst: Christian Richards , Washington D.C. + 1 (617) 530 8325 ; christian.richards@spglobal.com Secondary Contact: Jennifer K Garza (Mann), Dallas + 1 (214) 871 1422 ; jennifer.garza@spglobal.com Table Of Contents Rating Action Stable Outlook Credit Opinion Related Research WWW.STANDARDANDPOORS COM/RATINGSDIR ECT MARCH 31, 2022 1 Summary: Miami Beach, Florida; Miscellaneous Tax Credit Profile Miami Beach resort tax Long Term Rating Rating Action AA-I Stable Outlook Revised S&P Global Ratings revised the outlook to stable from negative and affirmed its 'AA-' rating on Miami Beach, Fla.'s series 2015 resort tax revenue bonds. The outlook revision reflects the rebound in pledged revenues exiting the pandemic and recession . The fiscal 2021 draft audit shows a 93% recovery relative to 2019-highs and 2022 pledged revenue exceeded 2019 levels in each of the first several months of the fiscal year for which reporting was available . We expect pledged revenues will continue to meet or exceed 2019 levels in the short term, leading to rating stability. The ratings reflect the application of our "Priority-Lien Tax Revenue Debt" criteria, published Oct. 22, 2018, on RatingsDirect, which factor in both the strength and stability of pledged revenues and the general creditworthiness of the municipality. The bonds are secured by a first lien on resort tax revenue, consisting of a 4% tax on each dollar charged for hotel rentals and other short-term accommodations and a 2% tax on the sales price of food or beverage sold at retail in any restaurant. There are no payments made that are senior to debt service, and neither of the taxes that make up pledged revenue sunset. The city commission enacted an ordinance on Oct. 28, 2015, that allows for an additional 1 % tax on hotel rentals, bringing the total levy pledged to the above-mentioned 4%. At the current rates, the city's resort tax is being levied at the maximum allowable under state law (i .e . Chapter 67-930). The additional 1 % levy was authorized by city voters in 2012 and can only be used to finance convention center projects and related debt service, while the balance of the 4% tax can be used for a variety of purposes centered on tourism. Resort taxes are collected citywide and then remitted directly to the city. Credit overview Due to the revenue uncertainty stemming from the pandemic, S&P Global Ratings revised its outlook on Miami Beach's series 2015 resort tax revenue bonds to negative from stable in May 2020 . Audited pledged revenues declined from fiscal years 2019 to 2020 by 37%, from $88.2 million to $55 million , resulting in maximum annual debt service (MADS) coverage declining from 7.09x to 4.41x . Based on the draft fiscal 2021 audit, we expect coverage to improve to approximately 6.6x, given pledged revenue improving to approximately $82 .2 million . Additionally, revenues exceeded 2019 collections in the first five months of the current fiscal year, and we expect collections will likely remain at least at 2019 levels . Consequently, we expect coverage to remain significantly stronger than 2020. We do not expect to revise the rating during the two-year outlook period. The ratings reflect our opinion of the following: WWW .STANDARDANDPOORS .COM/RATINGSDIR ECT MARCH 31, 2022 2 Summary: Miami Beach, Flor ida ; Miscellaneous Ta x • Strong-to-very strong economy, including the Miami-Fort Lauderdale-West Palm Beach metropolitan statistical area (MSA), which we consider to be broad and diverse; • Moderate volatility of tourist development tax revenues; and • Strong coverage and liquidity profile, with coverage expected to remain significantly above the 1.5x additional bonds test (ABT}. The city's general creditworthiness does not constrain the above credit characteristics or the rating on the 2015 bonds. Environmental, social, and governance We view this rating action as a direct result of improving health and safety conditions, a social factor under our environmental , social, and governance (ESG) considerations. We believe that environmental risks are elevated for the city. In particular, we believe hurricane winds and flooding represent the largest risks to Miami Beach over the long-term . For more information, see "ESG U.S. Public Finance Report Card: Florida Governments And Not-For-Profit Enterprises," published Sept. 9, 2021. We believe its governance and social risks, outside of the improving health and safety conditions, relative to its economy, management, financial measures, and debt and liability profile, are in line with the sector standard. Stable Outlook Upside scenario We could raise the rating on the 2015 revenue bonds if revenue growth results in extremely strong MADS coverage and we expect that it will remain elevated due both to continued revenue growth and limited future debt issuances. Downside scenario If revenue recovery stalls or if MADS coverage declines due either to reduced revenue or additional debt issuances, we could take negative rating action. Credit Opinion Economic fundamentals: Strong to very strong Miami Beach, with a population of 95,111, is on a barrier island in Miami-Date County on the state's Atlantic Coast. It is in the Miami-Fort Lauderdale-West Palm Beach MSA, which we consider broad and diverse , and which itself has an estimated population of 6.2 million . The city is a globally recognized tourism and cultural destination and is estimated to attract more than 10 million visitors annually. It has an effective buying income of 158% of the national level, which has remained relatively stable. Volatility: Adequate We assess the volatility of revenues to determine the likelihood of the availability of revenues during different economic cycles . We have two levels of volatility assessment: macro and micro. Our macro volatility assessment begins with an assessment of the historical volatility of the economic activity being taxed, and includes an analysis of societal, demographic, political, and other factors that could affect these activities. WWWSTANDARDANDPDORS COM/RATINGSDIRECT MARCH 31, 2022 3 Summary: Miami Beach, Florida; Miscellaneous Tax Based on the variance of national economic activity that we believe most closely represents the trucing base over multiple economic cycles, it is used to inform our opinion on expectations of future volatility. To determine our view of the volatility of hotel/hospitality taxes, we used total hotel/hospitality true data from the U.S. Census Bureau for the period 1993-2014. Our micro volatility assessment accounts for the stability and demonstrated trend of tourist development tax revenue growth, which we believe could experience some fluctuations through economic cycles. We believe that Miami Beach's revenue volatility is likely to mirror macro trends and consequently have not adjusted our view of revenue volatility. Coverage and liquidity: Adequate to strong Pledged revenues remained stable from 2016 through 2019, increasing 6.6% overall, before declining 38% from 2019 to 2020 . We believe the revenue decline in 2020 was due to the pandemic and restrictions or hesitancy to travel and gather in large public venues. As those abate, as demonstrated in the revenue recovery below, we expect continued improvement in coverage levels. Following the demonstrated recovery in the unaudited 2021 revenues , management reports continued recovery in the current fiscal year. Over the past few months, the county reported the following revenue recoveries relative to the same month in 2019. These reflect actual collections from the prior month. • October 2021 : $542 ,000 above, 112% recovery • November 2021 : $629 ,000 above, 111 % recovery • December 2021: $2 .1 million above, 134% recovery • January 2022 : $2 .4 million above, 124% recovery • February 2022 : $1.6 million above, 118% recovery We believe that the slight decline in February 2022 revenue recovery was due to the emergence of the omicron variant, but expect that collections will continue to exceed 100% of 2019 levels through March 2022 . Management notes that the average daily rate of $4 7 4 in January 2022 was the highest of any month dating back through fiscal 2019 , and from October 2021-January 2022 , average daily rates exceeded the same month in each of the prior three years . Notably, the January 2022 average daily rate was $124 (35 %) higher than the January 2019 rate. Occupancy rates are also rebounding, although they continue to lag 2019 and 2020 rates. December 2022 occupancy of 70 % lagged December 2019 by only three percentage points, but the January 2022 rate fell to 12 points below the January 2019 rate, reflecting the emergency of the omicron variant. As omicron concerns dissipate, we expect a continued rebound in occupancy rates. Overall, we expect revenues will maintain an upward trajectory on average , potentially exceeding 100% of 2019 total revenues at year-end . We expect coverage to remain significantly above the 1.5x ABT. The city does not have additional new-money debt plans on the resort true revenue streams. The 2015 series does not have a debt service reserve fund . WWW.STANDARDANDPOORS .COM/RATINGSDIREC T MARCH 31, 2022 4 Summary: Miami Beach, Florida; Miscellaneous Tax Obligor linkage: close Under our criteria, pledged revenues have exposure to operating risk and the city does not benefit from a limited scope of operations or extraordinary expenditure flexibility. Revenues are collected by the city and deposited into the Resort Tax Fund. Excess funds can be used for any lawful purpose. Rating linkage to Miami Beach We assess the city's general operations because we view overall creditworthiness as a key determinant of an obligor's ability to pay all of its obligations, including bonds secured by a special tax. The city has consistently maintained at least balanced operations, although it had a fiscal 2020 $21 million operating deficit of about 6.1 % of general fund expenditures and transfers out. Total available reserves remain very strong. Its assigned and unassigned reserves total approximately 8.8% of general fund expenditures and transfers out, with an additional 17.6% held in committed reserves for emergencies the city can make available. Miami Beach's economic profile has remained stable, with incomes at 158% of the national average, along with a very strong $541,960 market value per capita. While debt ( 10. 7%) and retirement ( 16 . 7%) costs are elevated as a percentage of total governmental funds audited expenditures, they have remained stable, and management is incorporating them into the annual budgets. Related Research • Through The ESG Lens 3.0: The Intersection Of ESG Credit Factors And U.S . Public Finance Credit Factors, March 2,2022 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. Please see Ratings Criteria at www.standardandpoors.com fo r 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 S&P Global Ratings' public website at www.standardandpoors.c om. Use the Ratings search box located in the left column. 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