CREDIT OPINION Cocoa (City of) FL Update to credit analysis following assignment of Aa2 issuer rating Summary Jerrel Baker +1.212.553.2862 Associate Lead Analyst jerrel.baker@moodys.com Edward (Ted) +1.212.553.6990 Damutz VP-Sr Credit Officer edward.damutz@moodys.com CLIENT SERVICES Americas 1-212-553-1653 Asia Pacific 852-3551-3077 Japan 81-3-5408-4100 EMEA 44-20-7772-5454 The issuer rating is equivalent to a rating for a hypothetical General Obligation Unlimited Tax (GOULT) debt issue and is used as a reference rating for the city's water and sewer enterprise rating (Aa2). On April 12, 2018 we assigned the city an initial Aa2 issuer rating. Exhibit 1 Recent tax base growth will continue given ongoing commercial development $1,350 $1,300 Full Value (in millions) Contacts The City of Cocoa (Aa2 issuer rating) benefits from a very strong financial position and a growing tax base near Orlando (Aa1 stable). Although small relative to similarly rated cities nationwide, the city's tax base will continue to grow because of ongoing commercial development. Wealth and income levels continue to trend below national medians; however, unemployment remains low despite a growing labor force. The city's strong financial position will likely benefit from additional revenue generated by a recently imposed public service tax on water consumption and management's continued efforts to control expenditures. Fixed costs will remain manageable despite above average debt and pension burdens. $1,250 $1,200 $1,150 $1,100 $1,050 $1,000 2013 2014 2015 Source: The City of Cocoa, FL Credit strengths» Expanding tax base given ongoing commercial development» Strong reserve and liquidity levels 2016 2017
Credit challenges» Weak socioeconomic indicators» Elevated pension liability» Reliance on transfers from water and sewer fund Rating outlook Outlooks are not typically assigned to local government credits with this amount of debt outstanding. Factors that could lead to an upgrade» Improved socioeconomic indicators commensurate with higher rated entities» Material tax base growth Factors that could lead to a downgrade» Deterioration in tax base or wealth levels» Significant decline in reserve or liquidity levels Key indicators Exhibit 2 Cocoa FM_Id 2013 2014 2015 2016 2017 $1,118,061 $1,128,162 $1,146,939 $1,209,826 $1,315,549 17,196 17,261 17,339 17,558 18,982 $65,019 $65,359 $66,148 $68,905 $69,305 62.2% 60.5% 59.3% 59.4% 59.4% Operating Revenue ($000) $35,613 $37,844 $37,985 $33,863 $34,748 Fund Balance ($000) $24,750 $31,433 $36,564 $34,187 $32,729 Cash Balance ($000) $27,443 $34,180 $38,398 $35,990 $33,230 Fund Balance as a % of Revenues 69.5% 83.1% 96.3% 101.0% 94.2% Cash Balance as a % of Revenues 77.1% 90.3% 101.1% 106.3% 95.6% $14,974 $14,040 $14,980 $13,836 $20,120 $74,979 $83,658 $90,831 Economy/Tax Base Total Full Value ($000) Population Full Value Per Capita Median Family Income (% of US Median) Finances Debt/Pensions Net Direct Debt ($000) 3-Year Average of Moody's ANPL ($000) Net Direct Debt / Operating Revenues (x) 0.6x Net Direct Debt / Full Value (%) 1.3% 1.2% 1.3% 1.1% 1.5% Moody's - adjusted Net Pension Liability (3-yr average) to Revenues (x) 2.0x 2.5x 2.6x Moody's - adjusted Net Pension Liability (3-yr average) to Full Value (%) 6.5% 6.9% 6.9% Source: The City of Cocoa, FL, Moody's Investors Service Profile The city of Cocoa is located in Brevard County (A1 senior most tax backed rating), approximately 47 miles east of Orlando. The city has an estimated population of 18,982. 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. 2
Detailed credit considerations Economy and Tax Base: Sizeable Tax Base Poised for Expansion The city's sizeable tax base will continue to expand as a result of ongoing commercial development. The city's favorable location between Orlando (Aa1 stable) and Port Canaveral positions the city to become an attractive commercial hub along Interstate 95 and State Road 528, which provides direct access to the Orlando metro area. The city's tax base experienced consistent declines following the recession; however, growth has been positive since 2014. Notably, the city's tax base grew at a compound rate of 2.9% over the last five years, increasing to $1.3 billion in 2017. Although the city is primarily residential, commercial development will be a key driver for growth. Ample developable land along Interstate 95 and nearby state roads will likely attract private developers to the city. Positively, management reports that demand for private investment has increased, which is reflected by a recent uptick in commercial building permits. During fiscal 2017, the construction of a new Wal-Mart Inc. (Aa2 stable) distribution center and two new automotive dealerships commenced. Both projects are projected to bring 460 and 100 new jobs, respectively. Moody's believes commercial growth will continue in the medium-term, which will likely strengthen the city's existing economic base. The city's wealth and income levels are well below the national medians for cities across the state and nationwide, which reflect the limited availability of high-wage paying jobs within the city. MFI and PCI are equal to 59% and 70% of the national median, respectively. Poverty is also outsized at 27%. Positively, regional unemployment is low at 3.7% and falls below the national level. The city's top employers include Eastern Florida State College, the City of Cocoa, and Beyel Brothers, Inc. As the availability of new jobs increase, the city's unemployment rate is expected to remain low while the labor force continues to grow. Financial Operations and Reserves: Strong Financial Position Likely to Benefit From Additional Revenue The city derives considerable credit strength from its strong financial position, which will likely remain so given its history of conservative budgeting, adherence to strong fiscal policies, and continued efforts to control expenditures. Despite a sizable general fund operating deficit in 2016 driven primarily by one-time capital expenditures, the city experienced sizable operating surpluses between fiscal 2012 and fiscal 2015. The city s financial position is bolstered by the healthy performance of its water and sewer fund from which it receives annual transfers. During fiscal 2017, transfers from the water and sewer fund to the general fund totaled $6.6 million or 94% of total transfers. The general fund's top three revenues sources for the general fund were charges for services (33.4%), transfers in (19.6%), and taxes (19.4%). While tax revenue is projected to increase alongside growth in the tax base, significant reductions in garbage collection or green fees (charges for services), or a notable decrease in transfers into the general fund, could pressure the city's current financial position. The city s current reserve levels (proportionally and nominally) are well above the medians of similarly rated cities within the state and across the nation. Fiscal 2017 fund balance declined from $33 million or 99.8% of revenues in fiscal 2016 to a still very strong $32.2 million or 95.5% of revenues. The aforementioned levels have historically exceeded the city s formal policy to maintain a stabilization reserve of at least $9.5 million or 33% of operating expenditures (whichever is greater). The fiscal budget includes a 24% general fund budget decrease and demonstrates management's efforts to control expenditures. Furthermore, the fiscal 2018 millage rate remained flat at 5.97 mills, which is well below the 10 mill cap for cities in the State of Florida (Aa1 stable). Notably, the city also implemented a 10% public service tax (PST) on water consumption for water customers within city limits (effective October 2017). The PST is applied to city's base rate for water consumption and is estimated to increase customers monthly water bill by no more than $2.73. Revenue generated from the PST is collected by the city's water and sewer fund and must be remitted to the city's general fund on an ongoing basis. Management reports that the PST is projected to generated $335,000 during fiscal 2018, which will likely increase going forward given the city's commitment to automatically increases water rates on an annual basis. 3
LIQUIDITY The city's liquidity, which is well above the national and state medians for the Aa2 rating category, will remain stable, since management's plans to draw down available for capital are minimal. General fund net cash totaled $32.4 million or a very strong 96% of revenues in fiscal 2017. Debt and Pensions: Low Debt Burden With Minimal Borrowing Plans The city's debt burden is low but remains above average compared to similarly rated cities nationwide. While above average, the city's debt burden is likely to remain manageable given the city's minimal borrowing plans and the self-supporting nature of the city's water and sewer fund. Notably, the city issued $8.9 million Capital Improvement Refunding Revenue Bonds in November 2016 to refund Capital Improvement Bonds, Series 2007, which allowed the city to obtain an economic gain of $925,052. As a result of the refunding, the city's total debt service payments over the next twenty years is reduced by $2.2 million. The city currently has $20.1 million in net direct debt outstanding, which comprises 1.5% of full value, a level that is above the median for Aa-rated cities nationally (1.0%). The city's most recent issuance includes $8.0 million in Fire Protection Assessment Revenues Bonds, issued in December 2016. The bonds were issued to finance a portion of the costs of acquisition and construction of three new fire station facilities. Although the issuance of the bonds increased the city's long-term obligations, total annual debt service will remain manageable since debt service on the bonds is secured by non-ad valorem special assessments with rates established each year at levels sufficient to cover debt service. Positively, fire protection assessments generated $2.2 million in fiscal 2017, providing a very strong 6.2 times (x) coverage of the required debt service payment of $359,679. The city maintains a five-year capital improvement plan that is updated annually. Major projects underway include various street and sidewalk improvements and the construction of three new fire stations. DEBT STRUCTURE All of the city's debt is fixed rate. DEBT-RELATED DERIVATIVES The city is not party to any interest rate swaps or derivative agreements. PENSIONS AND OPEB The city's pension burden is above average but will likely remain manageable given the city's recent history of contributing 100% of its annually required contribution (ARC). The city participates in two defined benefit, multiple-employer pension plans that are administered by the State of Florida. The fiscal 2017 contribution to the plans totaled $3.6 million or 10.46% of operating expenditures, which covered 100% of the ARC. The city's adjusted net pension liability, under Moody's methodology for adjusting reported pension data decreased from $100 million in fiscal 2016 to $98.5 million or an elevated 2.06x operating revenues in fiscal 2017. Moody's uses the adjusted net pension liability to improve comparability of reported pension liabilities. The adjustments are not intended to replace the city's reported liability information, but to improve the comparability with other rated entities. We determined the city's share of the liability for the state administered plans in proportion to its contribution to the plans. The city also administers a single-employer defined benefit health care plan that provides medical insurance and other postemployment benefits (OPEB) to its employees and their eligible dependents. Fiscal 2017 OPEB contributions totaled $1.1 million or 3.14% of operating expenditures. Total fixed costs (inclusive of debt service, pensions, and OPEB) equaled a moderate 18.7% of operating expenditures. Management and Governance Florida Cities have an Institutional Framework score of Aa, which is high compared to the nation. Institutional Framework scores measure a sector's legal ability to increase revenues and decrease expenditures. The sector's major revenue source, property taxes, are subject to a cap of 10 mills, which cannot be overriden. However, most cities are well below the cap which allows for significant revenue-raising ability. Unpredictable revenue fluctuations tend to be moderate, or between 5-10% annually. Across the sector, 4
fixed and mandated costs are generally less than 25% of expenditures. Florida has public sector unions, which can limit the ability to cut expenditures, although municipalities have legal ability to make changes to union contracts. Unpredictable expenditure fluctuations tend to be minor, under 5% annually. Across the sector, fixed and mandated costs are generally less than 25% of operating expenditures. Florida has public sector unions, which can limit the ability to cut expenditures, although municipalities have legal ability to make changes to union contracts. Unpredictable expenditure fluctuations tend to be minor, under 5% annually. 5
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CLIENT SERVICES 7 Americas 1-212-553-1653 Asia Pacific 852-3551-3077 Japan 81-3-5408-4100 EMEA 44-20-7772-5454