Okaloosa County BOCC — November 4, 2014 — Okaloosa Cnty, FL_20141024

RATINGS SERVICES McGRAW HILL FINANCIAL >) STANDARD & POOR'S RatingsDirect® Summary: Okaloosa County, Florida; Miscellaneous Tax; Sales Tax Primary Credit Analyst: Timothy J Daley, Boston (1) 617-530-8121; timothy.daley@standardandpoors.com Secondary Contact: Daniel J Zuccarello, New York (1) 212-438-7414; daniel.zuccarello@standardandpoors.com Table Of Contents Rationale Outlook Related Criteria And Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 24, 2014 1 1365772 | 302307438 Summary: Okaloosa County, Florida; Miscellaneous Tax; Sales Tax Credit Profile US$24.1 mil sales tax rev bnds ser 2014 dtd 12/04/2014 due 10/01/2034 Long Term Rating AA/Stable New Okaloosa Cnty sales tax Unenhanced Rating AA(SPUR)/Stable Affirmed Many issues are enhanced by bond insurance. Rationale Standard & Poor's Ratings Services has assigned its 'AA' long-term rating, and stable outlook, to Okaloosa County, Fla.'s series 2014 sales tax revenue bonds. At the same time, Standard & Poor's affirmed its 'AA' rating, and stable outlook, on the county's series 2009A and 2009B (direct payment Build America bonds) parity sales tax revenue bonds outstanding. The rating reflects our view of: e An established and largely stable economic base, anchored by Eglin Air Force Base; e Strong 3.41x coverage of maximum annual debt service (MADS) based on projected fiscal 2014 pledged revenues; e A good additional bonds test (ABT) requiring 1.35x MADS coverage; and e The county's historical reliance on sales tax revenues to fund transportation, judicial, and public safety operations, making it unlikely that it will bond down to its ABT. Securing the bonds is a first-lien pledge of the one-half-cent sales tax imposed and collected by the state and distributed to the county monthly. Although there is no debt service reserve requirement for the series 2014 bonds, the series 2009A and B bond documents required a debt service reserve sized at the least of 10% of par, 125% annual debt service, or MADS. Given the current coverage levels, we do not believe the lack of a debt service reserve is a credit negative at this time. We understand the series 2014 bond proceeds will be used to finance the costs of the acquisition and construction improvements of county facilities, including the Crestview courthouse. Okaloosa County, with a population of 186,000, is in northwestern Florida on the panhandle. Pledged sales tax revenues continue to improve, averaging 4.5% annual growth since 2010. Fiscal 2013 revenues rose 4.6% year-over-year from fiscal 2012 to $12.6 million. Management projects fiscal 2014 pledged revenues will increase 3.4% over fiscal 2013 to $13.1 million. This unaudited figure provides MADS (occurring in fiscal 2016) coverage of 3.41x, which we consider strong. Sales tax revenue performance is steady throughout the year; however, there is a significant increase in revenues from April to September, reflecting the county's tourism-based economy. Improved tourism activities in the area has driven continued improvement in sales tax revenues, as well as increased construction WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 24, 2014 2 1365772 | 302307438 Summary: Okaloosa County, Florida; Miscellaneous Tax; Sales Tax activity, which is consistent with our regional economic forecasts. According to IHS Global Insight Inc., Florida's GDP growth rate ranks third in the nation; the state is also benefiting from a real estate market rebound and an increase in construction activities. On a state basis, IHS Global Insight projects that Florida will lead the nation in housing starts in 2015, when measured by the number of units. This projection is not surprising given Florida's growing economy, job opportunities, and relatively lower cost of living compared with that of its peers. Along with economic growth and lower unemployment rates, we project that retail sales in the region will grow 2.50% in 2014 and 2.76% in 2015, reflecting an increase in disposable income. Consequently, we believe these factors will support continued improvement in sales tax performance in the next two years. Management reports that there is no concentration among its leading sales taxpayers, with sales tax revenues covering a broad range of categories including general merchandise sales, restaurant sales, and automotive dealers. In addition, the county historically has used the pledged sales tax revenues to pay for transportation, judicial, and public safety program operations. Given this reliance on the pledged revenue base, we believe it is unlikely that the county will bond down to its ABT of 1.35x MADS. Management indicates it will be cognizant of maintaining strong debt service coverage levels, and does not have significant debt plans in the next three years. In March 2012, the governor signed into law House Bill 5301, which changed collection procedures for Florida counties’ share of Medicaid costs. With respect to past due Medicaid amounts, counties will now have this amount netted from their portion of certain state-shared revenues, or primarily its guaranteed entitlement funds. In addition, as of May 1, 2012, the state began withholding from each county's half-cent sales tax distribution that county's monthly share of Medicaid costs, unless the county has paid these costs by the fifth of each month. The legislation provides assurance to holders of bonds secured by the half-cent sales tax issued before May 1, 2012, that the future half-cent sales tax amounts withheld will not be reduced below what is necessary to make timely debt service payments and comply with related bond covenants. It also provides the same assurance to the holders of half-cent sales tax bonds issued to refund such bonds as long as they mature no later than the refunded bonds' maturity date and as long as the refunding bonds result in a reduction of debt service in each fiscal year. County management has indicated that it plans to pay its share of Medicaid expenses by the first of each month (as it has in the past), and does not expect withholdings of its half-cent sales tax revenues from the state. As such, we do not expect these changes to materially affect the credit quality of the county's half-cent sales tax bonds. Outlook The stable outlook reflects our expectation of continued strong debt service coverage by pledged revenues strengthened by our projection of sustained improvement in the local economy, and management's limited additional debt plans. We believe rating upside is limited at this time due to Okaloosa County's weakened coverage levels as a result of this issuance. Should coverage weaken over the two-year outlook period due to a decline in pledged revenue performance or significant new party debt, we could lower the rating. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 24, 2014 3 1365772 | 302307438 Summary: Okaloosa County, Florida; Miscellaneous Tax; Sales Tax Related Criteria And Research Related Criteria USPF Criteria: Special Tax Bonds, June 13, 2007 Related Research US. State And Local Government Credit Conditions Forecast, Oct. 15, 2014 Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 24, 2014 4 1365772 | 302307438 Copyright © 2014 Standard & Poor's Financial Services LLC, a part of McGraw Hill Financial. All rights reserved. No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages. Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P's opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof. S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process. S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription) and www.spcapitaliq.com (subscription) and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 24, 2014 5 1365772 | 302307438