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11 Oct 2018
Approximately $2. billion of debt affected
New York, October 11, 2018 -- Moody's Investors Service has downgraded the city of Jacksonville's (FL) issuer rating to A2 from Aa2, Special Revenue Non Ad Valorem Covenant bonds to A3 from Aa3, Better Jacksonville Sales Tax Revenue bonds to A2 from A1, Capital Projects bonds to A2 from Aa3, Excise Taxes Revenue bonds to A2 from Aa2, Capital Improvement bonds to A2 from Aa3 and the Transportation bonds to A2 from A1; affecting approximately $2.1 billion of outstanding debt. The outlook has been revised to negative from stable.
The downgrade of the city's debt reflects our concurrent downgrade of JEA's electric, water and sewer and District Energy System utility debt ratings. For further details on the downgrade of JEA's utility debt, please see our reports, dated October 11, 2018.
The broad Jacksonville rating action is driven by the city's participation as a plaintiff in litigation with JEA, a component unit of the city, against Municipal Energy Authority of Georgia (MEAG), in which JEA and the city are seeking to have a Florida state court invalidate a "take-or-pay" power contract between JEA and MEAG. The city's action calls into question its willingness to support an absolute and unconditional obligation of its largest municipal enterprise, which weakens the city's creditworthiness on all of its debt and is not consistent with the prior Aa rating category. The contract in question was signed in 2008 and is the sole source of repayment for $1.4 billion of outstanding MEAG Power Project J debt bonds.
JEA continues to make payments in full and on time for amounts billed by MEAG Power under the PPA and intends to do so unless and until a court invalidates the PPA.
The one-notch distinction between the A3 rating of the city's non ad valorem bonds and its issuer rating is based on the more limited revenue pledge of the non-ad valorem bonds.
The A2 rating of the special tax bonds is capped at the city's GO rating because of a lack of legal separation of the pledged revenues from the city's general operations.
The negative outlook reflects the uncertainty surrounding the disposition of the city's litigation during the outlook period.
FACTORS THAT COULD LEAD TO AN UPGRADE
- Withdrawal by the city and JEA from the lawsuit against MEAG requesting the termination of the take-or-pay contract
- Material improvement in the city's cash and liquidity position
- Significant reduction in the growth of the city's pension obligations
- Material economic improvement reflected in tax base growth, lower unemployment and increased median family income
- Trend of significant pledged revenue growth
- Increases in debt service coverage levels for special tax bonds
FACTORS THAT COULD LEAD TO A DOWNGRADE
- Continuation of JEA-MEAG lawsuit and decisions by the court favorable to termination of the contract
- Further increases in fixed costs (pension, OPEB and debt service payments)
- Significant reduction in reserves and liquidity
- Material economic deterioration reflected in declining taxable values and increasing unemployment
- Protracted pledged revenue declines
- Decreases in debt service coverage levels for special tax bonds
The issuer rating reflects the implied general obligation equivalent rating of the city.
The non-ad valorem bonds are secured by the city's covenant to budget-and-appropriate legally available non-ad valorem revenues, by amendment if necessary, to repay this obligation, after payment of essential services and bonds having a prior lien on specific non-ad valorem revenues.
The Series 2006C and 2009A excise tax bonds are secured by utility taxes levied on various utility purchases, as well as occupational license taxes. Purchases of utility services including electricity, natural gas, and water are subject to a 10% excise tax, and telecommunications services including cellular, are subject to a 7% tax.
The Series 2008B, 2012A and 2018 transportation bonds are secured by a transportation (half-cent) sales tax and constitutional gas tax (two cents per gallon) revenues.
The principal methodology used in the general obligation rating was US Local Government General Obligation Debt published in December 2016. The principal methodology used in the lease ratings was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2018. The principal methodology used in the special tax ratings was US Public Finance Special Tax Methodology published in July 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
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