Fitch Rates Lakeland, FL's Non Ad Valorem Revs 'AA-'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA-' rating to Lakeland, Florida's (the city) non ad valorem revenue bonds:

--Up to $62.2 million, series 2010A tax-exempt;

--$12.8 million, series 2010B taxable;

--Up to $20.2 million, series 2010C taxable Build America Bonds (BABS).

The bonds are expected to sell via negotiation in September.

In addition, Fitch assigns the following rating:

--'AA' implied general obligation (GO).

The Rating Outlook is Stable.

RATING RATIONALE:

--Financial management is strong highlighted by ample reserves and results consistently above budget. While the city plans to use a portion of fund balance over the next few years, reserves are expected to remain healthy.

--Although the general government is highly dependent on transfers from utility funds (electric, water/sewer and solid waste), substantial financial flexibility remains on both the revenue and expenditure sides.

--Debt levels are moderate and are expected to remain so given the city's manageable capital needs and the rapid principal amortization of existing debt.

--The area economy continues to expand despite the economic downturn, although the unemployment rate remains above the national average.

--The ratings for the bonds secured by the city's covenant to budget and appropriate (CB&A) non-ad valorem revenues incorporate debt service being subject to annual appropriation.

KEY RATING DRIVER:

--The city's ability to maintain adequate financial flexibility throughout the economic downturn will be a key rating driver over the next few years.

SECURITY:

The bonds are secured by the city's covenant to budget and appropriate (CB&A) legally available non ad valorem revenues.

CREDIT SUMMARY:

The available non ad valorem revenues draw from a broad and diverse mix of revenues with transfers from other funds, notably the electricity fund (electric system revenue bonds rated 'A+' by Fitch), accounting for over 37% of available revenues in the fiscal 2010 budget. Coverage provided by legally available revenues is robust at over 5 times for fiscal 2009 and fiscal 2010 (budget) and is expected to remain strong as excess revenues are required to fund general government operations.

Financial operations are sound; the city has accumulated reserves in prior years with the expectation to utilize a portion as needed in an economic downturn. Fiscal 2009 ended with a $4.7 million surplus increasing the unreserved fund balance to an ample 22.4% of spending. Fiscal 2010 projections show a minimal decline of less than 1% of fund balance. The city states that it may drawdown its undesignated reserves, equal to over 16% of spending at the end of fiscal 2009, to closer to $10 million (11.6% of fiscal 2009 spending) and in a worst case scenario, down to 7.5% of spending over the next three years.

The city remains highly dependent on the electric, water/sewer and solid waste utilities which accounted for over 30% of general fund revenues in fiscal 2009. Transfer levels are set by informal policies and adopted annually by the city commission during the budget process. Overall transfer revenues, which include hospital lease payments in addition to the utility transfers, account for 40% of total revenues. Transfer revenues have fluctuated moderately in recent years, due mainly to the profitability of the electric utility, and are expected to increase minimally in fiscal 2010.

Overall debt levels are moderate and are projected to remain so in upcoming years. The city maintains a 10 year CIP including its multiple enterprise funds, currently totaling $911 million. The electric utility makes up almost half of all needs, followed by other utilities (14%) and general public improvements (14%). There are no additional debt plans in the next five years.

Lakeland is located within Polk County (implied GO rated 'AA' by Fitch) in central Florida. The city benefits from its location along an interstate connecting two of the state's largest cities, Orlando and Tampa. Due partially to its location, distribution services have a presence in the county as well as health care and education representing sizeable components of the economy. Economic drivers located within the city include the headquarters for the regional supermarket chain Publix as well as Lakeland Regional Medical Center, the fourth largest hospital in the state. Economic development continues throughout sectors of the city's economy with 12 new companies opening in 2010 bringing over 160 new jobs to the city while five existing companies have expanded adding and additional 180 jobs. Two larger companies, WellDyne RX a pharmacy services firm and GTech a printing company, both opened offices in the city in 2009 employing a combined 800 people. Unemployment has increased moderately from a year prior and remains above the national average but in line with the state and has declined from its high of 12.9% in January 2010.

Additional information is available at www.fitchratings.com.

In addition to the sources of information identified in the report 'Tax-Supported Rating Criteria', this action was additionally informed by information from Creditscope, University Financial Associates, LoanPerformance, Inc., and Underwriter.

Related Research:

'Tax-Supported Rating Criteria', dated Aug. 16, 2010

'U.S. Local Government Tax-Supported Rating Criteria', dated Dec. 21, 2009'.

For information on Build America Bonds, visit www.fitchratings.com/BABs.

Considerations for Taxable/Build America Bonds Investors

The following sector credit profile is provided as background for investors new to the municipal market.

For Appropriation Debt:

The unlimited taxing power of most local government general obligation pledges is the broadest security a U.S. local government can provide to the repayment of its long-term borrowing, and therefore is the best indicator of its overall credit quality. Some debt repayment requires annual legislative appropriation, and this lesser long-term commitment to repayment is reflected in a lower rating than that of the general obligation rating, usually by one to two notches.

The average local government general obligation rating is 'AA ' with approximately 85% rated at or above 'AA-' and 1% rated 'BBB+' or below. The relatively high ratings reflect local governments' inherent strengths: the authority to levy property taxes, nonpayment of which can result in property foreclosures; additional taxing power that can include sales, utility, and income taxes; and essentiality of and lack of competition for services provided by local governments. Those with low investment-grade or below-investment-grade ratings generally have a combination of a limited or highly volatile economic base, high levels of long-term liabilities including debt and post-employment benefits, and/or unusually limited financial flexibility.

Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=492470

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