Fitch Rates Tallahassee, FL's Capital Bonds 'AA'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'AA' rating to the city of Tallahassee, FL's (the city) following revenue bonds:

--$40,400,000 capital bonds, series 2014.

The bonds are scheduled to sell via negotiation on May 20. Proceeds will be used to reimburse the city for a portion of the costs of constructing a public safety complex, constructing a new fire station and funding various road and sidewalk improvements.

In addition, Fitch affirms the 'AA' rating on the following city debt:

--Implied unlimited tax general obligations (ULTGOs);

--$46.7 million outstanding capital refunding bonds, series 2012.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by the city's share of the local government half cent sales tax, state guaranteed entitlement revenues, public service tax revenues and the local communications service tax revenues. No debt service reserve is expected to support the series 2014 bonds.

KEY RATING DRIVERS

VERY STRONG DEBT SERVICE COVERAGE: The 'AA' rating on the capital bonds reflects ample debt service coverage provided by pledged revenues enhanced by the addition of the public service tax as part of the security structure for this issue and the parity series 2012 bonds. Debt service coverage is expected to remain solid given the city's need for pledged revenues in excess of debt service to fund basic operations.

REVENUE DIVERSITY ENHANCES STABILITY: The breadth and diversity of revenues pledged to debt service including fixed annual guaranteed entitlement distributions enhance the consistency of the revenue stream.

REVENUE BOND RATING LIMITED BY ULTGO: The rating on the capital bonds is capped by the implied ULTGO rating of 'AA'.

CONSERVATIVE CITY MANAGEMENT: Management's prudent and conservative practices have enabled the city to build up substantial reserves and liquidity, despite a limited and declining property tax base.

STATE PRESENCE REDUCES ECONOMIC CYCLICALITY: The city's role as the state capital and the presence of two major state universities both delayed and mitigated the impact of the past recession upon the area economy. Recovery has been somewhat slow but has gained traction recently.

MODEST DEBT LOAD: The city's debt burden is relatively light while principal amortization is above average. These favorable debt metrics are expected to be maintained given the city's manageable capital plans.

RATING SENSITIVITIES

REDUCED FINANCIAL RESERVES: Contraction of the city's strong reserve levels could lead to negative rating action on the implied GO and on the revenue bonds as the revenue bond ratings are capped by the implied GO rating. Continuation of favorable operating results leading to further reserve growth could result in upward rating movement.

NARROWED DEBT SERVICE COVERAGE: Deterioration of debt service coverage by pledged revenues would be viewed unfavorably by Fitch. The Stable Outlook indicates Fitch's expectation that this scenario is unlikely.

CREDIT PROFILE

The city is located in the north central portion of the state within the Florida panhandle. It serves as the state capital and the seat of Leon County. Encompassing about 103 square miles, the city has been aggressive over the past three decades annexing land. Nearly three quarters of the present city boundaries were annexed since 1980. The city's population, currently estimated at 183,727, experienced solid growth over the past decade averaging 1.9% annually.

ADDITIONAL SECURITY ADDS TO COVERAGE

The city is amending the master bond resolution in conjunction with the current offering to add public service tax revenues to pledged revenues, applying the enhanced security to outstanding parity series 2012 capital refunding bonds and all subsequent parity issues. The addition of public service taxes substantially enlarges the pledged revenue base, which would have added $14 million to fiscal 2013 pledged revenues for a 70% increase, and widens coverage somewhat even with the current issue. Pro forma fiscal 2013 pledge revenues, with the public service tax, would cover maximum annual debt service (MADS) on the series 2012 and series 2014 bonds by a robust 3.45x. All-in coverage of MADS, including a subordinate, privately placed series 2009 issue falls to a still ample 2.75x. Even with a planned issue of parity bonds in 2017, all-in coverage is not projected to drop below 2.5x.

The addition of public service taxes broadens and diversifies pledged revenues. The variety of revenue sources tends to cushion revenue volatility, enhanced by fixed state guaranteed entitlement fund distributions. Including public service taxes, pledged revenues fell modestly in fiscals 2009 and 2010 but have registered small gains in each of the past three fiscal years for an overall increase of 3.5% since fiscal 2010. Year-to-date pledged revenues for fiscal 2014 are about even with prior year revenues for the same period.

OPERATIONAL NEEDS RESTRICT ADDITIONAL ISSUANCE

Debt service repayment can withstand significant stress. Pledged revenues could decline by over 70% and still cover MADS by at least 1.0x. Wide coverage levels offset concerns regarding the absence of a debt service reserve fund. Despite a weak additional bonds test of pledged revenues equaling at least 1.25x MADS, additional issuance is more effectively restricted by the city's need of pledged revenues in excess of debt service to fund general operations.

MUCH IMPROVED FINANCIAL OPERATIONS

The city's finances have improved markedly as general fund balance increased by 175% since fiscal 2009. The fiscal 2013 general fund net surplus of $176,000 represented the fifth consecutive year of positive results, bringing general fund balance up to $24.6 million and unrestricted fund balance to $23.9 million or a healthy 18% of expenditures. Reserves are now above pre-recession levels. Liquidity has also strengthened with unrestricted general fund cash and investments more than doubling since fiscal 2009.

As part of fund balance, the city maintains a deficiencies fund for unforeseen expenditures and emergencies targeted at two months of general government operating spending. After previously falling well below the target, the city has aggressively replenished the deficiencies reserve over the past four fiscal years. Funding levels now approach the two months spending target ($23 million) and officials anticipate meeting the target within the next two or three fiscal years.

Property taxes, which represented approximately 24% of general fund revenues in fiscal 2013, have fallen by over 10% since fiscal 2010 due to declining assessed values with no offsetting increase in property tax rates. The city's tax rate of 3.7 mills is among the lowest of all major cities in Florida and well below the 10 mill maximum rate, providing significant potential revenue flexibility.

UTILITY FUND TRANSFERS SUPPORT GENERAL OPERATIONS

Officials have balanced property tax declines with tight spending controls and higher transfers from the utility funds, particularly the electric fund. In fiscal 2013, transfers from the utility funds into the general fund totaled $34 million or 25.6% of general fund revenues of which electric fund transfers approximated $24 million or 18% of revenues. Fitch rates Tallahassee's Energy System electric utility revenue bonds 'AA-' with a Stable Outlook. The transfers keep the property tax rate low and offset the city's limited taxable property base, as nearly half of the base is tax-exempt.

BALANCED FISCAL BUDGET FOR 2014

The fiscal 2014 general fund budget is balanced. The budget includes a 2.5% salary increase for general employees and increased costs for full year consolidated dispatch operations with the county and StarMetro transit operations. These additional costs are partially offset by lower debt service as a result of the series 2012 refunding, increased half cent sales tax and state revenue sharing revenues, as well as one-time allocations of surplus revenues from the special insurance reserve and transfers from the capital improvements fund. Non-recurring revenues total approximately $4.7 million or 3.4% of budget. Officials project that year-end results should adhere closely with the budget.

LARGE STATE PRESENCE STEADIES LOCAL ECONOMY

The city's economy is anchored by state government stemming from its role as the state capital and the location of two major state universities. Consequently, the state is the predominant area employer with about 34,500 jobs representing over 38% of total city employment. The state's outsized presence has served as a stabilizing factor in the area economy. Unemployment rates historically have trended well below state and national averages. The downturn in housing during the past recession, while significant, was milder and occurred later than in other areas of the state.

While the city's recovery has lagged somewhat, recent economic data indicate a moderate recovery. Employment trends have been mixed, up by 2% in 2010 followed by two years of modest losses before registering a 2.3% increase 2013. As of December 2013, city employment levels were 2.6% higher year over year pushing unemployment rates down to 5.3%, below the state and national norms. Housing values in the Tallahassee area as of April 2014 were up 4.5% from the previous year, according to Zillow.com, and are forecast to increase by 1.7% over the next 12 months. Taxable values declined by over 21% between fiscals 2008 and 2013 as a result of statewide property tax reform and the effects of the recession. However, valuations stabilized in fiscal 2014 and officials project modest but consistent near-term growth, which Fitch believes is reasonable given other positive economic trends.

EXTENSIVE STUDENT POPULATION LOWERS WEALTH LEVELS

Wealth indices are well below the state and national medians while poverty rates are high, most likely due to the high proportion of undergraduate and graduate students among the population. Educational attainment levels, particularly the percentage of the city's population with undergraduate and graduate degrees, are significantly above the national profile.

MANAGEABLE DEBT AND RETIREMENT OBLIGATIONS

Debt levels are modest with a debt burden of 2.1% and debt per capita at $2,087. General government debt consists exclusively of revenue bonds secured by or payable from non-ad valorem revenues. Carrying costs of debt, pension and other post-employment benefits (OPEB) are moderate at 17% of general government spending. Principal amortization is relatively aggressive with 65% retired within the next 10 years. The city's five-year capital plan totals $764 million, however, over 60% of capital spending is directed towards utilities and another 25% is allocated for transportation, including mass transit and aviation. Planned general governmental projects include several new fire stations, a senior center, a public safety facility and an extension of the entrance into Florida Agricultural and Mechanical University (FAMU). Officials plan on issuing additional capital bonds in an amount ranging from $25 million to $40 million in 2017.

The city's retirement obligations are well-managed. The city's pension plan includes both defined contribution and defined benefit components. The defined benefit plan is approximately 84% funded using Fitch's more conservative discount rate of 7%. In 2012, officials reduced benefits for employees hired after April 2013 which is expected to generate future savings. The city contributes 100% of its ARC requirements. OPEBs provided to retirees include health insurance and prescription drug coverage. City subsidies to retirees have been capped at fiscal 2010 levels with employees responsible for all costs above that amount, limiting the city's future liabilities.

Fitch has withdrawn its ratings for the following Tallahassee bonds due to prerefunding activity:

--Capital bonds series 2004 (all maturities).

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors,

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=830193

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Contacts

Fitch Ratings
Primary Analyst
Larry Levitz, +1-212-908-9174
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Committee Chairperson
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Larry Levitz, +1-212-908-9174
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Committee Chairperson
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com