OREANDA-NEWS. February 16, 2015. Fitch Ratings affirms the following ratings for Leesburg, Florida (the city):

--Implied general obligation (GO) bonds at 'AA-';
--\\$14.3 million capital improvement revenue bonds, series 2013 at 'AA-';
--\\$14.3 million non-ad valorem revenue bonds (tax increment bonds) at 'A+'.

The Rating Outlook is Stable.

SECURITY

The capital improvement bonds are secured by the city's receipt of the half-cent sales tax, guaranteed entitlement and public service tax (PST). The lien on the half-cent sales tax and guaranteed entitlement revenues is subordinate to the capital improvement revenue note, series 2009. A reserve fund is funded with a surety from Assured Guaranty.

The non-ad valorem revenue bonds are secured by tax increment revenues derived from the U.S. Highway 441/27 Community Redevelopment Area (CRA) and a covenant to budget and appropriate (CB&A), by amendment if necessary, an amount of legally available non ad valorem revenues sufficient to meet debt service payments.

KEY RATING DRIVERS

IMPLIED ULTGO RATING: The implied ULTGO rating of 'AA-' reflects the city's solid finances, moderate debt and limited economy based on agriculture and healthcare. Per Fitch's criteria, the ULTGO rating serves as a cap on the special tax bond rating.

FINANCES REMAIN STRONG: Management has maintained a strong financial profile with elevated reserve balances and ample liquidity. Reliance upon utility fund transfers, particularly from the electric utility, has recently increased subjecting general fund operations to swings in the electricity market.

MODERATE DEBT: Debt costs are manageable although amortization is slow. Absence of new money bonding plans should keep overall debt levels moderate.

STRONG CAPITAL IMPROVEMENT BOND COVERAGE: Pledged revenue debt service coverage on capital improvement revenue bonds after payment of the senior capital improvement note is robust at 4x maximum annual debt service (MADS). PSTs, the largest source of pledged revenues, are levied on essential services.

COVENANT DEBT NOTCHING: The rating on the non-ad valorem revenue bonds is based on the city's CB&A back-up pledge. Available non-ad valorem revenues include a broad and diverse mix of city income and provide sufficient debt service coverage, even after taking essential service expenditures into account. The one notch rating difference with the implied GO rating is attributable to the ability of the city to dilute coverage by issuing debt specifically secured by certain non-ad valorem revenues and the lack of a requirement to raise revenues to cover debt service.

RATING SENSITIVITIES

RELIANCE ON UTILITY TRANSFERS: Continued high reliance on utility transfers including electric system transfers, would be of concern to Fitch given volatility of the energy sector.

EROSION OF RESERVES: Deterioration of the city's financial reserves could lead to negative action on the implied GO rating.

REDUCED BOND COVERAGE: Significant declines in non-ad valorem revenues supporting the capital improvement revenue bonds leading to materially narrowed coverage levels would result in a downgrade to the rating.

CREDIT PROFILE

The city is located in north central Florida midway between the Gulf of Mexico and the Atlantic Ocean, about 40 miles northwest of Orlando. It encompasses over 38 square miles with approximately 21,000 residents.

SOLID FINANCIAL PROFILE

Financial operations have continued to perform well as characterized by consistent general fund operating surpluses (after transfers), strong balances and abundant liquidity. Between fiscals 2008 and 2013, the city more than doubled general fund balances from \\$4 million to \\$10.1 million. The positive results were due in part to tight controls on spending, including position reductions and salary freezes. The city reported a \\$583,000 net surplus for fiscal 2013, which improved upon an originally budgeted small fund balance drawdown. The surplus was primarily attributable to actual spending which came in about 6% under budget. Unrestricted general fund balance was boosted to \\$9 million or a healthy 36% of expenditures.

INCREASED RELIANCE UPON UTILITY FUND TRANSFERS

Fitch has noted the city's extensive use of transfers from its enterprise systems (electric system rated 'A+' and utility system revenue bonds rated 'AA-' with Stable Outlooks by Fitch) to support general operations. Utility transfers to the general fund were significantly increased in fiscal 2013, facilitated by a 1.2% rise in utility rates. As a result, fiscal 2013 utility fund transfers represented a very high 37% of general fund revenues while transfers from the electric fund alone accounted for 25% of revenues. Utility transfers have enabled the city to maintain a very low tax rate (4.3 mills) despite large declines in taxable assessed value (TAV). Fitch believes the elevated dependence on the electric utility raises the exposure of general operations to the vicissitudes of the volatile electric market. The city is considering imposing a fire assessment fee, the revenues of which would enable a reduction in electric fund transfers.

SURPLUS OPERATIONS FOR FISCAL 2014

The fiscal 2014 budget projected utility contributions to the general fund to be at or near prior year levels while proposing a modest general fund deficit. The city budgets very conservatively and actual results typically outperform the budget. Unaudited results for fiscal 2014 show a solid \\$1.9 million net surplus representing nearly 8% of spending as tax revenue receipts came in over budget. Unrestricted general fund reserves increased by \\$2 million raising the balance to \\$11 million or a hefty 47% of spending.

Balanced operations were budgeted for fiscal 2015 including a 5% across the board salary increase with additional costs partially offset by 18 fewer general fund positions (5.8%). The budget is smaller than in previous years as airport operations were removed from the general fund and transferred to a separate airport enterprise fund.

ROBUST DEBT SERVICE COVERAGE

Debt service coverage of MADS on the capital improvement bonds, after payment of the senior lien capital improvement note is ample at 4.1x as of fiscal 2014. Pledged revenues exhibited solid growth of 4% and 3%, respectively in fiscals 2013 and 2014, reflecting the improved economic climate. PSTs, the largest pledged revenue source accounting for over 70% of revenues are levied at the rate of 10% on purchases of electricity, natural gas and water services within the city. PST revenues grew by nearly 5% over fiscals 2013 and 2014 while half cent sales tax revenues gained 17% over that period. Bond repayment can withstand significant stress as pledged half cent sales tax and public service tax revenues could drop by over 72% and still cover MADS at least 1.0x.

While Fitch considers the 1.3x MADS additional bonds test requirement to be weak, current strong coverage levels and the use of excess pledged revenues for operations militates against extensive issuance. The debt service reserve fund is funded with a surety from Assured Guaranty.

BROAD AND VARIED NON-AD VALOREM REVENUE BASE

The rating for the non-ad valorem revenue bonds (tax increment bonds) is based upon the city's CB&A back-up should tax increment revenues within the community redevelopment area prove insufficient. The 441/27 CRA continues to generate no tax increment revenues as current assessed values remain below base year valuations. The non-ad valorem revenues available for debt service are broad and diverse with the largest being utility fund transfers. Available revenues have declined modestly over the past two fiscal years primarily due to the transfer of funds for fleet maintenance from the general fund into a separate internal service fund. Despite the reductions, coverage levels of all CB&A obligations remain very strong, even when taking into account debt service secured by specific non-ad valorem revenues and essential service expenditures (general government and public safety expenditures). A debt service reserve fund for the 2009 tax increment bonds is funded 50% with cash and 50% with a surety to MADS.

WEAK AND VOLATILE ECONOMIC PROFILE

The city's economy remains limited and somewhat volatile. Formerly based on agriculture, the area experienced a residential construction boom from the 1990s through the mid-2000s, with much of the growth driven by incoming retirees. Population growth was very rapid between 2000 and 2006 due in part to the city's proximity to Orlando and the availability of affordable land. The rate of growth has slowed recently but remains positive.

According to the 2010 census, Leesburg residents 65 years and over constituted over 22.6% of the population compared with the state average of 17.3%. This demographic fostered a growing service sector, particularly in healthcare as well as retail. Central Florida Health Alliance, which includes the Leesburg Regional Medical Center and the Villages Hospital, is the largest employer with 1,770 positions.

The area economy is recovering from the severe recession in which jobs in Lake County declined by a total of 13% while the unemployment rate surged to over 12%. Since 2010, employment has grown every year at an advancing pace. November 2014 jobs were up by 5.1%, year over year pushing county unemployment rates down from 6.7% to 5.9%, slightly above the state and national averages. Housing values suffered a decline of over 50% from the peak period in 2006 through mid-2013, according to Zillow.com. Values have regained some of the earlier losses and, as of January 2015, were up over 28% from the prior year. Zillow forecasts an additional 9% gain in housing values in 2015.

Taxable values have stabilized after a 30% loss since 2008. The tax base, however, has yet to register significant gains currently experienced by other Florida localities. Fitch believes the recent sizable uplift in housing values will eventually translate into a more solid growth pattern in the city's taxable assessed values.

The city's wealth indices are well below state norms and below average educational attainment may inhibit economic development despite city and county efforts.

AVERAGE DEBT LOAD

Debt levels are moderate with a net debt burden of 3.8% or \\$2,827 on a per capita basis. Direct debt consists primarily of capital improvement bonds and tax increment financings. The city has no GO bonds outstanding. Payout is slow as 39% of principal is retired within the next 10 years. Capital plans are manageable. Total carrying costs of debt service, pension annual required contributions and other post-employment benefit (OPEB) contributions are moderate at 21.8% of general government spending. Officials indicate that there are no plans for additional bonds for the foreseeable future.

RETIREMENT LIABILITIES DO NOT PRESSURE FINANCES

The city maintains three separate defined benefit plans for general employees, firemen and police officers. The defined benefit general employee plan was frozen in 2008 and all members transferred to a defined contribution plan. All three plans are well-funded as of October 2013 at 81.1%, 81.8% and 87.7% for general employees, firemen and police officers, respectively using Fitch's assumed 7% discount rate.

City retirees receive subsidized health care benefits from the city on a pay-go basis. As of fiscal 2012, the unfunded actuarial accrued liability for the city's OPEB plan was \\$21.7 million, representing an above average 1.9% of fiscal 2014 taxable values.