OREANDA-NEWS.  Fitch Ratings has affirmed the following ratings for the city of Palm Bay, Florida (the city):

--Implied unlimited tax general obligation (ULTGO) rating at 'AA-';
--$50,855,000 taxable special obligation refunding bonds, series 2013 at 'AA-';
--$5,485,000 public service tax revenue bonds, series 2010 at 'AA-'.

The Rating Outlook for all bonds is Stable.

SECURITY
The special obligation bonds are payable by a subordinate lien on public service tax (PST) and communications service tax (CST) revenues (collectively, the designated revenues). The city has also covenant to budget and appropriate non-ad valorem revenue in the event the designated revenues are insufficient to pay debt service. Such covenant to budget and appropriate non-ad valorem revenue is subject to the availability of non-ad valorem revenues after satisfying obligations with a specific lien on such revenue and the funding of essential government services.

The public services tax revenue bonds are secured by a senior lien on PST and CST revenues and a cash-funded debt service reserve fund (DSRF).

KEY RATING DRIVERS

RATING REFLECTS DESIGNATED REVENUES: The 'AA-' rating on the outstanding special obligation refunding bonds reflects the credit quality of the PST and CST revenues streams, which cover maximum annual debt service (MADS) on an all-in basis a healthy 2.14 times (x). The rating on these bonds is capped by the implied ULTGO rating, which is also 'AA-'.

ROBUST COVERAGE ON PST BONDS: The 'AA-' rating on the outstanding public service tax revenue bonds reflects robust senior MADS coverage of 11.05x, as well as the city's covenant not to issue additional parity bonds which eliminates leveraging risk. The rating on these bonds is also capped by the implied ULTGO rating.

SATISFACTORY FINANCIAL OPERATIONS, MODERATE DEBT: The 'AA-' implied ULTGO rating reflects the city's practice of maintaining an adequate financial position over time, an affordable debt structure with limited issuance and capital needs. These positives are weighed against income and employment metrics that are generally weaker than the state and nation. The employment base also exhibits some concentration, though this is somewhat mitigated by the city's inclusion in the broader Palm Bay-Melbourne-Titusville metropolitan statistical area (MSA).

RATING SENSITIVITIES
All special tax ratings are sensitive to changes in coverage levels principally dictated by changes in revenue performance and general economic conditions. Risk to over-leveraging is viewed as minimal.

The rating on the special obligation bonds and the public service tax bonds are capped at the city's implied ULTGO rating. The city's implied ULTGO rating is most sensitive to stability in the city's operating performance. The city's tax rate is on the high side, which would create some vulnerability to a period of tax base decline or revenue weakness.

CREDIT PROFILE
Palm Bay is located in central Florida in Brevard County near the Atlantic Coast. The city covers an area of over 100 square miles and is the largest incorporated municipality in the county by population, with a 2012 estimate of 105,838.

SOLID COVERAGE FROM PST and CST REVENUE
The essential nature of the taxed commodities (electric, water, gas, and communication services) have led the PST and CST revenue streams to exhibit good growth over time and remain resilient during the economic downturn. Fiscal 2014 pledged revenue of $10.9 million covers senior lien MADS of $1.1 million (in 2014, excludes Build America Bonds subsidy) by 11.05x, and 2.14x MADS on an all-in basis. The city has covenanted not to incur additional obligations secured by a senior lien on the PST or CST, effectively closing this lien to additional leveraging. The additional bonds test for the subordinate lien requires an adequate 1.5x coverage requirement of all-in MADS.

NON-AD VALOREM SUPPORT FOR SPECIAL OBLIGATION BONDS
The city has covenant to review the amount of designated revenues received 60 days prior to each payment and determine if a sinking fund deficiency is expected to exist. If so, the city shall immediately amend its annual budget to include an amount of non-ad valorem revenue to cure such deficiency, and transfer such sum to the sinking fund not later than five business days prior to the debt service payment date.
The only debt obligation backed by the city's non-ad valorem covenant is the series 2013 bonds, with debt service that gradually escalates from $2.5 million in fiscal 2014 to MADS of approximately $4.7 million in fiscal 2032. Fitch calculates available non-ad valorem revenues at $13.8 million for fiscal 2014, whereas total non-ad valorem revenues as defined in the bond resolution are higher at $17.8 million. Fitch adjusts the gross non-ad valorem revenue of $35 million not only by the amount of fuel and gas taxes not legally available for general purpose but also a proportional share of general government and public safety costs not covered by ad valorem taxes.

IMPROVING ECONOMY / WEAKER DEMOGRAPHICS
Palm Bay's economy continues to stabilize following the recession. Employment grew by 1.7% in 2014, although growth has been flat through July 2015 compared to the prior year. After peaking at 11.2% in 2010 the city's unemployment rate is presently 6.1%, which remains elevated compared to state and U.S. averages. Wealth indicators for the city are below state and national averages.

The city's main industry, outside of housing and tourism, is equipment and communications manufacturing. The Harris Corporation employs about 3,000 or a somewhat elevated 6% of the city's total employment base. The firm recently completed its acquisition of Exelis Inc. and decided to integrate the two segments headquarters in Palm Bay, which speaks to the firms' longer-term commitment to the area. The combined operations of the two firms will create one of the largest defense contractors in the nation.

SATISFACTORY FINANCIAL PERFORMANCE
Fiscal 2014 general fund operations produced a $2 million operating deficit (after transfers) exceeding the original budget forecast of a $793 thousand drawdown of reserves. The main elements attributable to the larger than budgeted drawdown were a 3% salary increase provided to employees ($693,555) combined with an increase in transfers out related to debt refunding ($609,640). The unrestricted fund balance declined to $10 million (from $10.4 million) or 17% of operating expenditures and transfers out. The city has a 10% fund balance policy, although it is more lenient in that it excludes transfers out, which are largely for debt service, and employee benefits that Fitch views as recurring obligations.

The fiscal 2015 approved budget, which incorporated a 2.5% salary increase (approximately $537,915) and a 4% health insurance increase ($348,779), included the use of approximately $378,000 of fund balance. Management reports a year-end deficit of approximately $1.8 million (3% of expenditures) primarily because of an unbudgeted $2 million transfer out to the road maintenance capital fund. The unrestricted fund balance is projected to drop to about $8.2 million, or 14% of budgeted expenditures.

The adopted fiscal 2016 budget is balanced, and drops the tax rate to 8.5 mills (from 8.6326 mills), which allows only a modest cushion under the statutory 10 mill cap. The budget includes an additional $1.6 million transfer out for road maintenance, as well as a 1.5% employee salary increase ($421,880).

MODERATE DEBT, MANAGEABLE CAPITAL NEEDS
Overall debt levels are low to moderate at $1,403 per capita and 3.1% of market value. Debt payout is slow, with only 29% of outstanding principal repaid in 10 years. The city's fiscal 2016-2020 capital improvement plan (CIP) totals $50.4 million, with about $31.1 million allocated towards the city's stormwater system (to be funded through user fees) and $11 million allocated towards fleet replacement, with a funding source yet to be identified. The remaining capital needs are expected to be financed through impact fees, grants, and other cash sources.

Debt service accounted for a reasonable 9% of governmental fund spending in fiscal 2014. The city's carrying cost for long-term liabilities factoring in contributions for pension and other post-employment benefits (OPEB) is moderate at 17%.

PENSION FUNDED POSITION SATISFACTORY, REFLECTS PRIOR ISSUANCE OF DEBT
The city administers a single-employer pension plan for general employees (which has been closed to new hires since 1991), police, and fire. The pension plan assets reflect the issuance of $43.7 million of special obligation bonds in 2004 and 2008, the bulk of which remains outstanding. The funded status of the plan is solid at 83.4% as of the Oct. 1, 2013 actuarial report. The funded ratio assuming a 7% rate of return (the plan assumes 8%) would approximate a still satisfactory 75.2%.