OREANDA-NEWS. Fitch Ratings has affirmed the following Raleigh, NC (the city) ratings:

--$327.4 million general obligation (GO) bonds at 'AAA';
--$266.6 million limited obligation bonds (LOBs) at 'AA+';
--$33.2 million variable-rate demand limited obligation revenue bonds, series 2009 at 'AA+/F1+';
-- Issuer Default Rating at 'AAA'.

Fitch has also upgraded the ratings on the following annual appropriation debt obligations to 'AA+' from 'AA':

--$55 million downtown improvement project series 2004A;
--$33.9 million downtown improvement project series 2005A;
--$134.5 million downtown improvement project series 2005B-1;
--$46.5 million downtown improvement project series 2005B-2 and 2005B bank bonds corresponding to the series B-1 and 2 bonds.
--$2.4 million downtown improvement project series 2007.

The upgrade of the appropriation debt reflects Fitch's application of its revised criteria for U.S. state and local government credits, which was released April 18, 2016. The revised criteria include more focused consideration of project factors in ratings for appropriation-backed debt. The series 2004A, 2005A, 2005B-1, 2005B-2, and 2007 COPs do not carry any of the additional risk features that Fitch identifies for rating more than one notch below the IDR.

SECURITY
The GO bonds are secured by the city's full faith and credit and unlimited tax pledge.

The COPs and LOBs are secured by annual payments made by the city subject to appropriation and a deed of trust on certain governmental property.

KEY RATING DRIVERS

The city's strong economic base, supporting historically strong operating performance and a solid revenue framework, coupled with a moderately low liability burden and solid spending flexibility support the 'AAA' IDR.

Economic Resource Base
Raleigh is located in Wake County (IDR of 'AAA'/Stable) in the north central portion of the state. Population increased a notable 46% between 2000 and 2010 and a more moderate 8.9% since 2010. This growth has been due, in part, to the presence of Research Triangle Park (RTP).

Revenue Framework: 'aaa' factor assessment
The city has strong revenue flexibility given the current property tax rate is about a third of the cap. Steady assessed value (AV) appreciation has generated natural revenue growth and Fitch expects this trend to continue given solid economic prospects.

Expenditure Framework: 'aa' factor assessment
The city has significant control over spending, including the legal ability to decide on terms of labor given the absence of collective bargaining. Additional flexibility can be found in pay-go spending and employee vacancies.

Long-Term Liability Burden: 'aaa' factor assessment
Debt levels are manageable and moderately low at 8% of personal income.

Operating Performance: 'aaa' factor assessment
The city's historical operating performance is resilient. Reserves remained robust during and after the recession. Given the city's revenue and expenditure flexibility and ample reserves, the city is poised to perform exceptionally well in an economic downturn.

RATING SENSITIVITIES
The rating is sensitive to shifts in fundamental credit characteristics, most notably the city's continued strong fiscal health. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely in the foreseeable future.

CREDIT PROFILE

Raleigh is located adjacent to the successful Research Triangle Park (RTP), which serves as an important economic engine. The city has a highly skilled labor force and an employment base concentrated in service sector jobs related to government, education, technology, healthcare, and other professional services. Strong population growth, an expanding technology and medicine niche, and a surging professional and businesses service sector augur well for a strong future.

The economy remained relatively stable through the economic downturn and an unemployment rate of 4.4% as of March 2016 is well below the state (5.4%) and national (4.7%) averages. Wealth levels are above the state average.

Revenue Framework
The revenue base is dominated by property and sales taxes at about 53% and 20%, respectively, of fiscal 2015 general fund revenues. During the recession, total revenues declined in just one year by 2.2% mostly due to sales tax performance and lower revenues from licensing and permitting fees. Revenues have recovered solidly.

The city's general fund revenue growth has trended above inflation and in line with U.S. GDP growth. Revenue growth reflects a revaluation in 2009. The city's assessable base is reassessed every four years. Recent AV growth has been modest but Zillow data on home values indicates future property value trends are likely to be robust. Home values have fully recovered and are approximately 108% of pre-recession levels. Ongoing investment particularly in the city's downtown districts is expected to generate new revenues.

The city maintains healthy capacity under the statutory cap of $1.50 per $100 of assessed value given the fiscal 2016 tax rate of $.4210. The proposed fiscal 2017 budget includes a lower rate of $.4183.

Expenditure Framework
The city maintains healthy expenditures flexibility with affordable spending associated with fixed carrying costs.

During the economic recovery, the city demonstrated its spending flexibility. Officials reduced spending during the years revenues declined or growth weakened by eliminating vacant positions, suspending its merit pay program, reducing pay-go spending, and implementing operational efficiencies.

The city's expenditure flexibility is aided by the favorable workforce environment that prohibits labor contracts and gives management independent control of compensation and work rules. Carrying costs associated with debt service, actuarially determined pension payments and OPEB actual contributions total 17.7% of governmental spending, of which debt service accounts for 11%.

Long-Term Liability Burden
Debt levels are low at 8% of personal income. The city's variable rate exposure (approximately, $302 million of which $181 million is synthetically fixed with a BMA swap), excluding enterprise and self-supporting parking debt, is 39% of net direct debt.

The current fiscal 2016 to 2020 five-year capital improvement plan (CIP) totals $1.04 billion. Water and sewer enterprise projects (revenue bonds rated 'AAA'/Stable) account for the majority of the plan at 66%. The plan is 54% debt-funded.

The city's near-term new money issuances include a possible water/sewer financing for capital needs during the summer or fall of 2016, the size of which is unknown at this time, and equipment financing (a bi-annual program) subject to final council approval. Given the average amortization of existing debt and the prospects for continued tax base growth, debt metrics should not be impacted by the planned borrowings.

Pension and other post-employment benefits (OPEB) continue to be well managed. The city is a member of the statewide cost-sharing multi-employer defined benefit Local Government Employees' Retirement System (LGERS). The city's fiduciary net position of the system's total pension liability is 100% funded, adjusted for a 7% investment return assumption. The city also participates in the Law Enforcement Officers' Special Separation Allowance plan. While the city has been overfunding the actuarially required contribution recently the funded ratio is just 10%, but the unfunded liability is minimal at less than 1% of personal income. For OPEB, the city has set up an irrevocable trust. The unfunded liability as of the December 2014 valuation was $140 million, which represents a very low 0.7% of personal income.

Operating Performance
In a moderate economic decline scenario Fitch believes the city would maintain an operating reserve cushion well above the level needed for an 'aaa' financial resilience assessment given the city's superior revenue and spending control. The city proved its financial resilience and strong budget management through the most recent recession by eliminating vacant positions, suspending its merit pay program, reducing pay-go spending and increasing fees.

The city's budget management demonstrates a strong commitment to maintaining a robust reserve cushion. Despite annually budgeting for a portion of fund balance, the city has recorded an operating surplus in each fiscal year for over a decade and has added to unrestricted/unreserved fund balance.

The unrestricted general fund balance of $191.4 million was a healthy 49% of spending at year-end 2015. The city's reserve required by state statute, which is primarily to offset accounts receivable, is an additional source of financial flexibility ($51.2 million) and increases reserves to $242.7 million or 62.2% of spending. The city has a target unassigned fund balance policy of 14% which it is comfortably exceeding.

Consistent with previous years, the adopted 2016 general fund budget, which is a 4.4% increase over 2015, includes a $13 million appropriation of general fund balance. The budget also includes a moderate $1.72 cent2 per $100 of AV property tax rate increase to $0.421 per $100 of AV for voter-approved park bonds ($8.8 million). Year-to-date operations are positive relative to budget due to strong utility franchise tax, property tax and sales tax revenue performance, and vacancy savings. Management expects to add to fund balance at year-end.

The proposed fiscal 2017 general fund budget is a 7.1% increase over fiscal 2016. The budget appropriates $13 million and a property tax rate reduction to $0.413. The budget provides additional funding for low-income housing, funds improvements to the economic development system, and additional park and public safety staff among other cost increases. Based on the city's historical financial performance, operations are expected to remain positive and reserves ample.