OREANDA-NEWS. Fitch Ratings assigns an 'A+' rating to the following bonds to be issued by Fort Myers, FL:

--$50,715,000 capital improvement and refunding revenue bonds, series 2016.

The bonds will be sold via negotiated sale on Aug. 17. Proceeds will be used to refund a portion of the city's outstanding series 2006 improvement and refunding revenue bonds and to finance various capital improvements.

Fitch also affirms the 'A+' rating on the following city bonds that are subject to a covenant to budget and appropriate:

--$38 million outstanding capital improvement and refunding revenue bonds, series 2014A and 2014B.

Fitch has withdrawn the 'A+' rating on Fort Myers's capital improvement & refunding revenue bonds series 2015 as the bond sale did not occur.

In addition, Fitch affirms the city's Issuer Default Rating (IDR) at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The capital improvement and refunding revenue bonds are backed by the city's covenant to budget and appropriate (CB&A), by amendment if necessary, non-ad valorem revenues in amounts sufficient 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 series 2016 bonds have a debt service reserve fund which will be funded with a surety bond.

KEY RATING DRIVERS

A strengthening of the economy over the past four years has led to an improvement in both property and non-ad valorem tax revenues, helping management make notable progress in restoring stability to financial operations after a period of operational imbalance due to revenue declines. Management's projections for fiscal end 2016 are positive and are expected to improve reserves to levels above the city's policy limit. Fitch expects management to utilize its spending flexibility and conservative budgeting practices to maintain future spending within the framework of anticipated sound revenue growth.

Economic Resource Base

Fort Myers is located along Florida's southern Gulf Coast in Lee County (Fitch IDR of 'AA', Stable Outlook) immediately east of Cape Coral and adjacent to Interstate 75. The city is a very popular tourist destination with a year-round population of approximately 69,000 residents.

Revenue Framework: 'aa' factor assessment

Revenue growth exceeded both GDP and inflation for the period of 1999 through 2014. Fitch expects future growth to exceed inflation going forward based on trends in non-ad valorem revenues and positive tax base growth. The city's elevated tax rate of 8.77 mills leaves only moderate capacity within the maximum statutory 10 mill limit; however, other revenue sources, including a fire assessment fee, support the legal ability to raise revenues.

Expenditure Framework: 'a' factor assessment

Fitch expects that the city's overall spending needs will be in line with future revenue growth. Local pension reform efforts have helped to control expenses and future debt needs are not material. Fixed costs are very high as a percentage of spending and are expected to remain elevated as pension funded levels are low.

Long-Term Liability Burden: 'aa' factor assessment

The city's moderate liability burden for debt and pensions is expected to remain unchanged given limited bond issuance plans and recent pension reform efforts that have helped control growth in pension liabilities.

Operating Performance: 'aa' factor assessment

Management effectively responded to revenue declines during the Great Recession by curtailing spending, using reserves and budgeting conservatively. Fitch expects management would take similar actions during an economic decline. The city's existing reserve levels and commitment to maintaining reserves in excess of policy levels support its financial resilience.

Covenant Debt Notching: A one-notch distinction in the rating on the CB&A revenue bonds from the city's IDR reflects the absence of a pledge of specific revenue and inability to compel the city to generate non-ad valorem revenue sufficient to pay bondholders.

RATING SENSITIVITIES

STABLE FINANCIAL PERFORMANCE: The rating is sensitive to the city's continued sound financial management, keeping expenditures in line with expected revenue growth, as well as maintenance of an adequate reserve cushion throughout the economic cycle.

CREDIT PROFILE

Economic activity is mainly driven by tourism, retail, and real estate sectors which are exposed to variability of economic cycles over the long term. County statistics report notable growth in sales taxes, hotel taxes and passenger traffic at Southwest Florida International Airport since 2013 reflective of the strong tourism destination. The population base is mixed with a number of young working adults and a high number of retirees. The city is home to Florida Gulf Coast University which has an enrollment of just under 15,000. City wealth levels are below state and national averages and the 2013 poverty rate was high at 28.6%.

The Fort Myers housing market and tax base have experienced recent strong growth. The city's housing market was hit exceptionally hard during the recession and its taxable assessed value dropped 41% from fiscal years 2008 through 2013. Tax base growth since 2013 has improved by 35% through fiscal 2017. The Zillow home value index was up 10% through July 2016 year over year following a year of similar growth providing an indication of improving housing values.

Revenue Framework

The city's revenue base is comprised of a diverse mix of property, sales and excise taxes and assessments. These revenues are subject to volatility due to economic cycles. Revenues have rebounded the past four years as the economy and tax base have experienced notable improvement.

Fitch expects natural revenue growth to exceed inflation levels going forward based on potential tax base growth from new developments and a general trend in economic growth. Non-ad valorem revenues, which make up the bulk of operating revenues, have experienced mixed levels of improvement the past six fiscal years and Fitch expects moderate growth to continue.

The city's tax rate of 8.77 mills is viewed as high by Fitch and leaves only moderate capacity within the maximum statutory 10 mill limit. The city raised its tax rate gradually between fiscal 2009 and 2013 to its current level of 8.77 mills to support operations. Recent tax base growth has negated the need to increase the millage the past three fiscal years. The additional capacity combined with other revenue flexibility, including a fire assessment fee, provides adequate revenue raising flexibility in the event of an economic downturn.

Expenditure Framework

Fort Myers's spending is primarily related to public safety and services. The increasing demands to fund pensions and the general rise in employee medical and salary costs will drive spending.

Fitch expects the city's overall spending needs will increase in the future at a pace in line with natural revenue growth.

Carrying costs for debt, pension and OPEB pay-as-you-go are high at 30% of fiscal 2015 spending. Pension contributions make up the bulk of this figure at 19% and could be subject to increases in the future due to low funded levels. Recent pension reform efforts were achieved with all current employees participating in the plans and included an increase in the retirement age, a limit on includable overtime hours and a downward reduction in the annual cost of living adjustment to 1.5% from 3%. These changes are expected to help control future annual increases in contributions and growth in future long term liabilities.

The city continues to fully fund the actuarially determined contribution (ADC). Although pension contributions declined to $21.3 million in fiscal 2015 from $23 million in fiscal 2014, they have more than doubled from $9.3 million in fiscal 2007. Fitch expects pension costs to remain a high percentage of the budget.

The city has the ability to reduce certain service related costs and employee contracts are not overly restrictive.

Long-Term Liability Burden

Long-term liabilities for debt and pensions represent a moderate 14% of personal income. Debt levels account for roughly 43% of the metric and are not expected to increase materially based on future limited borrowing plans.

The city administered firefighter, police, and general employee plans' funding levels as of Oct. 1, 2015 were an estimated 57% funded on an aggregate basis using Fitch's 7% investment rate of return. The combined Fitch-adjusted net pension liability totaled $201 million (2.4% of market value) and has decreased moderately since 2013 as a result of pension reform efforts.

Operating Performance

Fitch expects Fort Myers to maintain financial resilience throughout the economic cycle. The city has built a sound reserve cushion through a combination of expenditure reductions and revenue increases and is committed to maintaining reserves at or above 10%. While reserves would likely decline in a moderate recession scenario (1% decline in national GDP), Fitch expects that management would address the shortfall through an increase in revenues and expenditure management as it has done in the past.

Revenue raising flexibility became constrained due to significant declines in the tax base during the recession. The city raised its tax rate gradually during fiscal periods of 2009 through 2013 to its current level of 8.77 mills to support operations and subsidized operations with reserves causing overall reserve levels to decline. However, reserves remained in compliance with the city's minimum policy level of 10%. Management instituted wage freezes, staff cuts and furloughs to control expenditure growth and Fitch would expect similar actions to occur during an economic downturn.

The city's tax rate is viewed as high by Fitch and leaves only moderate capacity within the maximum statutory 10 mill limit. However, recent tax base growth of between 9% and 10% in fiscals 2015, 2016 and 2017 has contributed to additional revenue growth of close to $10 million (11% of spending) limiting the need for further tax rate increases. Consecutive years of growth in non-ad valorem revenues have also contributed to improved financial flexibility. Management approved a new fire assessment fee effective fiscal 2015 which resulted in new revenues of approximately $1.6 million and a projected $2.2 million (2.3% of budget) in fiscal 2016.

The original fiscal 2015 general fund budget of $88.5 million was an increase of 3.8% or $3.2 million over fiscal 2014. The tax base increase of 8.5% resulted in new revenues of $2.7 million. In addition to the new fire assessment fee, certain miscellaneous fees were moderately raised. Management approved partial salary restorations for all employees after years of no increases. Management was also successful in negotiating reform of pension benefits for current and future employees helping control the growth in future annual pension costs. Capital-pay-as-you-go spending was just over $1 million. Unrestricted fund balance declined modestly from prior year levels by $0.7 million to $14.2 million, or an adequate 15% of budgeted spending. Reserve levels have declined over the past five fiscal years to current levels from $22.7 million in fiscal 2011.

The fiscal 2016 general fund budget of $93.9 million maintained the millage rate at 8.77 for the third year in a row and includes new property tax revenues of $3.5 million due to a 9.5% increase in the tax base. Non-ad valorem revenues are conservatively budgeted and fire assessment fee revenues are budgeted at $2.2 million. Salary increases of approximately 3% and rising pension costs drive the budget. A modest use of assigned reserves equal to $0.76 million was included in the budget. Management is projecting an approximate $3 million operating surplus net of appropriated fund balance, improving unassigned general fund reserves to 15% of spending.