OREANDA-NEWS. Fitch Ratings has affirmed the ratings on the following St. Augustine, Florida's (the city) outstanding obligations:

--\$47 million outstanding capital improvement revenue bonds, at 'A+';
--Implied unlimited tax general obligation (ULTGO) at 'AA-'.

The Rating Outlook is Stable.

SECURITY
The capital improvement bonds are secured by the city's covenant to budget and appropriate non-ad valorem revenues, by amendment if necessary, in an amount sufficient to pay debt service.

The availability of non-ad valorem revenues to pay debt service is subject to the funding of essential government services. The issuer's non-ad valorem covenant is cumulative and continues until the bonds have been fully paid.

KEY RATING DRIVERS

COVENANT DEBT LINKED TO GO RATING: The rating on the capital improvement bonds is one notch below the city's implied GO rating, reflecting the covenant to budget and appropriate security structure and the lack of a mechanism to compel the city to generate sufficient non-ad valorem revenue to pay bondholders.

DIVERSE NON-AD VALOREM REVENUES: The city's non-ad valorem revenue base exhibits good diversity and stability and is more than sufficient to meet debt service requirements on the outstanding capital improvement bonds.

STRONG MANAGEMENT; GOOD LIQUIDITY: Management has controlled expenditure growth and maintained robust general fund reserves over the past several years. A recovering tax base and improving economy has bolstered revenues providing the city with a good degree of financial flexibility.

MIXED DEBT PROFILE: The city's debt ratios are moderate to above-average. Slow par amortization at 28% in 10 years is somewhat mitigated by modest future debt plans.

LIMITED COASTAL ECONOMY: The local economy is concentrated in tourism; however, the city is within commuting distance to Jacksonville and its large regional economy.

RATING SENSITIVITIES

CONTINUED STRONG MANAGEMENT PRACTICES: The city's implied ULTGO rating takes into consideration the city's fundamental credit characteristics including its strong management practices and strong reserves. The Stable Outlook reflects Fitch's belief that a shift in these characteristics is unlikely.

CREDIT PROFILE
St. Augustine is located approximately 35 miles south of Jacksonville on the state's northeast coast and has a 2013 year-round population of 13,679.

NON-AD VALOREM REVENUES ARE AMPLE AND DIVERSE
The city's non-ad valorem (NAV) revenues under the covenant are diverse and include franchise fees, parking fees, and a public service tax. These revenues typically account for roughly 50% of annual general fund revenues. NAV revenues, excluding transfers, have ranged from \$9.3 million to \$9.5 million the last three years; including transfers in from proprietary funds, they ranged from \$12 million to \$12.7 million.

Non-ad valorem revenues have been more than sufficient to meet debt service requirements, as well as fund other essential general government services. Coverage on maximum annual debt service of \$3.25 million (in 2031) from unaudited fiscal 2014 NAV revenues of \$12.7 million is 3.89x and coverage on fiscal 2015 debt service is projected at over 4.0x. Fitch expects coverage levels to remain healthy, given the prominent role these revenues play in operations and the current minimal future borrowing plans.

FINANCIAL PERFORMANCE REMAINS SOUND
The city has managed its expenditures and maintained sound reserves in recent years, despite revenue pressures associated with taxable assessed value (TAV) declines. TAV declined by 39% from fiscal 2008 through 2012 but has been trending upward since then as new development has been occurring in the city. Management reports additional tax base growth is expected over the next two years as projects underway are completed and recent building permit activity has been greater than expected.

The city's operating tax rate has been 7.5 mills since fiscal 2009, maintaining a cushion under the statutory 10 mill cap. NAV revenues improved slightly during fiscal 2013 as sales tax revenues were higher and franchise fees and parking fees increased due to city imposed rate increases. General fund expenses were flat for the fiscal periods of 2010 through 2013 reflecting expenditure control.

The fiscal 2013 net operating deficit after transfers is largely attributable to a \$19.9 million transfer out, of which \$15.4 million was for capital projects funded by bond proceeds. Fiscal 2013 unrestricted general funds were unchanged from fiscal 2012 at \$9.5 million and represented a solid 37% of spending (net of transferred bond proceeds).

Audited fiscal 2014 results are unavailable, but management expects a \$1 million decline in fund balance due to funding for additional capital projects. Expenditures are projected to be slightly less than budgeted and revenues are up 7.3% compared to fiscal 2013. Fund balance levels are projected by Fitch to decline moderately to a still solid approximate 31% of spending.

Management approved a formal general fund balance policy in fiscal 2013, requiring committed funds be maintained equal to 33% of budgeted general operating revenues. Projected fiscal 2014 general fund balance exceeds the policy requirements by \$0.86 million or 4% of budgeted fiscal 2015 revenues.

The fiscal 2015 budget is balanced after taking into consideration standard operating and administrative transfers-in and does not anticipate a use of reserves. Fitch anticipates that over the near term reserves will be maintained at or near the current level, based on historic trends and the city's newly approved general fund balance policy.

MIXED DEBT PROFILE AND MODERATE CARRYING COSTS
The city's debt profile is mixed, with overall debt a moderate 3.7% of market value but above average at \$5,107 per capita. Amortization is slow with only 28% of principal retired within 10 years. The slow amortization is largely a result of the issuance of debt in 2011 which was back-loaded in order to maintain total annual debt service at the then current level.

Total carrying costs including debt service, pension, and other post-employment benefit (OPEB) contributions are moderate at approximately 17.7% of fiscal 2013 total governmental funds expenditures.

PENSION AND OPEB COSTS ARE MANAGEABLE
City employees participate in one of three single-employer pension plans for general employees, police officers, and firefighters, which reported a combined funded ratio of 81.6% as of Sept. 30, 2013. The combined funded level using Fitch's more conservative 7% investment rate of return was an estimated 76%. The unfunded liability based on Fitch's 7% rate was a manageable \$16.2 million or 0.9% of market value. Other post-employment benefits are funded on a pay-as-you-go basis and the unfunded liability was a low \$1.9 million as of Sept. 30, 2013, a small percentage of the city's \$1.87 billion market value.

LIMITED LOCAL ECONOMY
The local economy is based mainly on tourism, but the largest area employers provide some diversity. Top employers in the area include St. Johns County School Board (3,700), Flagler Hospital (1,887), and Northrop Grumman (1,100). The unemployment rate for St. John's County was 4.7% for October 2014 compared to 5.1% a year prior amid notable growth in both employment and the labor force. It remains below the state (5.8%) and national (5.5%) rate for the month. Wealth levels are below state and national levels as historically has been the case.