OREANDA-NEWS. Fitch Ratings has assigned an initial public rating of 'AA' on the following bonds to be issued by the City of Kissimmee, Florida:

--$43,655,000 capital improvement revenue bonds series 2016.

The bonds are expected to sell via negotiation on or about January 27. A total of $33.8 million in bonds will be sold to fund various improvement projects. The city also plans to sell $9.9 million in bonds, pending market conditions, to refund certain outstanding obligations for debt service savings without extending final maturity.

Fitch also assigns an implied unlimited tax general obligation (implied ULTGO) rating of 'AA' on the city.

The Rating Outlook is Stable.

SECURITY

The bonds are a limited obligation of the city backed by a pledge of the following: (i) local government half-cent sales tax (LGST) revenues, (ii) public utilities and services taxes (PST) imposed on the sale of electricity, metered or bottled gas and water services in the city, and (iii) communication services taxes (CST) imposed on certain communication service sales in the city. The city has also covenanted to budget and appropriate sufficient non-ad valorem revenue, in addition to such revenues specifically pledged to the bonds, to pay debt service on the bonds in the event the pledged funds are insufficient to do so.

KEY RATING DRIVERS

HEALTHY DEBT SERVICE COVERAGE: The 'AA' rating on the capital improvement revenue bonds, which is capped at the city's implied ULTGO rating, reflects the very strong coverage of debt service and tolerance to revenue losses with unaudited fiscal 2015 pledged revenue equal to 3.6x maximum annual debt service (MADS). The rating also considers the breadth of pledged revenues and expectations for moderate growth despite declines in CST collections. The city's reliance on surplus pledged revenue to fund the operating budget creates a practical barrier to over-leveraging that tempers risk associated with a permissive 1.35x additional bonds test.

SOUND FINANCIAL PROFILE: Kissimmee's operating and financial profile is marked by its high reserves and compliance with a prudent 20% fund balance policy, a demonstrated capacity to achieve favorable results in varying operating environments, significant room under the state property tax cap, and a diverse mix of revenues that have grown sharply during the economic recovery.

STRONG TOURISM LINK: Kissimmee is a suburban community in close proximity to Orlando and Walt Disney World that helps to fuel steady population growth. Residents are largely employed in the service and retail sectors with income metrics considerably below regional and state norms. The local economy and tax base are prone to periods of significant volatility, but are currently riding an upswing associated with the strong performance of area theme parks.

MODERATE OVERALL LIABILITIES: The city's low property wealth contributes to mixed debt metrics - a high 6.5% of market value but roughly $2,500 per capita. The current offering fulfills a significant component of the city's capital plan with very modest additional debt contemplated. Unfunded pension liabilities are manageable at $29 million or roughly 1% of market value. The cost of servicing the city's debt, pension, and retiree health benefits is reasonable, consuming less than 20% of the operating budget.

RATING SENSITIVITIES

SHIFTS IN COVERAGE LEVELS: The rating on the capital improvement revenue bonds is sensitive to shifts in coverage levels related to changes in pledged revenue collections and/or the issuance of additional parity indebtedness.

GO LINK; FINANCIAL STABILITY: The rating is capped at the city's implied ULTGO rating and will be rated no lower than one notch below the implied ULTGO rating based on the city's covenant to budget and appropriate non-ad valorem to pay debt service on the bonds if pledged revenues are insufficient to do so. The city's implied ULTGO rating is sensitive to changes in the city's financial and operating strength, and its continued capacity to manage risks associated with potential volatility in its economy and tax base over time.

CREDIT PROFILE

Kissimmee is the county seat of Osceola County, located in central Florida approximately 20 miles south of Orlando and less than 10 miles east of Disney. The city's position within one of the world's renowned tourism markets supports a steadily growing population estimated at 66,772 in 2014, up from 47,814 in 2000. A significant portion of the city's population is employed in industry related to tourism activity. The city's demographic profile reflects this economic reality, with a relatively young median age of 33.7 years, median household income that measures roughly 75%-80% of the region and Florida norm, and low property wealth with a market value per capita less than $40,000. Healthy job gains continue to drive the city's unemployment rate lower, to an estimated 5.1% as of November 2015. Job losses were significant during the recession and the city's unemployment rate did spike to a very high 12.7% in the fall of 2010.

STRONG COVERAGE ON CAPITAL IMPROVEMENT REVS

Revenues pledged to the repayment of the capital improvement revenue bonds totaled $11 million in fiscal 2015 (unaudited) or 3.6x projected MADS. At this coverage level Fitch estimates pledged revenue can decline by more than 70% or 6.4x the actual loss experienced during the recession before MADS coverage would fall below 1.0x. The PST and LGST components are roughly equivalent and combine to account for close to 85% of total pledged revenue. PST and LGST have increased at a CAGR of 4.9% and 5.0% respectively since fiscal 2010. During this same period CST collections have fallen 7.3%, about double the statewide trend, due to changes in consumer preference and competition, among other factors. Coverage assuming no CST revenue is still strong at 3.0x MADS.

HIGH RESERVES CUSHION AGAINST UNEXPECTED FISCAL CHALLENGES

Kissimmee has a very strong balance sheet position with unrestricted general fund reserves totaling $23.4 million in fiscal 2014 or a high 43.6% of spending. The city has a long-standing history of compliance with a formal 20% fund balance policy. Government-wide unrestricted cash and investments are ample at $37.2 million in fiscal 2014 equivalent to nearly 5 months of operating expenses.

STABLE FINANCIAL RESULTS ACHIEVED

General fund operating results have been favorable over the prior decade. During the recession the city incurred a very minor $20,000 deficit in fiscal 2011, otherwise posting surplus results. More recently, audited financials for fiscal 2014 showed a $2.7 surplus (after transfers) equivalent to 5% of spending. In each fiscal year 2014 - 2016 the city has appropriated $1.6 million to $1.8 million in reserves to balance the general fund budget. The appropriations reflect an investment in capital on a pay-go basis equal to or exceeding $2 million in each year. Unaudited financial statements for fiscal 2015 are not yet available, but management does not anticipate a material change in the level of general fund balance. Year-end results are typically favorable to the budget, reflecting the assumption of 95% revenue collection (per Florida statute) and recurring savings around personnel costs due to vacancies and turnover.

CONSIDERABLE PROPERTY TAX REVENUE RAISING CAPACITY

General fund revenues are diverse in their sources. Property taxes fund roughly 20% of general fund budget but offer the greatest opportunity for revenue increases, if needed. The city's tax rate remains unchanged for the fifth consecutive year at 4.63 mills for fiscal 2016. The tax rate is comfortably below the statutory 10-mill cap. Fitch estimates each 1-mill increase would generate $2.47 million or slightly more than 4% of the budget based on an existing tax base valued at $2.6 billion and a 95% collection rate. The tax base is showing positive signs after experiencing a very significant 43% decline from fiscal year 2008 - 2012, having increased 7.6% in fiscal 2016 and 6.8% in fiscal 2015. The median home value in Kissimmee was $139,100 in January according to Zillow Group - a 7.2% increase on the year. The tax base is moderately diverse and tax collection rates are fair averaging 96.8% over the prior seven fiscal years.

UTILTY PAYMENTS ENHANCE REVENUE DIVERSITY AND GROWTH

The city is able to maintain a low property tax rate partly due to the receipt of payments from two independent utility authorities, the Kissimmee Utility Authority (KUA) and the Tohopekaliga Water Authority (TWA). The KUA and TWA payments fund approximately 30% and 10% of the general fund budget, respectively. The KUA charter establishes an annual payment to the city based on retail electric sales, whereas the amount received from TWA is required pursuant to a long-term transition agreement and based on a fixed dollar amount and gross revenue. Combined utility payments are up nearly $9 million or 60% from fiscal 2011-2015 and are budgeted to increase a reasonable 3% in fiscal 2016. The payments are recorded as an operating expense paid ahead of debt service on outstanding revenue bonds; Fitch rates KUA and TWA's revenue bonds 'AA-' and 'AA+', respectively.

MANAGABLE DEBT & RETIREE OBLIGATIONS
Fitch estimates the city's net direct and overlapping debt at a relatively high 6.5% of market value post-issuance, with the new money portion of the current transaction equivalent to a roughly 20% increase in the overall burden. The high ratio reflects a relatively low level of property wealth, with market value per capita less than $40,000. Overall debt is a much more moderate $2,521 per capita. Debt service charges will near $7.6 million or an estimated 9% of governmental spending following the sale.

The city administers three separate defined benefit pension plans. As of October 1, 2014 the plans reported an aggregate ratio of assets to liabilities of 86.3% and a net pension liability of $29 million or 1.1% of market value at a 7% discount rate. The city consistently pays the actuarially-based contribution, which has been relatively stable the last several years ranging from $7.6 million-$8 million. Combined with debt service (including the new bonds) and the pay-go cost associated with other post-employment benefits, fixed charges are projected by Fitch to consume a manageable 18% of governmental spending.