OREANDA-NEWS. Fitch Ratings has assigned an 'AA+' rating to the following St. Petersburg, Florida (the city) bonds:

--$55.9 million public service tax (PST) revenue bonds, series 2016A and series 2016B.

The bonds are scheduled for competitive sale on March 9. Proceeds will be used to fund improvements to the city's municipal pier as well as redevelopment of downtown areas surrounding the pier.

In addition, Fitch has assigned an Issuer Default Rating (IDR) of 'AA+' to the city.

The Rating Outlook is Stable.

On Sept. 10, 2015, Fitch published an exposure draft of revised state and local government tax-supported criteria. Fitch expects that final criteria will be approved and published by the end of the first quarter of 2016. Pursuant to Fitch policy, new rating assignments during a criteria exposure draft period, and while the prior criteria is still outstanding, must be analyzed under both criteria approaches. If there is a difference in the rating under the two criteria then the proposed criteria is used because it more accurately reflects Fitch's current view. In this case, the assigned ratings are based on the exposure draft criteria, as the ratings under the current criteria would be lower. The difference reflects the more focused consideration of the economy in conjunction with the more explicit recognition of the strong operating environment for U.S. governments in the exposure draft criteria.

SECURITY
The bonds are payable from a prior lien on PST revenues. These revenues are composed of tax levies by the city on the purchase of critical services such as electricity, water, metered and bottled gas, liquefied petroleum gas and fuel oil. No reserve fund is provided for this issue.

KEY RATING DRIVERS

SOLID ECONOMIC BASIS: The city's economy includes a diverse mix of economic activity, and benefits from its inclusion in the broader Tampa regional economy. A strong tourist sector lends some volatility to economic output.

STRONG REVENUE FRAMEWORK ('aaa' key rating factor assessment): The city shows strong revenue flexibility with property tax rates well below the 10-mill cap and a relatively diverse mix of revenues. Growth prospects for continued revenue growth are good.

FLEXIBLE EXPENDITURE FRAMEWORK ('aa' key rating factor assessment): The city has significant flexibility to dictate terms to labor as well as cut other costs when necessary. However, moderate carrying costs do impinge upon flexibility somewhat.

MANAGEABLE LONG-TERM LIABILITY BURDEN ('aaa' key rating factor assessment): Debt and pension liability levels are very low relative to personal and property wealth. Modest capital needs and debt plans should keep these levels low going forward.

SOLID OPERATING PERFORMANCE ('aaa' key rating factor assessment): Management demonstrated strong gap-closing measures during the recession by clamping down on expenditure growth. Although some deficits were registered during those years, reserves remained ample. The city is building up reserves as the economic recovery continues.

AMPLE DEBT SERVICE COVERAGE: Public service tax (PST) revenues provide very wide coverage of debt service. The rating on the PST bonds is capped by the IDR rating.

RATING SENSITIVITIES

STRONG FINANCIAL PERFORMANCE: Although not expected, a reduction in budget flexibility or an inability to maintain a solid reserve cushion could result in negative rating action.

PST BOND RATING CAP: The IDR serves as the cap for the PST revenue bond rating. A downgrade of the IDR would lead to a downgrade of the PST revenue bonds.

PST CONTRACTION: A decline in collections and/or significant additional leveraging of the pledged revenue stream which diminishes coverage would be viewed negatively.

CREDIT PROFILE
St. Petersburg encompasses 60.9 square miles located 20 miles southwest of Tampa along the west coast of Florida. With a population of 246,642, the city is the most populous in Pinellas County.

PST REVENUE TRENDS BASED ON ELECTRICITY PRICES

The city levies the maximum rate of 10% on the purchase cost of each component of the PST except for fuel oil where the maximum rate is four cents per gallon. Electricity purchases account for over 80% of total PST revenues. As such, major factors affecting tax collections include weather patterns and the price of electricity. Due to these variables, PST trends over the past 10 years have been volatile. Collections rose by 5.6% and 6% in fiscals 2013 and 2014, respectively, as electricity rates increased. Conversely, PST collections fell by 2% in fiscal 2015 and four-month collections for fiscal 2016 were down 1.1% as the cost of electricity has been reduced.

High debt service coverage offsets the inherent volatility of the pledged revenue stream. Fiscal 2015 PST collections of $26.8 million cover maximum annual debt service (MADS) on the bonds by 4.4x. A 1.5x MADS additional bonds test limits over-issuance although a more practical restriction on additional bonds is the city's use of the PST to fund general operations. Management plans on using tax increment revenues from its Intown Tax Increment District although these are not pledged to bond repayment. There are no plans to further leverage the PST at this time.

INCORPORATION INTO ROBUST TAMPA REGIONAL ECONOMY

The city's strong economic base is supported by its location within the Tampa, St. Petersburg Clearwater metropolitan statistical area (MSA) with a population of 2.8 million. Chief economic drivers include manufacturing, information technology, financial services, marine science and healthcare. Tourism is an important economic factor as well. Chief employers include Raymond James & Associates with its corporate headquarters located within the city, All Children's Health System, Home Shopping Network and FIS Management Services. Overall employment within the city has expanded consistently since a moderate downturn in 2007 and 2008. Between 2009 and 2014, employment growth has averaged a healthy 3.6% annually led by the leisure and hospitality and professional and business services sectors, which increased by 29% and 27%, respectively, during this period.

Employment continues to expand in 2015 although at a slower pace. October 2015 employment was up 1.2% over the past 12 months and year-to-date 2015 employment was 1.4% higher than in 2014. The October 2015 unemployment rate of 4.3% was considerably lower than the state (5.2%) and national (5.9%) unemployment rates. Rates have fallen steadily since 2009, when the recession drove the unemployment rate to over 11%. The modest employment growth rates of 2015 may signal a future economic slowdown.

TAXABLE ASSESSED VALUES RECOVER AFTER LARGE DECLINES

Taxable assessed values (TAV) declined by a steep $5.6 billion or 32% between fiscals 2008 and 2013. Since then, TAV has steadily increased, growing by nearly 4% in fiscal 2014, 7.9% in fiscal 2015, and 8.5% in fiscal 2016 TAV, and now stands at $14.7 billion. Despite the recent expansion, TAV levels remain well below pre-recession peaks. There are no concentration issues, as the top 10 taxpayers represent a moderate 5.8% of fiscal 2014 values, with the leading taxpayer, Duke Energy, accounting for a modest 1.7%.

Recent activity in the city's housing market has supported the rise in the city's mostly residential tax base. Since hitting a trough in 2012, median home values in the city have increased by over 60% according to the Zillow Group. Median home values gained 13% over the past 12 months although Zillow forecasts lower growth of 2.7% in the upcoming year.

Wealth values are consistent with those of the state but below the national averages although the city's poverty rate trends above both the state and nation's.

WELL-MANAGED FINANCES

Financial operations are well maintained with general fund balance hovering close to the city's 20% of spending target throughout the recession. The city's revenue base is relatively diverse with property taxes constituting about 40% of revenues. The city also receives payments from its enterprise operations including its utility systems (combined utility revenue bonds of the water, wastewater and stormwater systems rated 'AA'/Stable Outlook), which in aggregate account for about 12% of general fund revenues.

Management implemented significant spending adjustments in response to a recession-driven downturn in property tax revenues, in order to stabilize operations. The city was also willing to substantially increase the property tax rate in fiscal 2013 to offset some of the property tax decline. The city's fiscal 2014 unrestricted general fund balance totaled $46.2 million or a healthy 21.7% of spending.

MODERATE CARRYING COSTS

Carrying costs of debt, pensions and other post-employment benefits (OPEB)-to-general government spending are moderate at 20.1% in fiscal 2014 and are expected to remain manageable over the near term given modest debt plans and stable pension liabilities.

POSITIVE UNAUDITED FISCAL 2015 RESULTS

The fiscal 2015 budget included a $5 million increase in tax revenues due primarily to an 8% gain in TAV. The budget includes modest wage increases partially offset by lower pension costs. General fund revenues exceeded expenditures by $10.3 million (including $8 million in a non-recurring settlement), boosting general and unrestricted fund balance to $ 27.2% and 25.8% of expenditures, respectively.

The fiscal 2016 budget includes higher salary and benefit costs due in part to a net increase of 73 full-time positions in the general fund. The increased costs are funded by a $7 million uptick in property taxes again fueled by TAV growth. First-quarter general fund revenues are well ahead of fiscal 2015 first-quarter revenues, while expenditures appear to be under budget.

MINIMAL DEBT

Debt levels are very low with net debt burden (including the series 2016 bonds) of 0.7% and debt per capita of $389. The city's direct debt is modest at under $100 million including the proposed offering and none of the city's overlapping jurisdictions has any non-self-supporting debt outstanding. The proposed and outstanding bonds and notes are rapidly amortized with 72% of principal retired within the next 10 years. Planned additional bonding includes a short-term $40 million issue to fund a new police headquarters later this year or early next year. The city is expecting Pinellas County to contribute $20 million toward repayment of the bonds.

PENSION LIABILITIESS EXPECTED TO DECLINE

The city maintains three defined benefit plans for general employees, police officers and firefighters. Funding for the plans as of the beginning of fiscal 2014 were estimated by Fitch at 76.4%, 79% and 83%, respectively, for the general employees, police officers and firefighters plans, using a 7% return on investment assumption. Pension liabilities include amortization over 40 years of prior benefit-rich plans from the 1970s which were restructured into supplemental plans currently in place.

The prior police plan liability has been fully amortized and the prior firefighter plan liability is scheduled for full amortization by fiscal 2020. Pension costs in fiscal 2016 decline by 19% due to amortization of the prior plan, better than expected investment returns and some revised assumptions. Fitch expects annual pension costs as a portion of spending to remain fairly stable once the old plans are fully amortized The city also maintains a defined contribution plan for certain employees.

The city funds its OPEB on a pay-go basis. Management ended subsidies (other than the state-required implicit rate subsidy) for new employees hired after 2009 and instituted a gradual freeze on subsidies for employees retiring after 2009.