TEXT - Fitch affirms Leesburg, Florida revs & GOs

Wed Feb 20, 2013 11:45am EST

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Feb 20 - Fitch Ratings affirms the following ratings for Leesburg, Florida
(the city):

--Implied general obligation (GO) bonds at 'AA-';
--$14.6 million capital improvement revenue bonds, series 2004 at 'AA-';
--$14.6 million non-ad valorem revenue bonds (tax increment bonds) at 'A+'.

The Rating Outlook is Stable.

SECURITY 

The capital improvement bonds are secured by the city's receipt of the half-cent
sales tax, guaranteed entitlement and public service tax. A reserve fund is 
funded with a surety from FGIC.

The non-ad valorem revenue bonds are secured by tax increment revenues derived 
from the U.S. Highway 441/27 Community Redevelopment Area (CRA) and a covenant 
to budget and appropriate (CB&A), by amendment if necessary, an amount of 
legally available non ad valorem revenues sufficient to meet debt service 
payments.

KEY RATING DRIVERS

IMPLIED GO RATING: The implied GO rating of 'AA-' reflects the city's solid 
finances, moderate debt and limited economy based on agriculture and healthcare.


FINANCES REMAIN STRONG: Management has maintained a strong financial profile 
with elevated reserve balances and ample liquidity. Reliance upon utility fund 
transfers from a strong utility system provides diversification to the revenue 
base. 

MODERATE DEBT: Debt costs are manageable although amortization is slow. Absence 
of new money bonding plans should keep overall debt levels moderate.

STRONG CAPITAL IMPROVEMENT BOND COVERAGE: Pledged revenue debt service coverage 
on capital improvement revenue bonds is robust at 3.5x maximum annual debt 
service (MADS). Public service taxes, largest source of pledged revenues, are 
levied on essential services.

COVENANT DEBT NOTCHING: The rating on the non-ad valorem revenue bonds is based 
on the city's CB&A back-up pledge. Available non-ad valorem revenues include a 
broad and diverse mix of city income and provide sufficient debt service 
coverage, even after taking essential service expenditures into account. The one
notch rating difference with the implied GO rating is attributable to the 
ability of the city to dilute coverage by issuing debt specifically secured by 
certain non-ad valorem revenues and the lack of a requirement to raise revenues 
to cover debt service.

RATING SENSITIVITY

EROSION OF RESERVES: Deterioration of the city's financial reserves could lead 
to negative action on the implied GO rating. 

REDUCED BOND COVERAGE: Significant declines in non-ad valorem revenues 
supporting the capital improvement and non-ad valorem revenue bonds leading to 
materially narrowed coverage levels would result in downgrades to either or both
bonds.

CREDIT PROFILE

The city is located in north central Florida midway between the Gulf of Mexico 
and the Atlantic Ocean, about 40 miles northwest of Orlando. It encompasses over
38 square miles with approximately 20,000 residents. Population growth was very 
rapid between 2000 and 2005-2006 due in part to the city's proximity to Orlando 
and the availability of affordable land. The rate of growth has slowed recently 
but remains positive. 

SOLID FINANCIAL PROFILE

Financial operations have improved markedly since the early and mid-2000s as 
evidenced by four consecutive years of general fund operating surpluses (after 
transfers) from fiscal years 2008 through 2011. Part of the reason for the 
positive results was due to tight controls on spending, including position 
reductions and salary freezes. Unaudited fiscal 2012 actuals indicate an 
additional surplus. The cumulative surpluses more than doubled fund balance 
during this period from $4 million in fiscal 2007 to $9.5 million at the end of 
fiscal 2012. Unrestricted fiscal 2012 general fund balance equaled $8.2 million 
or a healthy 31% of general fund spending.

HISTORICAL RELIANCE UPON UTILITY FUND TRANSFERS

Fitch has noted the city's extensive use of transfers from its enterprise 
systems to support general operations. In fiscal 2011 utility fund transfers 

represented 25% of general fund revenues while transfers from the electric fund 
alone accounted for 17% of revenues The fiscal 2013 budget projects utility 
contributions to the general fund to be at or near the city imposed cap of 10% 
of utility operating revenues. Utility transfers have enabled the city to 
maintain a very low tax rate (4.3 mills) despite large declines in taxable 
assessed value (TAV). Fitch does not expect the city to significantly reduce its
reliance on utility transfers without a substantial recovery in TAV. 

The fiscal 2013 general fund budget projects a minor operating surplus. 
Expenditures are in-line with fiscal 2012 spending and increased utility 
transfers offset a further reduction in property taxes. Officials have noted 
favorable budget variances to date and project either balanced or surplus 
end-of-the-year results.  

WEAK AND VOLATILE ECONOMIC PROFILE

The city's economy remains limited and somewhat volatile. Formerly based on 
agriculture, the area experienced a residential construction boom from the 1990s
through the mid-2000s, with much of the growth driven by incoming retirees. 
According to the 2010 census, Leesburg residents 65 years and over constituted 
over 24% of the population compared with the state average of 18%. This influx 
fostered a growing service sector, particularly in healthcare as well as retail.
Central Florida Health Alliance, which includes the Leesburg Regional Medical 
Center and the Villages Hospital, is the largest employer with 2,355 positions. 
Lake County employment grew by 20% between 2003 and 2008, including large gains 
in both construction and service sector jobs. 

The past recession stifled overall economic     activity. County jobs decreased
by 
over 13% between 2008 and 2010 pushing unemployment rates above 12% in 2010. 
Housing values suffered a 55% decline from the peak period in 2006 through the 
end of 2011, among the highest in the state according to Case Schiller. The 
city's wealth indices are well below state norms and below average educational 
attainment may serve to inhibit economic development despite city and county 
efforts. 

RECENT SIGNS OF RECOVERY

Recent improvement is evidenced in accelerating job growth and recovering 
housing valuations. County employment increased by 1.7% in 2011. As of December 
2012, year over year employment growth was a healthy 3.3%, well above the state 
and national averages, pushing unemployment rates down to 8.1% from 10.4% the 
year before. 

Single family home prices in Lake County are up 2.5% on the year according to 
Case-Shiller. Taxable values, lagging any housing recovery, continued to fall 
through fiscal 2013, losing a total of 30% since fiscal 2008. However, the 
fiscal 2013 tax base drop was much lower than in previous years signaling 
potential near term stabilization. 

AVERAGE DEBT LOAD

Debt levels are moderate with a net debt burden of 3.6% or $2,895 on a per 
capita basis. Direct debt consists primarily of capital improvement bonds and 
tax increment financings. The city has no general obligation bonds outstanding. 
Payout is slow as 26% of principal is retired within the next 10 years. Capital 
plans are manageable. Officials indicate that there are no plans for additional 
bonds for the foreseeable future. Fiscal 2012 debt service represents an average
9.7% of general government spending (excluding capital related funds).

RETIREMENT LIABILITIES DO NOT PRESSURE FINANCES

The city maintains three separate defined benefit plans for general employees, 
firemen and police officers. The defined benefit general employee plan was 
frozen in 2008 and all members transferred to a defined contribution plan. All 
three plans are well-funded as of October 2010 at 84.4%, 85.3% and 83% for 
general employees, firemen and police officers, respectively using Fitch's 
assumed 7% discount rate. 

City retirees receive subsidized health care benefits from the city on a pay-go 
basis. As of fiscal 2010, the unfunded actuarial accrued liability for the 
city's other post-employment benefit plan was $24.9 million, representing an 
above average 2.2% of fiscal 2012 taxable values. Total carrying costs of debt 
service, pension contributions and OPEB contributions represent a manageable 
21.4% of general government non-capital spending. 

ROBUST DEBT SERVICE COVERAGE

Debt service coverage of MADS on the capital improvement bonds remains robust at
3.5x as of fiscal 2011. Public service taxes, the largest pledged revenue 
source, decreased by 1% in fiscal 2011 balanced by a similarly sized increase in
half cent sales tax collections. While Fitch considers the 1.3x MADS additional 
bonds test requirement to be weak, current wide coverage levels and the use of 
excess pledged revenues for operations militates against extensive issuance. The
city is planning to refund the series 2004 capital improvement bonds for savings
within the next few months.

BROAD AND VARIED NON-AD VALOREM REVENUE BASE

The rating for the non-ad valorem revenue bonds (tax increment bonds) is based 
upon the city's CB&A back-up should tax increment revenues within the community 
redevelopment area prove insufficient. Currently, the 441/27 CRA is generating 
no tax increment revenues as assessed values are below base year valuations. The
non-ad valorem revenues available for debt service are broad and diverse with 
the largest being utility fund transfers. While available revenues have declined
modestly over the past two fiscal years, coverage levels of all CB&A obligations
is very strong, even when taking into account debt service secured by specific 
non-ad valorem revenues and essential service expenditures (general government 
and public safety expenditures). A debt service reserve fund for the 2009 tax 
increment bonds is funded 50% with cash and 50% with a surety to MADS.
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