OREANDA-NEWS. Fitch Ratings has affirmed the following ratings for Palm Beach County, FL:

--$115.1 million general obligation (GO) bonds at 'AAA';

--$914.4 million non-ad valorem revenue bonds at 'AA+'.

In addition, Fitch has affirmed the county's Long-Term Issuer Default Rating (IDR) at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The GO bonds constitute general obligations of the county, for which its full faith, credit and unlimited taxing powers are irrevocably pledged for the payment of principal and interest.

The county's non-ad valorem revenue bonds are special obligations of the county, payable from its covenant to budget and appropriate (CB&A), by amendment if necessary, non-ad valorem (NAV) revenues. The availability of NAV revenues to pay debt service is subject to the funding of essential government services and obligations with a specific lien on non-ad valorem revenues. Such covenant to budget and appropriate shall continue until all required amounts payable under the indenture have been paid.

KEY RATING DRIVERS

The 'AAA' IDR and GO rating reflect the county's broad and diverse economy and its historically solid operating performance, characterized by a strong revenue framework and expenditure flexibility, and low long term liability burden.

The CB&A bonds are rated one notch below the county's IDR and GO rating due to the absence of a specific pledge and the absence of a mechanism to compel the county to generate NAV revenues sufficient to pay debt service.

Economic Resource Base

The county is the largest in the state, located along the southeast coast of Florida. It encompasses 2,385 square miles with a population of 1.4 million, which has grown by 7.8% since 2010. The county contains 39 municipalities, including the cities of West Palm Beach and Boca Raton.

Revenue Framework: 'aaa' factor assessment

Revenue growth is projected to be strong given the expectation of continued population growth and robust economic activity. The county has considerable revenue raising ability, with the current property tax rate well under the 10 mill property rate tax cap.

Expenditure Framework: 'aa' factor assessment

Expenditure growth is expected to remain in line with or marginally above revenue trends, given the broad range of services provided and demands associated with an expanding population. Fixed carrying costs associated with debt and pension liabilities are moderate.

Long-Term Liability Burden: 'aaa' factor assessment

County debt and pension benefit liabilities are low relative to personal income and are expected to remain stable with no additional debt plans, rapid debt amortization and affordable pension liabilities.

Operating Performance: 'aaa' factor assessment

Fitch expects the county to continue to maintain solid operations and gap-closing ability through an economic downturn given its strong revenue raising ability, expenditure flexibility and sound reserve levels.

RATING SENSITIVITIES

Financial Management: The rating is sensitive to shifts in fundamental credit characteristics, including county's financial flexibility. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

The local economy is broad and well diversified, and county income levels exceed state and national averages. Unemployment levels are currently below the state and national norms and have shown considerable improvement from their recessionary peak.

Assessed values have increased the past six consecutive years, benefitting from improved home values and economic development. Prospects for additional tax base expansion are good, given the continued increase in permit activity and numerous projects planned and underway. The county's tourism sector continues to strengthen, with tourist development tax revenue up 26% in fiscal 2015; the gain is due to both an increase in visitors and a 1 cent rate increase, to a total of 6 cents.

Revenue Framework

Property taxes are the county's largest revenue source at almost 60% of fiscal 2015 general fund revenues. Property tax revenues experienced steep declines during the recession, due to a significant reduction home values and state property tax reform. The county increased property tax rates from fiscal 2010 to 2012 to mitigate some of the decline.

The county's historical general fund revenue growth has been strong, exceeding both U. S. GDP and inflation increases since 1999. Revenue growth prospects are solid given population trends and ongoing development.

The county has ample legal revenue raising authority. The county is subject to a statutory property tax cap of 10 mills. The adopted tax rate for fiscal 2016 was 4.7815 mills. Fitch estimates the county could generate roughly $750 million in additional revenue through an increase in the property tax rate to the maximum legal rate, or about 70% of the total general fund budget.

Annual changes in the property tax rate are determined using a roll-back or revenue neutral rate, which is then adjusted for changes in Florida's per capita personal income. However, this limitation may be overridden by vote of the county governing body. The county also has the ability to increase various license and permit revenues and service charges that make up a smaller but still notable portion of its revenue base.

The county's non-ad valorem revenues include a broad mix of special taxes, license and permit revenues, fee income, and service charge revenues. Overall NAV revenues have historically fluctuated, although they experienced three consecutive year of growth through fiscal 2015. NAV revenues in fiscal 2015 provided sound coverage of maximum annual debt service after taking into consideration general government and public safety expenditures.

Expenditure Framework

The county provides a broad range of government services. Public safety is the largest spending item, with fiscal 2015 outlays comprising 53% of total general fund expenditures. General government spending is the second largest spending category equal to about 30% of the total.

The county's pace of spending is likely to be in line with or slightly above revenue growth trends, driven by its expanding population and related service needs.

The county retains solid expenditure flexibility, due partly to its ability to manage labor costs. During the recession, the county reduced its workforce and maintained vacant positions. Currently, two of the county's four unions are operating under expired contracts, which are currently under negotiation. Under state law, if an impasse is declared both parties are required to engage in a non-binding mediation process; subsequently, the governing body of local government may ultimately impose contract terms for a year. Carrying costs are moderate at 14% of total governmental spending. These fixed costs are largely driven by direct debt, which amortizes rapidly (nearly 65% within 10 years).

Long-Term Liability Burden

The county's long term liability burden is equal to a low 4.2% of personal income and is expected to remain below the 10% threshold consistent within the 'aaa' assessment. Direct debt is mainly comprised of non-ad valorem bonds and general obligation bonds. The county's five-year capital improvement plan for 2016-2020 outlines $754 million in general government capital needs, which include library, roads, parks & recreation, and fire rescue projects. There are no plans to issue debt to fund these projects.

County officials are holding a 1% sales tax referendum in November 2016. If approved, proceeds will be shared among the county, school district and municipalities and will finance various infrastructure projects. In the absence of additional debt plans and rapid debt amortization, direct debt levels are expected to decline as existing debt amortizes. Overlapping debt is largely comprised of debt issued by the Palm Beach County School Board, which is expected to remain manageable given the use of pay-as you-go funding to finance school capital projects.

Overall pension costs are manageable, with a net pension liability of $1 billion or 1% of personal income (using Fitch's adjusted 7% investment return). The county participates in three pension plans, although most employees are members of the state-administered Florida Retirement System (FRS). The other two smaller pension plans have a combined net pension liability of less than 1% of personal income.

Operating Performance

The county's sound budget management was challenged in the recent years by the impacts of the last recession, which negatively affected both taxable values and economically sensitive revenues. The county chose to spend down a portion of its general fund reserves rather than increase the property tax rate, but continued to adhere to its minimum reserve policy level of 15% to 20% of general fund expenditures and transfers out. While the county's reserves are at the lower end of its policy range, they remain well above the minimum safety margin consistent with a 'aaa' operating performance assessment. Fitch expects the county to continue to maintain solid gap closing ability through an economic downturn.

The fiscal 2016 budget is balanced with no change to the property tax rate, aided by a sizeable increase in property tax revenues due to the expanding tax base will pay the increased cost of new hires, a 3% employee pay increase and increased health insurance costs. Management is expecting a small increase in general fund reserves at year-end, consistent with fiscal 2015 results. The county is still in the early stages of preparing its fiscal 2017 budget, and management plans to propose a balanced budget with no change to property tax rates.