OREANDA-NEWS. Fitch Ratings has affirmed the following Kansas City, Missouri (the city) bond ratings:

--\$378.8 million in outstanding unlimited tax general obligation (ULTGO) bonds at 'AA';
--\$298 million Kansas City Industrial Development Authority (KCIDA) at 'A+';
--\$288.1 million Kansas City Municipal Assistance Corp. (KCMAC) at 'A+';
--\$468.3 million special obligation bonds at 'A+'.

The Rating Outlook is Stable.

SECURITY

The ULTGO bonds are backed by the city's full faith and credit and its ad valorem tax, without limitation as to rate or amount.

The special obligation, KCMAC and KCIDA bonds are ultimately payable from any legally available funds of the city, subject to annual appropriation. Certain transactions additionally have cash funded debt service reserves or sureties, leasehold interests in the pledged assets and/or dedicated revenues.

KEY RATING DRIVERS

STRONG ECONOMIC BASE: The city has a deep and diverse economic base that serves as the economic engine for the surrounding region. The city's population is expanding. Wealth levels and unemployment rates are roughly average.

REVENUE VULNERABILITY; ADEQUATE CUSHION: The city is reliant on periodic voter renewal of its primary revenue source. Reserves are expected to remain adequate but below policy minimums, as the city resumes full actuarial pension funding.

PENSION PLAN RESOLUTION: Lack of full funding for the annual required contribution (ARC) has reduced pension funding ratios from previously strong to more moderate levels and increased the unfunded actuarial accrued liability (UAAL). All four plans have recently adopted new policies requiring full funding of the ARC, increased employee contributions and lower benefits for new hires that will restore funding levels and reduce the UAAL over time.

APPROPRIATION RATING DIFFERENTIATION: The two-notch rating distinction between the city's ULTGO bonds and the KCIDA, KCMAC and special obligation bonds reflects the inherent appropriation risk and the less essential nature of the assets financed.

RATING SENSITIVITIES

ABSORPTION OF INCREASED PENSION COSTS: Failure to maintain operating balance as fixed costs rise to fully fund pension ARC payments could place negative pressure on the rating.

CREDIT PROFILE

REGIONAL ECONOMIC ENGINE

Kansas City has a deep and diverse economic base that serves as the economic engine for western Missouri and eastern Kansas. The economy is anchored by a stable employment mix of government, utilities, and health care, but also by the more economically sensitive telecommunications and auto manufacturing sectors.

Wealth levels are on par with the state and slightly below the national average. The November 2014 unemployment rate of 6.1% represents an improvement over the 6.5% recorded a year prior. The rate is above the national rate of 5.5% and the state's rate of 5.1%.

Kansas City is a host city for Google Fiber, an ultra high-speed broadband network up to 100 times faster than current broadband. The network is attracting smaller internet and data companies to the city and has the potential to make a significant economic impact. The city is also the home of Cerner, a large and growing health care information technology company.

DIVERSE REVENUE STREAM VULNERABLE TO PERIODIC VOTER APPROVAL

The city's general fund operations are primarily supported by an earnings tax, which accounted for 34% of general and debt service fund revenues in fiscal 2014. The earnings tax is subject to voter approval every five years. Although city residents overwhelmingly approved its continuation in April, 2011, the city's primary revenue source is still at risk of a permanent phase-out if voter support wanes. Roughly 50% of the earnings tax is paid by non-city residents, who cannot vote, which may increase the likelihood of revenue and related services preservation. Other major sources of operating fund revenue include licenses and permits and the property tax.

RESERVES DROP BELOW POLICY LEVELS

The city experienced significant fund balance growth in three of the four years from fiscal 2010 to fiscal 2013, driven by growth in key revenue sources and expenditure control, and increased further by the underpayment of pension ARCs. In fiscal 2014, the city's general fund recorded an \$11.2 million deficit in fiscal 2014, reducing the unrestricted fund balance to \$37.3 million or 7.2% of expenditures, versus 9.8% the year prior. The deficit was driven by unforeseen legal claims and the accelerated resolution of workers' compensation claims. Results would have been worse if the full ARC had been funded for other pension plans as pension underfunding levels consistently exceeded surplus amounts.

The city's current fund balance level is below its policy level of 8.3% and its target level of 16.7%. The city plans to restore fund balance to the policy level in its five-year plan through management of expenditures, particularly personnel. Failure to improve reserves could result in downward rating pressure.

Fiscal 2015 is currently projected to finish balanced. Fire expenses are over budget, but the city is prudently planning to make cuts to offset this. Fiscal 2015 is the first year of the full funding of the pension ARC for all plans, increasing pension costs by \$14.8 million to 7% of spending. The city cut 110 positions (2% of workforce) to offset this increase. The preliminary budget for fiscal 2016 includes moderate increases from key revenue sources, a wage freeze and additional position eliminations.

ELEVATED LONG-TERM OBLIGATIONS; PENSION REFORM

Debt levels are above average, measuring \$4,699 per capita and 7.7% of market value. Future capital plans are manageable and amortization is average.

Previously strong pension funding levels dropped in recent years as the city was not fully funding the pension ARC. As recently as 2008, the combined funding level of the city's four plans was a strong 90%. By 2013, reduced contributions and investment losses reduced the combined funding ratio to 78.6%, or 74.1% when adjusted by Fitch to reflect a 7% discount rate. The city paid 69% of its annual pension cost (APC) in fiscal 2013, or \$25 million below the APC. As a result, the UAAL across the four plans has grown.

The city has achieved pension reform that requires full funding of the ARC starting in fiscal 2015 to reach full actuarial funding across all four plans in 30 years. As part of the plan to fully fund the ARCs, reforms were made to the plans, including increased contributions for all employees and lower new hire benefit levels. Fitch views these changes favorably, though it will monitor how the increased expenses of full funding will be absorbed in the city's budget and operating results.

The city provides an implicit rate subsidy for post-employment healthcare, which has a modest unfunded actuarial accrued liability of \$160 million. Carrying costs for fiscal 2014, assuming full funding of the pension ARC, were a moderate 20%.