OREANDA-NEWS. Fitch Ratings has assigned an 'AA-' rating to the following city of Lakeland, Florida's (the city) non ad valorem (NAV) revenue bonds:

--48,874,500 capital improvement revenue bonds, series 2015.

Bond proceeds will finance various city capital improvements, including improvements to Joker Marchant Stadium, the Major League Baseball spring training facility for the Detroit Tigers (the stadium project). The bonds are tentatively scheduled to price via negotiation on or around March 24.

In addition, Fitch affirms the city's following outstanding ratings:

--\$39 million capital improvement revenue refunding bonds, series 2010A&B at 'AA-';
--\$21 million capital improvement revenue bonds, series 2010C at 'AA-';
--Implied unlimited tax general obligation (ULTGO) rating at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from the city's covenant to budget and appropriate (CB&A) legally available 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 NAV revenues. Such a covenant shall be cumulative to the extent not paid and shall continue until all required amounts payable under the indenture have been paid. Payments from Polk County pursuant to an interlocal agreement and state payments received by the city in connection with the stadium project are also pledged by the city but are only legally available to pay that portion of debt service associated with the stadium project.

KEY RATING DRIVERS

COVENANT DEBT NOTCHING: The non-ad valorem bonds are rated one notch below the city's implied ULTGO due to the prior payment requirements of essential government service costs, the absence of a specific pledged city revenue source, and the inability to compel the city to generate NAV revenues sufficient to pay debt service.

SOUND FINANCIAL PERFORMANCE: The city's reserve levels are satisfactory, although officials have been tapping them recently to maintain current levels of services. Continued drawdowns could result in reduced operating flexibility although management has flexibility to raise revenues.

RELIANCE ON ENTERPRISE FUND TRANSFERS: The city has historically relied on enterprise fund revenues to support operations and such transfers have been increasing in recent years.

IMPROVING ECONOMIC PROFILE: Lakeland's economy continues to improve following the recession, as evidenced by moderate growth in jobs and taxable values. A number of sizable projects either in development or recently completed is expected to support further economic growth. Wealth indices, however, remain below average.

MANAGEABLE DEBT AND RETIREE OBLIGATIONS: Governmental debt ratios are moderate and amortization is rapid. Fixed costs for debt service, pension and other post-employment benefits (OPEB) supported by governmental revenues are not burdensome.

RATING SENSITIVITIES

MAINTENANCE OF LIQUIDITY LEVELS: Failing to adhere to an informal fund balance target policy of 10% could result in negative rating action, as liquidity below these levels may no longer be consistent with the current rating.

CREDIT PROFILE

Lakeland is located in Polk County (implied ULTGO rated 'AA' with Stable Outlook) in central Florida about halfway between Tampa and Orlando along Interstate 4. Encompassing 74 square miles, the city supports a population of approximately 100,000 which expanded rapidly during the early years of the past decade. Growth has tempered recently, with population up 3.4% from 2010 through 2013.

BROAD REVENUE BASE AVAILABLE FOR CB&A DEBT

The city's NAV revenues represent a broad-based and diverse revenue stream. Leading revenue sources include utility enterprise transfers, Lakeland Regional Medical Center lease payments to the city, utility taxes and state shared revenues. NAV revenues declined by 4% in fiscal 2013 due mostly to a decline in investment earnings but improved by 7% in fiscal 2014 to \$80.6 million. Notable improvements were reflected in state shared revenues, investment earnings, the public service tax and enterprise fund transfers.

Fiscal 2014 NAV revenues cover pro forma maximum annual debt service (MADS) on the city's outstanding NAV revenue supported debt and the series 2015 bonds by 5.34x. MADS occurs in fiscal 2017. Coverage improves in subsequent years as the bulk of existing principal is paid off by 2022 and the city has limited near term debt plans.

PLEDGE OF COUNTY AND STATE REVENUES IMPROVES COVERAGE

A portion of the series 2015 bonds (\$37 million) will be used to improve the Joker Marchant Stadium complex, a spring training facility used since 1966 by Major League Baseball's Detroit Tigers.

The city has pledged other revenues to support debt service associated with this project. The city has entered into an interlocal agreement with Polk County whereby the county agrees to pay approximately \$1 million per year for 20 years commencing Sept. 30, 2017. The annual payment equals the debt service associated with the county's share of total stadium project costs (approximately \$14.56 million or roughly 40%).

The county has covenanted and pledged a portion of the revenues it receives from the fourth percent of the tourist development tax (TDT) it currently levies. The use of TDT revenues is restricted by state statutes for tourism-related projects or debt service. The county had fiscal 2014 TDT revenues of \$1.3 million available to support the interlocal agreement payments.

If TDT revenues are insufficient in any fiscal year, the county is required to carry the shortfall forward so that it becomes due with the next annual payment. A termination of the agreement by the county requires full payment of its share of unpaid principal due on the series 2015 bonds.

The city has also pledged it share of state revenues expected to be received in connection with pending state certification of the stadium complex as a facility for a retained spring training franchise. Section 212.20 of the Florida Statutes requires distribution of \$83,333 monthly (or approximately \$1 million annually) beginning July 1, 2016 for 20 years. The city anticipates receiving certification prior to pricing of the bonds.

The city has negotiated a new 20-year lease agreement with the Detroit Tigers for use of the stadium commencing Jan. 1, 2017. The combined rental and management service fees from the baseball club under the new agreement total \$530,000 annually and are expected to be used by the city to support the stadium project debt service.

Using fiscal 2014 NAV revenues of \$80.6 million, coverage of outstanding and pro forma series 2015 debt supported by NAV revenues and pledged state and county revenues improves to over 6.2x on MADS in fiscal 2017 and to 7.8x in fiscal 2018 (due to declining annual debt service).

Risk of over-leveraging is mitigated by an anti-dilution test that stipulates NAV revenues cover MADS by at least 2.0x on all bonds secured in whole or in part by NAV revenues. From a practical standpoint leveraging risk is also mitigated by the general fund's dependence on NAV revenue to fund operations.

FINANCES SOUND DESPITE RECENT RESERVE DRAWS

Management built up operating reserves throughout the recession and began drawing them down to balance operations beginning in fiscal 2012. Fund balance levels remain satisfactory, although they have declined to \$18 million at fiscal 2014 year-end (18% of spending) from \$25 million at fiscal 2011 year-end. Management is considering a fire service assessment city wide or a property tax hike beginning in fiscal 2016 to help maintain adequate reserve levels. It is estimated that a fire assessment fee would generate up to \$17 million in additional annual revenues.

Fiscal 2014 general fund results included a \$2.2 million deficit after transfers, significantly less than the \$11 million in use of reserves originally budgeted. Spending came in less than budgeted; departments continued to monitor spending, and revenues exceeded expectations as property taxes, state shared revenues, and other miscellaneous revenues came in above budget.

The fiscal 2015 general fund budget of \$107 million is up a modest 0.8% from the fiscal 2014 budget and assumes the use of \$6.8 million in fund balance. The budget incorporates salary and merit increases and additional insurance costs. Personnel costs also increase due to the hiring of 21 new firefighters (primarily in connection with the opening of a new fire station).

Budgeted revenues include a moderate increase in property tax revenues as a result of tax base growth. The property tax rate remained flat at 4.664 mills and was last raised in fiscal 2013. Management has indicated its expectation and desire to maintain unrestricted general fund balances above the 10% of spending mark. The city's unwillingness or inability to increase revenues or otherwise right-size operations over the short term would result in continued erosion of reserves and could result in negative rating action.

DEPENDENCE ON UTILITY TRANSFERS

Lakeland's general fund remains dependent on transfers from its utilities. Informal policies dictate annual transfer levels from the city's electric, water/sewer, and solid waste systems. Budgeted fiscal 2015 transfers to the general fund from the utility funds aggregate \$43.1 million or a substantial 40% of total revenues.

The city relies most heavily on its electric system (revenue bonds rated 'AA-', Stable Outlook by Fitch), which is the third-largest publicly owned electric utility in Florida. Transfers from the electric fund increased from \$16.6 million in fiscal 2007 to \$24.9 million in fiscal 2014. Effective fiscal 2015, the dividend rate has been raised 15% to \$9.68 per 1,000 kWh of budgeted retail sales, a rate consistent with the mean reported by comparable municipal utilities in the State of Florida. The dividend/transfer for fiscal 2015 is budgeted at \$28.8 million.

Despite the extensive transfers, Lakeland electric rates are among the lowest in the state. The general fund's reliance on the electric system's transfer lends some volatility to the city's revenue base given the potential cyclicality of the electric market.

DISTRIBUTION AND SERVICE-BASED SECTORS DOMINATE

Lakeland's location between Orlando and Tampa, two of Florida's larger cities, fosters a significant distribution services sector. Amazon opened a new one million square foot distribution center warehouse last year in Lakeland employing over 400 people. Publix Supermarkets, a regional supermarket chain with retail and distribution facilities in the city, is the city's largest employer with over 8,200 employees. Lakeland Regional Medical Center, the fifth largest hospital in the state, is the second largest employer with over 4,500 employees.

Florida Polytechnic University, located within the city, opened in August 2014 and currently has 550 students enrolled. Management reports a number of other significant commercial developments underway or nearing startup which are expected to generate sales and property tax revenue growth.

IMPROVING ECONOMIC ENVIRONMENT

Economic trends have improved recently for the city. The December 2014 unemployment rate dropped to 6% from 6.5% as employment and labor force grew year over year, but rates remain above the state's 5.4% average. Median household income levels are below average at 84% and 75% of state and national levels, respectively.

The housing market also continues its recovery. January 2015 city housing values were up 11% from the prior year, according to the Zillow Group. Somewhat lagging the housing downturn, taxable assessed values fell by 29% between fiscals 2008 and 2013. However, taxable values increased modestly by 3.7% in fiscal 2014, the first uptick in six years, and 6.3% in fiscal 2015. The top 10 taxpayers represent a slightly elevated 14% of fiscal 2014 taxable value, with Publix on top at 6%.

HIGH FIXED COST BURDEN

Overall debt levels are moderate at \$2,163 per capita and 3.2% of market value (MV). Fiscal 2014 debt service totaled \$7.6 million or a manageable 6% of total governmental spending. Amortization of outstanding governmental debt is rapid, with 75% retired in 10 years. Capital needs are manageable. Management reports no current general government debt plans but future utility revenue debt is possible.

For fiscal 2014, the city's contribution to its three defined benefit pension plans aggregated to \$19.8 million, of which \$8.9 million was paid from governmental funds. The city funded 103% of the annual required contribution (ARC) for the Lakeland employees' pension plan but only partially funds its smaller police and fire fighters' plans at 47% and 44% respectively. The aggregate funding level for all three plans is estimated at an adequate 78% using Fitch's 7% adjusted investment rate of return. The combined unfunded liability was \$154 million as of the Oct. 1, 2013 valuation date or a moderate 2.3% of MV.

The city contributed \$3.9 million toward its OPEB liability for fiscal 2014 or 38% of the ARC. As of Oct. 1, 2013, the plan was 3.37% funded and had an unfunded liability of \$135 million, or a moderate 2% of MV.

Fiscal 2014 carrying costs for debt service, OPEB and governmental fund pension contributions represented a moderate 16.4% of total governmental spending.