OREANDA-NEWS. Fitch Ratings has assigned an 'A+' rating to the following Cape Coral, FL (the city) bonds:

--\$44,185,000 special obligation refunding revenue bonds, series 2015.

Proceeds will be used to refund the series 2006 special obligation bonds and includes \$4.9 million in new money for vehicles, IT equipment and other equipment.

Fitch also affirms the following ratings:

--\$100 million special obligation revenue bonds, series 2006, 2007 and 2011 at 'A+';
--\$9 million capital improvement and refunding bonds, series 2005 at 'AA-';
--\$37 million gas tax revenue bonds, series 2010A and 2010B (Federally Taxable Build America Bonds-Direct Payment) at 'A-'.

In addition, Fitch affirms the city's 'AA-' implied unlimited general obligation (ULTGO) rating.

The Rating Outlook is Stable.

SECURITY
Special Obligation Bonds: The city has covenanted and agrees to appropriate in its annual budget legally available non-ad valorem (NAV) revenues in an amount sufficient to pay debt service on the special obligation revenue bonds. The obligation shall be cumulative to the extent not paid. Such covenant to budget and appropriate NAV revenue is subject to the availability of NAV revenues after satisfying obligations with a specific lien on such revenue and the funding of essential government services.

Capital Improvement Bonds: The capital improvement revenue bonds are payable from a first lien on the city's share of the local government one-half-cent sales tax.

Gas Tax Bonds: The gas tax revenue bonds are payable from a first lien on the revenues from the five- and six-cent local option gas tax imposed by the county and received by the city pursuant to state law and interlocal agreement. The county ordinances authorizing collection of the gas tax revenues do not extend to the scheduled final maturity date of the bonds; therefore, the city has a covenant to budget and appropriate legally available NAV revenues only in the event the city's receipt of gas tax revenues terminates as a result of the county's determination not to extend the levy of either of the local option gas taxes.

KEY RATING DRIVERS

SOUND RESERVE LEVELS: Unrestricted general fund reserve levels are sound and liquidity is favorable.

ECONOMIC IMPROVEMENT: The city's taxable assessed value (TAV) increased for the third consecutive year in fiscal 2015 but remains considerably below pre-recession levels. City employment trends have been positive and unemployment has been declining. Per capita income levels are below average.

HIGH CARRYING CHARGES: Debt ratios are moderate but pension funding levels are weak and the cost of servicing the city's debt and pension obligations consume a high portion of the budget limiting overall financial flexibility. Debt levels should remain stable given average amortization rates and additional planned near-term debt issuance.

COVENANT DEBT NOTCHING: A one-notch distinction between the special obligation bond rating and the implied ULTGO rating reflects the breadth of available resources to pay debt service, tempered by the absence of a pledge of specific revenue and the inability to compel the city to raise NAV revenue sufficient to pay debt service.

ADEQUATE GAS TAX COVERAGE: Maximum annual debt service (MADS) coverage by fiscal 2014 (draft audit) pledged revenues was 1.32x, up from 1.26x in fiscal 2012.

STRONG SALES TAX COVERAGE: The capital improvement revenue bond rating, which is capped at city's implied ULTGO rating, reflects strong coverage of MADS of nearly 3x from pledged half-cent sales tax revenues. The city reports no plans to issue additional parity debt; risk to additional leveraging is an important rating factor, given fairly lenient additional bonds test provisions.

RATING SENSITIVITIES

The special obligation and implied ULTGO ratings are sensitive to shifts in fundamental credit characteristics, most notably maintenance of solid financial reserves and continued budgetary balance. Fitch views these as important given risks inherent in the city's volatile economy and tax base. The capital improvement revenue bond rating is capped at the city's implied ULTGO rating.

The gas tax revenue bond rating is sensitive to shifts in debt service coverage driven by economic trends affecting revenues supporting the debt.

CREDIT PROFILE
Cape Coral is located on the southwest coast of Florida in Lee County, 10 miles south of Fort Myers and 125 miles south of Tampa. Access to the Intercoastal Waterway and Gulf of Mexico fosters tourism and attracts retiree residents. Population in 2013 totaled 165,831, a sizable 65% increase since 2000.

CITY EXPANDS REVENUE BASE
The city has been examining options to stabilize its finances, diversifying its revenue base away from a dependence on property tax revenues and better providing for capital needs. Property taxes are the city's largest revenue source (about 60% in fiscal 2013). Property values were hard hit during the recession, leading property tax revenue to decline 29% from the fiscal 2008 collections. Two new revenue sources have recently been approved: a public service tax (PST) on electric services and a fire services assessment (FSA). The PST was effective Oct. 1, 2013 and is levied at 7%; the state limit is 10%.

The FSA was approved by the city council, but is currently the subject of a Florida Supreme Court validation review of the proposed method of assessment. A court finding is expected soon. The city implemented the FSA for fiscal 2014, collecting about \$9.9 million (7.4% of general fund revenues), but did not include these revenues in the fiscal 2014 budget.

The fiscal 2015 budget includes \$11.6 million in FSA revenues, which will support significant city capital needs which had been deferred in past years. Until a final court ruling the city plans on delaying fiscal 2015 budgeted capital spending against the revenues. If the city receives an adverse court ruling, it is Fitch's understanding that the city has the option of implementing the assessment to comply with the court's ruling, with no net revenue loss.

ADEQUATE RESERVES DESPITE DRAW-DOWNS; SURPLUSES FOR FYS 2014-2015
Fiscal 2013 ended with a general fund operating deficit after transfers of about \$4 million, yielding an unrestricted ending balance of \$24.5 million (20.6% of spending). Draft audit fiscal 2014 results show a surplus of \$1.8 million, which would increase the total fund balance to about \$25.3 million or 20.5% of spending, with the unrestricted balance close to that figure. Include the aforementioned \$9.9 million in new FSA revenues, the ending balance is about \$36.4 million or 28.5% of spending. Fiscal 2014 revenues reflect the first year of the new PST collections, draft audit collections of \$7.2 million is 5.4% of revenues). The city is budgeting a \$4.2 million general fund operating surplus for fiscal 2015 and operations to date are reportedly on target.

HISTORICAL TAX BASE DECLINES; RECENT RECOVERY
Cape Coral was among the communities hardest hit by the housing downturn and recession. TAV dropped by more than \$12 billion or about 59%, from fiscal 2008 to fiscal 2012. After successive years of decline, TAV returned to growth in fiscal 2013 (3.9%), with continued growth in fiscal 2014 (6.9%) and fiscal 2015 (8.5%). The fiscal 2015 real property rate of 7.7 mills is below the state limit of 10 mills.

Employment trends have also been positive during the recovery, with annual job growth and declining unemployment rates. The city's August 2014 unemployment rate of 6.3% is down from 7% a year prior and is below state (6.7%) and equal to national levels. In addition to the city and the Lee County school district, the top 10 employers include retail establishments, health related facilities, and a senior residential housing complex.

MODERATE TO HIGH DEBT LEVELS; HIGH CARRYING COSTS
City overall debt ratios are moderate (\$1,758 per capita and 2.3% of market value), but fiscal 2013 debt service as a percentage of governmental spending is high at about 13.1%. Principal amortization, about 50% repaid within 10 years, is average. Planned near-term debt issuance includes potential issuance of \$1.5 million in debt backed by fire assessment revenues and about \$6 million in annual capital lease financings in fiscals 2016 and 2017 that should not have a meaningful impact on the city's debt burden.

The city maintains three defined benefit single-employer pension plans, including a general plan for non-public safety employees and separate plans for police and fire fighters. As of Oct. 1, 2014 the funded ratio on all three plans improved as a result of strong investment performance. The unfunded accrued liability for the three plans totaled \$155.5 million, down from \$171.7 million the prior year. Pension funded levels are 70%, 79.8%, and 7% for the general, police, and fire-fighter plans, respectively, or an estimated 64.7%, 77.7%, and 70.1%, based on a more conservative 7% discount rate.

Fiscal 2014 pension costs ran high at about 18.1% of governmental spending, although about 25% of pension costs are attributable to the city's enterprise funds. Total carrying costs for pension, debt service, and the current cost for retiree health benefits as a percentage of governmental spending are high at 35.1%.

In fiscal 2013 the city began implementing reform measures to control pension related costs that have essentially doubled since 2008. These included revisions to labor contracts that increased retirement age and length of service for new employees and certain caps on final retirement and changes in vesting requirements for all employees.

INCREASED REVENUES FOR SPECIAL OBLIGATION BONDS
NAV revenues are sizeable and diverse, at \$72.5 million in fiscal 2014. The four largest NAV revenues account for 52% of fiscal 2014 NAV revenue. Implementation of a PST and a fire assessment added \$17 million of revenue in fiscal 2014 (30.6% increase). In fiscal 2013, NAV revenues showed growth of 8.7%, largely driven by recovery in sales tax collections. Total MADS on all debt payable from NAV revenues, including the capital improvement (sales tax) and gas tax bonds, is \$20.4 million.

SOUND COVERAGE FOR CAPITAL IMPROVEMENT BONDS
Debt service coverage remains strong for the capital improvement revenue bonds at 3x MADS from fiscal 2014 pledged revenues (draft audit). After prior year declines, pledged sales tax revenues in fiscal 2012 were flat, followed by strong growth in fiscal 2013 (8%) and fiscal 2014 (9.5%). Year-to-date collections show continued strong growth with revenues up 8.3%. The additional bonds test is lenient, requiring only 1.25x coverage of MADS by pledged revenue in any 12 consecutive months out of the immediately preceding 18 months.

IMPROVED COVERAGE OF GAS TAX BOND DEBT SERVICE
Gas tax collections in fiscals 2013 and 2014 showed growth of 6.7% and 5%, respectively. MADS coverage in fiscal 2014 was 1.51x, or 1.32x excluding the federal subsidy for series 2010 bonds issued as BABs, which has been reduced modestly in fiscals 2013 through 2015 due to sequestration. Coverage of gas tax bond MADS was a tight 1.18x in fiscal 2012 or 1.35x including the federal subsidy. Additional bonds may be issued if gas tax revenues from the prior fiscal year equal 1.25x projected MADS.