OREANDA-NEWS. Fitch Ratings has affirmed Pensacola, Florida's (the city) non-ad valorem revenue bonds as follows:

--\\$43.97 million in outstanding redevelopment revenue bonds, series 2009A and 2009B at 'AA'.

In addition, Fitch affirms the city's implied general obligation (GO) rating at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The bonds are backed primarily by the city's covenant to budget and appropriate (CB&A), by amendment if necessary, legally available non-ad valorem (NAV) revenues sufficient to pay debt service on the bonds. The bonds are also payable from tax increment finance (TIF) revenues derived from the city's Community Redevelopment Area, although these revenues are currently pledged on a senior basis to a new markets tax credit transaction until 2017.

The series 2009B bonds were issued as Build America Bonds (BABs). The federal BABs interest subsidy received by the city is pledged to debt service on the series 2009B bonds.

KEY RATING DRIVERS

SOUND FINANCES: The implied GO rating of 'AA+' reflects the city's sound financial management, as demonstrated by consistently surplus operations, solid reserves and ample liquidity.

MODEST DEBT: City debt levels are modest, with no current plans for additional government-supported debt. Amortization is slightly below average, while carrying costs for debt service, pension and other post-employment benefit (OPEB) obligations are somewhat elevated but manageable.

ECONOMY STABILIZED BY MILITARY PRESENCE: City unemployment rates have historically trended below the state and national averages. Following multiple prior year decreases, taxable assessed values (TAV) increased for the third straight year in fiscal 2016. The area's large military presence provides some stability to balance the city's reliance on the potentially volatile tourism sector.

ONE NOTCH RATING DIFFERENTIAL: The city's CB&A rating of 'AA' is one notch below the implied GO rating due to the fact that essential services and any debt secured by specific NAV revenue must be paid before CB&A debt service. The distinction also reflects the inability to compel an increase of revenues to pay bondholders.

STRONG CB&A DEBT SERVICE COVERAGE: Total NAV revenues amply cover maximum annual debt service (MADS). An adequate additional bonds test and the use of NAV revenues to support city operations protect against over-issuance of CB&A obligations.

RATING SENSITIVITIES

MAINTENANCE OF RESERVES: The rating is sensitive to shifts in fundamental credit characteristics including the city's ample reserve and liquidity balances. Fitch's expectation that the city will continue to maintain sound reserves while addressing its large pension costs underscores the Stable Outlook.

CREDIT PROFILE

Pensacola is located in Escambia County (the county) in the Florida panhandle. The city's area covers 25 square miles. Totalling 52,703 in 2013, the city's population declined by nearly 8% between 2000 and 2010 but has grown modestly since.

STRONG DEBT SERVICE COVERAGE MITIGATES UTILITY-BASED NAV

NAV revenues comprise the bulk of the city's general fund revenues. Most NAV revenues are derived from utility related activities, including franchise fees, public service taxes (PST), and transfers from the city's gas utility system, the largest revenue source.

The gas system transfers made up over 22% of fiscal 2014 covenant revenues. Gas utility revenues historically have been sufficient to cover operating and debt service costs of the system while providing a sizable transfer to the general fund. All revenues stemming from the provision of electric, gas, water and sewer services represented two thirds of the NAV base in fiscal 2014.

NAV revenues are affected by economic shifts, as well as by utility rate changes. Fiscal 2014 NAV collections rebounded from a prior year decline with solid 4.3% growth due to increased electric and gas sales. Projected fiscal 2015 NAV revenues increase by 1.7% due to expanding sales tax, electric franchise fees and PST income. Gas utility transfers have been consistent at \\$8 million since fiscal 2010.

Debt service coverage remains strong, with fiscal 2014 revenues of \\$35.7 million covering MADS by over 8x. A 2.0x MADS coverage test limits additional parity bonds, and the city's dependence on NAV revenues to fund operations provides an additional safeguard against over-issuance.

The series 2009B bonds were issued as BABs, and the federal BABs interest subsidy received by the city is pledged to debt service on the bonds. The federal subsidy for the 2009 BABs was reduced modestly due to sequestration in both fiscal 2015 and 2016. However, the impact on debt service coverage of a loss of even the total subsidy would not be significant given strong coverage by NAV revenues.

SOLID FINANCIAL MANAGEMENT

The city's financial position remains strong despite revenue pressures over the past few years. Finances have featured generally balanced operations with healthy ending balances. The city reported a general fund surplus for fiscal 2014 of \\$965,000, the fifth surplus in the past six years and an improvement over the small deficit originally budgeted.

Franchise fee collections were \\$800,000 over budget due to an electric rate increase and a colder than anticipated winter. Decreased fines and forfeit revenues were more than offset by the lack of spending for economic development incentives, which had been budgeted at about \\$1 million for fiscal 2014. Reserves are robust, with the fiscal 2014 general fund unrestricted balance totalling \\$12.9 million or 27.2% of spending. Liquidity levels are also healthy--cash and investments cover more than three months of spending.

The city budgeted a moderate \\$1.1 million general fund net deficit for fiscal 2015, with much of the deficit attributed to increased pension costs. Management currently projects a year-end decline of \\$650,000 in overall fund balance because franchise fees and public service taxes are exceeding budget. Unrestricted reserves will remain well above the city's policy of 15% of general fund appropriations for unanticipated needs or emergencies.

Fiscal year 2016 budgeted operating revenues include the standard gas utility transfer (\\$8 million in recent years), and are projected to increase by 2.2% due to growth in property and sales taxes as well as franchise fee and public service tax revenues. A similarly sized increase in expenditures is fuelled by growing technology, insurance and landscaping costs. The city is budgeting another \\$1.1 million general fund drawdown for fiscal 2016 with the intention to balance operations in fiscal 2017 when pension spending is expected to decline by about \\$2 million.

MANAGEMENT TAKES MEASURES TO REDUCE PENSION COSTS

The city operates three defined benefit pension plans, a general plan for non-public safety employees (general plan) and separate plans for police and fire. Funding for the fire plan is healthy at 85.2% but less so for the general (72.6%) and police (68.7) plans, assuming Fitch's 7% discount rate. City pension costs relative to operations run high at about 17% of operational spending, although it should be noted that about 35% of pension costs are attributable to the city's enterprise funds. Excluding these funds, pension contributions for general government employees are manageable at about 11% of spending.

To achieve long-term cost savings non-public safety employees hired after fiscal 2007 were required to participate in the state-run Florida Retirement System (FRS). Other changes implemented by management included closing the police pension plan to new hires (effective January 2013), shifting new employees to the FRS and reducing benefits for the police and general plans.

More recently, the firefighters plan was modified to limit pensionable overtime, reduce the cost of living adjustment and expand the years of service for determining average final compensation for some members. These measures are expected to reduce longer-term pension expenditures by nearly \\$900,000 or 9% in fiscal 2016.

The city does not contribute to retiree health insurance but allows retirees to participate in its employee health care plans at their own cost. As such, the city's OPEB liability consists solely of the implicit subsidy arising from the co-mingling of retirees with active employees to determine OPEB costs.

DEBT LEVELS ARE MODERATE

City debt levels (1,588 per capita and 1.8% of market value) are manageable while principal amortization over the next 10 years is relatively slow. Debt service as a percent of operational spending is average at about 10.4% (fiscal 2014). Capital plans are manageable, with funding derived largely from the local option gasoline tax and the local infrastructure sales tax. Management reports no plans to issue tax-supported debt in the foreseeable future.

MILITARY PRESENCE STABILIZES ECONOMY

The city's economy is dependent upon the military, with six bases located within and around the city. Naval Air Station Pensacola provides employment for over 23,000 uniformed and civilian jobs. Health care and tourism are two other major sector employers. Tourism continues to expand, with robust growth in tourist development tax collections in fiscal 2014 and year to date fiscal 2015.

The military presence provides a stable offset to the more volatile tourism sector, as demonstrated by city unemployment rates that historically have trended below state and national norms. City employment stagnated in 2015 following five consecutive years of job growth, but despite the slowdown in job expansion the city's unemployment rate of 4.9% for March 2015 remained well below the state (5.5%) and national (5.6%) averages.

The city's tax base stabilized in 2014 following five years of recession-induced decline. Assessed value growth resumed in fiscal 2015 with an increase of 4.5%, and further growth of 3.6% is projected for fiscal 2016. Management projects continued taxable value growth due to several large downtown projects underway. Tax base concentration is moderate with the top 10 taxpayers accounting for 14.5% of the total. Sacred Heart Hospital and Gulf Power are the two leading taxpayers and represent 4.6% and 3.6% of taxable values, respectfully.