OREANDA-NEWS. Fitch Ratings has affirmed the 'A-' rating on the following outstanding Florida Municipal Loan Council's (FMLC) revenue bonds:

--\\$31 million refunding and improvement revenue bonds series 2012A (City of Hialeah).

In addition, Fitch has affirmed the City of Hialeah, FL's (the city) implied unlimited tax general obligation (ULTGO) at 'A'.

The Rating Outlook has been revised to Negative from Stable.

SECURITY

The bonds are limited obligations of the FMLC, payable solely from loan payments made by the city to the FMLC in an amount equal to debt service. Pursuant to the loan agreement, the city covenants to annually budget and appropriate (CB&A), by amendment if necessary, an amount of non-ad valorem revenue sufficient to satisfy its loan payments.

KEY RATING DRIVERS

CHRONIC STRUCTURAL IMBALANCE: Rating concerns center on a continuation of revenue pressure and reliance on one-time sources and deferred obligations to balance the budget. The Outlook has been revised to Negative reflecting concerns about the city's ability to achieve sustainable structural balance.

MODERATE RESERVE LEVELS: Reserve levels declined to more moderate levels after four years of deficit operations. General fund reserves benefitted in fiscal 2014 from a sizable internal asset sale, yet the city closed the year with a large payable to the pension trust fund. Reserves are currently in compliance with management's recently adopted 10% general fund balance policy.

COVENANT DEBT NOTCHING: Non-ad valorem revenues are ample relative to debt service and are diverse in nature. A one-notch distinction on the revenue bonds from the implied ULTGO reflects the absence of a pledge of specific non-ad valorem revenues securing these bonds.

PLANNED DEBT ISSUANCE: An issuance of \\$25 million in pension obligation debt is planned for November to enable funding of the fiscal 2015 pension required pension contribution. Fitch views the pension contribution as an operating expense, and the issuance a form of deficit financing. Overall debt levels are moderate to low while amortization of outstanding principal is slightly below average.

BELOW AVERAGE SOCIOECONOMIC INDICATORS: Wealth indicators are below state and national averages and unemployment rates are above the state and nation. The poverty rate is high and real property tax collections rates have been variable.

RATING SENSITIVITIES

BALANCED OPERATIONS: A downgrade of at least one notch is likely in the absence of action taken to eliminate deferral of pension obligations or reliance on one-time measures to support operations. Maintenance of an adequate reserve position is also necessary to maintain the current ratings.

CREDIT PROFILE

Hialeah, with a 2013 population of approximately 233,394, is located in Miami-Dade County immediately north of Miami International Airport.

FINANCIAL EROSION

Considerable tax base declines coupled with a determination to maintain existing tax rates resulted in significant ad valorem revenue declines from fiscal 2008 through 2014. The city implemented spending controls during the recession, but the rapidity of the revenue erosion exceeded the city's capacity to offset the deterioration, with resulting negative operating margins and the use of reserves. The city also began budgeting underfunding pensions and relying on one-time revenue. A pension obligation issuance is planned for next month and the city is currently working on a five financial year plan which will be made available with the debt offering statement. Structural balance, with recurring revenues meeting recurring expenses, is key to maintenance of the current rating level.

SUBSTANTIAL ONE TIME REVENUE IN FISCAL 2014

In fiscal 2014 almost 14% of general fund revenue sources was related to an asset sale to the solid waste fund. This \\$19 million asset sale as well as almost \\$5 million in revenue growth due to a new water and sewer franchise fee enabled the general fund to achieve a \\$7.8 million operating surplus yielding a year-end unrestricted general fund balance of \\$15.4 million or 11.6% of spending. The general fund also closed with an \\$18 million liability to the pension fund for contributions payable, boosting the general fund's cash position.

FISCAL 2015 BUDGET LACKED FULL PENSION FUNDING

The fiscal 2015 budget of \\$120 million included the normal costs for pensions (payments to retirees) but not contributions for amortization of the unfunded pension liability. Subsequent to budget adoption the city learned that failure to fully fund the required contributions would result in the loss of state collected insurance premium revenue. Consequently, the city restored payables to the pension fund and began plans to issue pension obligation bonds to fully fund the fiscal 2015 required pension contribution. The projected bond sizing includes \\$7 million beyond the amount needed to meet the 2015 pension payment. With receipt of proceeds of the pension obligation bonds, the city is expecting a stable fiscal 2015 year-end position.

The fiscal 2016 budget includes a stable property tax rate at 6.3 mills (comfortably below the state's 10 mill cap), but 7.6% growth in taxable assessed value (TAV) enables a \\$3.7 million increase in budgeted property taxes. Several other sources also contribute to moderate revenue growth. General fund expenditures (\\$128 million) are budgeted below the fiscal2014 spending level (\\$132 million). Frozen positions, staffing reductions and reorganizations drive the savings. The budget includes full funding of the required pension contribution and is balanced without reliance on reserves.

MANAGEABLE DEBT LEVELS

The low property wealth of the city (market value per capita approximates only \\$31,000) accounts for a moderately high overall debt burden equal to 5.1% of market value or a much more moderate \\$1,585 per capita. Direct debt levels are low; excluding county and school board issued obligations. Amortization of outstanding principal is average with approximately 48% retired within 10 years.

To fund the unbudgeted fiscal 2015 ARC payments the city is planning to issue \\$25 million of pension obligation bonds with closing by the end of November. The bonds are expected to be payable from utility franchise fees, but the city intends to seek pension reforms to offset the debt service costs. Reported capital needs are minimal and the city has not disclosed plans to issue other new money debt.

HIGH RETIREE COSTS

The city provides two defined benefit pension plans, one for its employees and a smaller one for certain elected officials. The employee plans' reported funded ratio is 76%; substituting the plan's 8% rate of return for a more conservative 7% would result in an estimated funded ratio of 68%. The Fitch-adjusted unfunded actuarial accrued liability of \\$275.8 million equates to a high 3.5% of market value. Importantly, the general employees' pension plan is closed to new hires effective April 1, 2012. The fiscal 2014 required pension contribution is a high 15% of government spending.

The city offers other post-employment benefits (OPEB) to its retirees. The city makes pay-as-you-go contributions for its employees and spent \\$10.5 million (57% of ARC) in fiscal 2014. As of Oct. 1, 2013, the unfunded liability of \\$307 million represented a high 3.9% of market value. Total carrying costs for debt service, pension ARC and OPEB contributions were a significant 25.7% of total governmental spending in fiscal 2014.

BROAD REVENUE BASE AVAILABLE FOR CB&A COVERAGE

The CB&A bonds have no direct lien on any specific revenue stream but are payable from a diverse collection of non-ad valorem resources after provision for certain essential governmental expenditures and any debt service with a specific lien on such revenue. Fiscal 2014 non-ad valorem revenues, including debt service fund balances of \\$6.8 million, totaled \\$86 million. The non-ad valorem anti-dilution test indicates net non-ad valorem revenues available for debt service on CB&A bonds total \\$28 million, relative to maximum annual debt service (MADS) of \\$8.6 million. The anti-dilution test requires that the average of non-ad valorem revenues for the prior two fiscal years cover MADS at least 1.5x and projected MADS for all debt secured or payable from non-ad valorem revenues must not exceed 20% of governmental fund revenues.

BELOW-AVERAGE ECONOMIC PROFILE

Hialeah benefits from its location within Miami-Dade County and from the county's broad and diverse labor market. Within city limits, the commercial sector consists of small businesses, specifically industrial, light manufacturing, and service related companies. The tax base is modest as previously noted but not concentrated. The top ten taxpayers make up 8.5% of fiscal 2014 TAV.

The Hialeah Casino opened in 2013, spurring job creation and other new development in the city.

Wealth indicators have historically been low with median household income at 65% and 59% of state and national levels, respectively. The individual poverty rate at 24.5% is well above local, state, and national levels. Unemployment rates were 6.8% as of March 2015, a sharp improvement from the double digit unemployment during the recession, but still considerably higher than the respective 5.5% and 5.6% unemployment rates for the State of Florida and U.S.