OREANDA-NEWS. Fitch Ratings has assigned an 'A-' rating to the following City of Hialeah, Florida (the city) special obligation bonds:

--$21,525,000 special obligation taxable revenue bonds, series 2015A;
--$25,000,000 special obligation refunding revenue bonds, series 2015B.

The series 2015A bonds are being issued to finance a portion of the city's fiscal 2015 annual required pension contribution. The series 2015B bonds are being issued to refund all of the outstanding Florida Municipal Loan Council Revenue Bonds, series 2005A, attributable to the city and for which the city is obligor. The bonds are scheduled to sell via negotiation on November 17.

In addition, Fitch affirms the following outstanding ratings:

-- City implied unlimited tax general obligation (ULTGO) at 'A';
--$38.7 million outstanding Florida Municipal Loan Council (FMLC) refunding and improvement revenue bonds, series 2012A (City of Hialeah), at 'A-'.

The Rating Outlook remains Negative.

SECURITY

The special obligation bonds are secured by a pledge and lien on franchise fee revenues levied and collected by the city, pursuant to Ordinance No. 07-55, granting the electric franchise to Florida Power & Light Company (FPL), its successors and assigns, or any franchise or franchises granted in substitution. If franchise fee revenues are insufficient to fully pay annual debt service, the city covenants and agrees to budget and appropriate (CB&A) non-ad valorem revenues in an amount which is equal to the deficiency in the sinking fund for the applicable fiscal year to the credit of the sinking fund. Such CB&A shall be cumulative to the extent not paid and shall continue until all amounts payable under the ordinance have been paid. The amount available to be budgeted and appropriated to make debt service payments is subject to the obligation of the city to provide essential services.

The improvement revenue 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

RATING BASED ON COVENANT: Fitch's rating on the special obligation bonds is based on the CB&A of the city. The pledged franchise fee revenues are currently required to be paid solely by one entity, FP&L, pursuant to a franchise fee agreement between FP&L and the city. Fitch does not believe this pledge enhances credit quality beyond the level provided by the non-ad valorem covenant

COVENANT DEBT NOTCHING: Non-ad valorem revenues are ample relative to overall debt service backed by the CB&A and are diverse in nature. A one-notch distinction on the special obligation revenue bonds from the implied ULTGO reflects the inability to compel the city to generate non-ad valorem revenues sufficient to pay debt service and the prior payment requirements of essential government service costs.

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. Fitch views the city's issuance of the series 2015A bonds to fund its annual pension contribution as a form of deficit financing. The Negative Outlook reflects Fitch's 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.

DEBT LEVELS MIXED: Overall debt levels are moderate on a per capita basis and high when compared to market value. Amortization of outstanding principal is slightly below average. New debt plans are limited.

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: The city has approved a balanced budget for fiscal 2016 after reducing expenses and approving increases in certain non-ad valorem revenues. Progress in reducing the reliance on one-time measures to support operations is key to maintaining the rating. Performance contrary to this could lead to a downward change in the city's implied ULTGO rating.

CREDIT PROFILE

Hialeah is located in Miami-Dade County immediately north of Miami International Airport. It has an estimated 2014 population of approximately 235,563 which is up 4.8% since 2010.

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 2013. The city implemented spending controls during the recession, but the rapidity of the revenue erosion exceeded the city's capacity to offset it, with resulting negative operating margins and the use of reserves. The city also began budgeting the underfunding of pensions and relying on one-time revenue. The city's series 2015A bond issuance will provide funds necessary to fully pay its fiscal 2015 annual required pension contribution of $25.7 million. Fitch considers this action to be a form of deficit financing. Demonstrated progress during this period of economic recovery towards improving structural balance, with recurring revenues meeting recurring expenses, is key to maintenance of the current rating level.

SPECIAL OBLIGATION BONDS RATED ONE NOTCH BELOW IMPLIED ULTGO
Fitch's rating on the special obligation bonds is based on the city's CB&A of non-ad valorem revenues (NAVs). The city's NAVs are derived from a diverse source of revenues, and bonds backed by such CB&A are payable after provision for certain essential governmental expenditures and any debt service with a specific lien on such revenue. The series 2015A&B bonds are the only bonds that will be outstanding with a lien on a portion of NAV revenues.

Fiscal 2014 NAVs, including debt service fund balances of $6.8 million, totaled $86 million. Net NAVs available for debt service total $28 million, relative to pro-forma maximum annual debt service (MADS) on the city's existing CB&A debt and the series 2015A&B bonds of $10.2 million. The city is subject to an anti-dilution test under certain outstanding loans backed by its CB&A which requires that NAVs cover MADS of existing and proposed debt backed by NAVs at least 1.5x. The series 2015A&B bonds do not have an anti-dilution test although they do have a 2.0x additional bonds test (ABT) based on franchise fee revenues, discussed below.

FRANCHISE FEE BACKING DOES NOT ENHANCE CREDIT QUALITY
The special obligation bonds are backed by a pledge of franchise fee revenues received by the city for the non-exclusive right and privilege of supplying electricity and other utility services within the city. Currently, FP&L is the only provider subject to the fee. The payment of franchise fees is payable monthly by FP&L and is based on 5.9% of FP&L's billed revenues from the sale of electricity to residential, commercial and industrial customers within the incorporated areas of the city. The agreement is for a 30-year term through June 2037. Fitch does not believe this pledge enhances credit quality beyond the level provided by the non-ad valorem covenant as the pledged revenues are subject to contractual terms with a single payer.

The bond ordinance has an ABT requiring franchise fee revenues for the prior fiscal year to be at least 2.0x MADS of existing and proposed bonds. Pledged franchise fee revenues for fiscal 2014 were $10.6 million and covered pro-forma MADS on the proposed special obligation bonds 2.7x.

SUBSTANTIAL ONE-TIME GENERAL FUND REVENUE IN FISCAL 2014
In fiscal 2014 almost 14% of general fund revenue sources were 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, temporarily boosting the general fund's cash position.

FISCAL 2015 BUDGET LACKED FULL PENSION FUNDING
The fiscal 2015 budget of $120 million included $7 million for the normal costs for pensions (payments to retirees) but not the $18.8 million in city contributions for amortization of the unfunded pension liability. Subsequent to budget adoption the city learned that failure to fully fund the required contribution 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. Use of the series 2015A bond proceeds to make the fiscal 2015 $25.8 million pension payment will result in a projected $7 million positive pension expense variance in the general fund. Preliminary plans for usage of this surplus by management include establishing a reserve restricting these monies for future pension costs. Management is projecting a $1 million - $2 million general fund operating surplus, net of these pension funds, for fiscal end 2015.

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 fiscal 2014 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. Management is in the process of preparing a five-year financial operating plan with expectations for approval by January 2016.

MANAGEABLE DEBT LEVELS
The low property wealth of the city (market value per capita approximates only $33,000) accounts for a moderately high overall debt burden equal to 5.2% of market value or a more moderate $1,722 per capita. Amortization of outstanding principal is average with approximately 48% retired within 10 years. 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 plan's reported funded ratio is 71% as of the Oct. 1, 2014 valuation date; substituting the plan's 8% rate of return for a more conservative 7% would result in an estimated funded ratio of 64%. The Fitch-adjusted unfunded actuarial accrued liability of $321 million equates to a high 4.1% of market value. The general employees' pension plan is closed to new hires effective April 1, 2012. The fiscal 2014 required pension contribution was a high 15% of total governmental spending. Management plans to seek pension reforms from its employees during contract negotiations next year to help control growing costs and provide potential budget relief for the city. Fitch believes that achieving reforms from existing employees could prove challenging.

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.

BELOW-AVERAGE ECONOMIC PROFILE
Hialeah is located within Miami-Dade County and has access to 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 10 taxpayers make up 8.5% of fiscal 2014 TAV.

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 6.6% as of August 2015, down from 7.4% a year prior and a sharp improvement from the double-digit unemployment during the recession.