OREANDA-NEWS. Fitch Ratings has assigned a rating of 'AA-' to the following revenue bonds to be issued by the city of Jacksonville, Florida (the city):

--$197,055,000 transportation refunding revenue bonds, series 2015.

The bonds will be sold competitively on Dec. 15. Proceeds will be used to refund a portion of the outstanding transportation revenue bonds, series 2007 for debt service savings without extending final maturity. The current offering will also refund the outstanding series 2008A bonds, converting the rate of interest on the bonds to fixed from variable, and fund a deposit to the debt service reserve fund (DSRF) securing the bonds. Net present value savings of $6.7 million are estimated on the refunding of the series 2007 bonds, equal to 9% of refunded par.

Fitch also affirms the following ratings:

--Implied unlimited tax general obligation (ULTGO) at 'AA';
--$891 million outstanding special revenue bonds, backed by the city's covenant to budget and appropriate non-ad valorem revenue, at 'AA-';
--$477.9 million outstanding transportation revenue bonds (pre-refunding) at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The transportation revenue bonds are backed by a first lien on the proceeds of a 0.5% sales tax and a 2-cent per gallon constitutional gas tax levied and collected throughout the city. The bonds are additionally secured by a subaccount within the DSRF funded by a combination of cash and surety.

KEY RATING DRIVERS

SOUND DEBT SERVICE COVERAGE: The 'AA-' rating on the transportation revenue bonds reflects good coverage levels from pledged revenue at better than 1.8x maximum annual debt service (MADS) in fiscal 2015. Five straight years of revenue growth have reversed the steep declines of the recession, and the outlook for retail sales activity remains stable. The bond ordinance provisions pertaining to future leveraging are somewhat lenient, but practical limitations to the incurrence of additional indebtedness moderate this risk.

GENERAL CREDIT QUALITY STABLE: Fitch affirms the implied ULTGO rating at 'AA' reflecting the city's continued stable budgetary management and financial position, moderate debt burden, and the city's position as an economic and population center for northeast Florida featuring adequate income metrics and good employment diversity.

COVENANT NOTCHING: The 'AA-' rating on the special revenue bonds is notched down from the city's implied ULTGO rating bonds due to the absence of a specific pledge and the inability to compel the county to generate non-ad valorem revenues sufficient to pay debt service.

HIGH PENSION LIABILITY: A high pension burden remains the primary credit pressure for the city and Fitch expects the cost associated with retiree benefits will continue to pressure the operating budget for some period of time despite the recent enactment of reforms for the police and fire pension fund (PFPF), the largest of its defined benefit pension plans.

RATING SENSITIVITIES

STEADY OPERATING STATE: The Stable Outlook reflects Fitch's expectation for continued sound fiscal management and maintenance of healthy reserves. Recent reform of the police and fire pension fund is a favorable development, but the city's pension liabilities and carrying costs are expected to remain high diminishing prospects for positive rating action.

CREDIT PROFILE

FAVORABLE REVENUE TRENDS AND COVERAGE PROTECTION

Unaudited pledged revenues for the fiscal year ended Sept. 30, 2015 totaled $87.7 million or 1.84x MADS of $47.5 million. Pledged revenues increased 6% on the year in fiscal 2015 and have risen at a CAGR of 4.2% since fiscal 2011, fully restoring recession-period revenue losses. Sales tax revenues, which comprise 90% of total pledged revenue, have been the driver of this growth as gas tax collections over the same period have been flat.

Current coverage levels provide a good cushion against revenue decline due to changing economic conditions or other unanticipated events. Fitch estimates pledged revenue can decline by 46% before coverage of MADS would fall below 1.0x, compared to the aggregate actual decline from fiscal 2007-2010 of 16.2%. In another stress scenario that replicates the recession-period declines on a recurring 10-year basis with 2% growth in other years the minimum annual debt service coverage ratio would remain satisfactory at 1.58x.

Additional parity indebtedness may be issued upon compliance with a fairly lenient 1.35x additional bonds test. There are no plans to issue additional new money bonds to be sold. Furthermore, remaining funds after the payment of debt service on the transportation revenue bonds are a significant funding source for the operations of the Jacksonville Transit Authority, a component unit of the city whose budget is subject to review and approval by the city council.

GENERAL FUND POSITION REMAINS HEALTHY

Audited financial results for the year ended Sept. 30, 2014 depict the total general fund balance increasing by $7.1 million, marking nine consecutive years of surplus operating results after transfers. The surplus, equal to 0.7% of total spending, increases the unrestricted fund balance to $178.1 million or 17.6% of spending. The city has a goal of maintaining a 5% to 7% emergency reserve and a 5% to 7% operating reserve. Cash and investments across the primary government and component units totaled $2.6 billion at the end of fiscal 2014 equal to more than 260 days of spending. Audited results for fiscal 2015 are not yet available; city officials preliminarily indicate flat to slightly positive results for the general fund on the year.

FINANCIAL STABILITY ANTICIPATED IN NEAR TERM

The $1.1 billion adopted budget for fiscal 2016 represents a moderate 3% increase from the prior year. The budget does not increase taxes, does not enact new revenue and does not rely on fund balance transfers or other non-recurring sources. The key source of revenue growth is from ad-valorem taxes, which are budgeted to increase $28.3 million due to tax base growth of 5.1% on the year, and state-shared sources (sales tax mostly), which are up $9.6 million or 6.8%. The ad-valorem tax rate of 11.44 mills is comfortably below the city's 20-mill statutory cap and competitive compared to the combined city/county tax rates of other large metro areas in the state. The city's legal tax raising capacity provides a significant source of protection against unanticipated budgetary challenges or emergencies. Fitch estimates each 1-mill increase in the tax rate would generate near $48 million in new revenue. Property taxes fund approximately 50% of the general fund budget.

PROGRESS ON PENSION BUT BURDEN REMAINS HIGH

The city reached an agreement with its PFPF, the largest of its defined benefit pension plans, that modifies the benefit package for both existing and new employees. The city's actuary (Milliman) projects savings of $1.36 billion over 30 years. The projection excludes $350 million of additional payments above the actuarial required contribution to be made by the city over 13 years to accelerate amortization of the unfunded liability. The agreement with the PFPF requires the city to pay $5 million in the current year (which the city has budgeted), $10 million in fiscal 2017, $15 million in fiscal 2018, and $32 million in each year from fiscal 2019-2028. The city has not identified a specific funding source for these additional contributions.

The agreement with the PFPF is expected to moderate the growth of the actuarial contribution to the plan, which has dramatically risen to $148 million in fiscal 2016 (plus the additional $5 million, as noted above) from $53.3 million in fiscal 2006. The actuarial based contribution for the general employees and corrections officers pension plans is approximately $100 million; the city has only funded 84% of the actuarial contribution for both plans from fiscal 2012-2014 (an aggregate shortfall of $39.4 million) due to differences in the actual payroll and payroll assumption utilized by the actuary. Payroll assumptions have been modified to help alleviate this issue going forward. The cost associated with funding pension, debt service, and the normal cost for other post-employment benefits (OPEB) is estimated by Fitch to equal a high 30% of governmental fund spending.

The city has yet to negotiate reforms for its general employee and correction officers pension plans, which accounted for 40% of the city's combined $2.69 billion unfunded pension liability reported as of Sept. 30, 2014. Fitch estimates a higher unfunded liability of $2.95 billion (or 3.6% of market value) adjusting the investment rate of return to 7% for the general employee and corrections officer's plans, from 7.7% and 8%, respectively.

MODERATE DEBT BURDEN

Overall debt metrics remain moderate at 3.5% of market value or $3,003 per capita. Debt levels should remain fairly stable as future borrowing plans are notably lower than the amount of outstanding debt scheduled to amortize during the current capital improvement plan period.

ECONOMIC CENTER FOR NORTHEAST FLORIDA

Jacksonville anchors a reasonably sized economic base, ranking fourth largest in the state as measured by non-farm jobs (640,000) and gross metro product ($68.3 billion) according to Global Insight (IHS). IHS forecasts non-farm employment and gross metro product for Jacksonville to increase at a compound annual growth rate of 1.5% and 4.9%, respectively through 2020. Both measures compare favorably to other large metros areas across the U.S. The city's September 2015 unemployment rate of 5.3% is equal to the Florida rate and slightly higher than the nation at 5.1%. Income indicators are on par with the state, but a slightly above average poverty rate remains a concern shared by many large cities.

The U.S. Navy has a fair amount of influence on the economy, as Naval Air Station (NAS) Jacksonville and NAS Mayport combine to employ 34,240 or 4.5% of the Jacksonville metro labor force. The Kings Bay Naval Submarine Base about 40 miles north of the city employs an additional 1,400. The Navy continues to increase its investment and presence in the region, recently moving three amphibious assault ships with approximately 2,000 sailors and family members to NAS Mayport. The Port of Jacksonville continues with major expansion projects that should serve to boost the metro's sizable trade and transportation sectors. Growth in the healthcare sector has helped diversify the economy, with major employers including Baptist Health (8,270 workers), the Mayo Clinic (4,970), St. Vincent's Health (4,000), and Shands Jacksonville (3,500).