OREANDA-NEWS. March 28, 2016. Fitch Ratings has assigned a rating of 'AA' to the following revenue bonds to be issued by the city of Deltona, Florida:

--\\$31,950,000 transportation capital improvement refunding and revenue bonds, series 2016.

The bonds will be sold competitively on or about May 5. Bond proceeds will advance refund \\$12,150,000 principal amount of outstanding transportation capital improvement revenue bonds, series 2006 for an estimated net present value savings of \\$611,249. The remaining proceeds will partially fund certain roadway improvements and a senior community center. The bonds will have a final scheduled maturity date of Oct. 1, 2046.

In addition, Fitch affirms the following ratings:

--Implied unlimited tax general obligation (ULTGO) at 'AA';
--\\$12,150,000 transportation capital improvement revenue bonds, series 2006 (pre-refunding) at 'AA-'.

The Rating Outlook is Stable.

SECURITY
The series 2016 bonds are backed by a first lien on half-cent sales tax revenue received by the city from the state of Florida's Local Government Half-Cent Sales Tax Clearing Trust Fund (LGST) in addition to revenue derived from the public service tax (PST) and local communications services tax (CST) levied and collected by the city. The city has also covenanted to appropriate in its budget each fiscal year an amount of non-ad valorem revenue sufficient to make up any deficiency in pledged taxes to pay principal and interest on the bonds when due. Such covenant shall be cumulative to the extent not paid, and shall continue until such non-ad valorem revenues or other legally available funds are sufficient to make all such required payments under the bond resolution.

The series 2006 bonds are backed by a first lien on the city's share of a five-cent and six-cent local option gas taxes levied by Volusia County, applicable interest, and transportation impact fees. The city has covenanted to budget and appropriate non-ad valorem revenue, if necessary, to make up any deficiency in the debt service reserve fund securing the series 2006 bonds.

KEY RATING DRIVERS

STRONG DEBT SERVICE COVERAGE: The 'AA' rating on the series 2016 bonds is based on the strength of the pledge of the LGST, PST, and CST as well as the city's general credit quality. Pledged taxes totaled \\$11.74 million in fiscal 2015 or the equivalent of 6.18x maximum annual debt service (MADS). Pledged taxes can withstand significant stress before coverage declines below 1.0x. A dependence on pledged taxes to fund operations creates a practical impediment to overleveraging and tempers risk associated with a fairly liberal 1.35x additional bonds test (ABT).

RATING CAP AND FLOOR: The rating on the series 2016 bonds is capped by the city's implied ULTGO rating and will be no lower than one-notch below the implied ULTGO rating based on the city's covenant to budget and appropriate non-ad valorem revenue to pay debt service in the event of a shortfall in pledged taxes. The rating on the series 2006 bonds is based on the non-ad valorem covenant to cure any deficiency in the DSRF, which Fitch views as providing a higher level of creditworthiness relative to the lien on gas taxes and transportation impact fees.

VERY HIGH RESERVES: Unaudited fiscal 2015 financial statements show the total and unrestricted fund balance at \\$25.2 million or 78% of spending and available reserves have equaled no less than 30% of spending dating back to fiscal 2005. The city adheres to conservative fiscal policies including a minimum two-month operating reserve and other set-asides for natural disaster recovery and economic development.

STABLE OPERATING PROFILE: Fiscal 2015 marks seven consecutive years of general fund operating surplus after transfers and the current year budget is structurally balanced. An improving economy and tax base, very low fixed costs associated with debt and retiree liabilities, and an adequate cushion within the statutory property tax cap position the city to achieve stable operating results in the intermediate term.

LOW LIABILITY BURDEN: The city's debt metrics are estimated at a low 2.2% of market value or \\$840 per capita and future capital and borrowing plans are modest. Pension liabilities are similarly affordable.

RATING SENSITIVITIES

DEBT SERVICE COVERAGE: The rating on the series 2016 bonds could become sensitive to significant and prolonged reductions in pledged revenue collections but is otherwise expected to remain stable.

MANAGEMENT PRACTICES: The implied ULTGO rating and Stable Outlook reflect expectations for continued prudent budgetary management and adherence to existing reserve policies.

CREDIT PROFILE
Deltona spans a land area of 37.5 square miles in southwest Volusia County. The city is largely residential in character and has a 2014 population of 86,890 which is up 2% since 2010 and 24% since 2000. The city's economy is oriented in government, health care, and retail and has experienced five straight years of job growth that have helped lower unemployment from a high of 12.8% in 2010 to 5.1% in 2015. The city is positioned along Interstate 4 roughly 30 miles from both Orlando and Daytona Beach providing residents access to broader employment opportunities. However, the city's labor force exhibits a lower level of educational attainment relative to the state benchmark, and median household income in the city has declined in each of the prior four years and is currently equal to only 82% of the state and 89% of the Deltona-Daytona Beach-Ormond Beach CBSA. Continued expansion in the health care and biomedical industries could support wage growth over the intermediate term.

EXCEPTIONAL COVERAGE FROM PLEDGED TAXES

The 'AA' rating on the series 2016 bonds reflects an exceptional level of coverage from the combination of taxes pledged to bondholders with fiscal 2015 unaudited pledged revenues totaling \\$11.74 million or 6.18x MADS (\\$1.9 million). Fitch estimates pledged revenues can decline by 84% before MADS coverage would fall below 1.0x. Pledged taxes have been very stable experiencing annual declines of just 3.9% in fiscal 2008, 4.1% in fiscal 2011, and 1.9% in fiscal 2012 dating back to fiscal 1999. Pledged taxes have increased at a CAGR of 4.2% during this period, including gains of 2% or better in each of the last three years.

No additional debt is planned. The ABT establishes a lenient 1.35x coverage threshold for additional parity indebtedness, but the city's capital needs are moderate and no additional debt is planned within the five-year capital improvement plan (CIP). The pledged taxes also fund close to one-third of the general fund budget limiting the ability of the city to leverage the revenue stream significantly without other budgetary adjustments.

VERY STRONG RESERVES PROVIDES SIGNIFICANT FLEXIBILITY

The 'AA' implied ULTGO rating reflects the city's maintenance of high reserves for an extended period of time. The city has adopted a set of formal reserve policies that establish a prudent level of financial protection against emergencies and unforeseen budgetary demands. Unrestricted general fund balance in fiscal 2015 totaled \\$25.2 million or 77.6% of spending. The city's adopted minimum fund balance policies include a two-month operating reserve (16.7% of spending), and reserves for natural disaster recovery (a fixed \\$6 million or 18% of current spending) and economic development/infrastructure (\\$2 million or 6%). Reserves are largely comprised from unrestricted cash and investments (\\$57.6 million or 327 days cash on hand government-wide) and there are no net deficit positions reported in any of the city's governmental fund types.

STABLE OPERATING RESULTS ACHIEVED DESPITE TAX BASE VOLATILITY

Budgetary management has been strong with fiscal 2015 expected to mark the seventh consecutive year of general fund operating surpluses after transfers. Historical revenue and expenditure assumptions have been conservative yielding actual results favorable to the budget. Management reports a similar pattern developing for fiscal 2016 based on year-to-date results. The fiscal 2016 budget as adopted projected adding approximately \\$240,000 to the total general fund balance.

The city's ability to achieve favorable results in the intermediate term is supported by its very low fixed cost burden with debt and retiree benefits consuming less than 8% of governmental fund spending in fiscal 2015. Budgetary risks center on the historically volatile nature of the local housing market with residential properties accounting for 90% of the city's tax base. Property taxes fund close to 40% of the general fund budget. Assessed value (AV) fell more than 45% between fiscal 2007 and 2012 but revenue losses were far less dramatic due to city's willingness to adopt consecutive tax rate increases. AV has rebounded 23% between fiscal 2012 and 2016 to \\$3.2 billion and the current median home value in Deltona is up 15.2% on the year. However, the median home price of \\$119,500 remains roughly 40% below the pre-recession peak, and the city's tax base is not particularly robust with a market value per capita less than \\$40,000. The property tax rate for fiscal 2016 was set at 7.99 mills for the fifth consecutive year and continues to provide an adequate cushion within the 10-mill statutory cap in the event of another downturn in the housing market.

AFFORDABLE DEBT AND CAPITAL PLANS

The city's debt metrics are estimated at a low \\$840 per capita or 2.2% of market value on an overall basis. Principal amortization is extended with the issuance of the series 2016 bonds to a slow 28% in 10 years. Future capital needs are manageable with the fiscal 2016-2020 capital improvement plan (CIP) identifying \\$24.1 million in projects largely for stormwater (\\$6.4 million), vehicle replacement (\\$5.7 million), road resurfacing and construction (\\$4.9 million), and equipment (\\$3.5 million). The CIP is funded primarily through general fund pay-go and transfers, excess gas tax revenue, grants, and impact fees. Management indicated the city has no future tax-supported debt plans.

LIMITED RETIREE LIABILITIES

The city administers two single employer pension plans for its employees: a closed defined contribution plan for general employees and an open defined benefit plan for firefighters. As of October 1, 2014 Fitch estimated the firefighter's plans' ratio of assets to liabilities at 68.6% assuming a 7% investment rate of return, with an adjusted net pension liability of only \\$9.6 million (0.3% of market value). Pension benefits for general employees are provided via the city's participation in the Florida Retirement System (FRS), a multi-employer defined benefit pension plan. Fitch estimates the city's proportional share of FRS' net pension liability at roughly \\$9-10 million. The city has historically funded the actuarially determined or required contribution for pensions with payments representing an affordable 2% to 3% of governmental spending in recent years. The city also records a liability associated with the implicit benefits offered through its other post-employment benefit (OPEB) plan totaling \\$1.9 million. OPEB benefits are minimal and funded on a pay-as-you-go basis.