Fitch Affirms Leesburg, FL's Implied GOs at 'A'; Revises Outlook to Negative.

NEW YORK -- Fitch Ratings has affirmed the 'A' rating on Leesburg, Florida's (the city) implied general obligation bond (GO) rating as well the 'A-' rating on the approximately $23.9 million outstanding capital improvement revenue bonds. The Rating Outlook applied to the implied GO rating is revised to Negative from Stable. The Rating Outlook for the capital improvement revenue bonds is Stable.

The city's implied GO rating reflects the city's adequate general fund reserves, a growing tax base and a moderate debt burden. The rating also incorporates the city's limited economy, below-average wealth levels, and the general government's dependence on cash transfers from city-owned utilities to fund operations.

The Outlook revision to Negative reflects the strained cash position of the city-owned utilities, which account for a significant percentage of total general fund revenue, and the third consecutive year of a decline in total general fund balance as a percentage of spending and transfers. While the current general fund balance level is adequate for the rating category, Fitch believes preservation of current levels will be a challenge for the city. Maintenance of the rating will depend on the city's ability to formulate a comprehensive plan aimed at preserving the current level of general fund reserves and regaining adequate cash levels in the utility systems that support the general fund. Maintenance of the 'A-' rating and Stable Outlook on the capital improvement bonds is based on the relatively stable nature of, and strong debt service coverage by, the pledged revenue stream.

In conjunction with this rating action, Fitch has also downgraded Leesburg's electric system revenue bonds to 'BBB+' and revised the Outlook to Negative from Stable and downgraded to 'A-' from 'A' the city's utility system revenue bonds, series 2004. For additional information on that rating action, please see the press release dated Jan. 10, 2007 available on Fitch's web site at www.fitchratings.com.

The city owns and operates utility systems serving the city and portions of the unincorporated county bordering the city. The general fund has historically been dependent on cash transfers from the utility systems to fund operations. In fiscal 2005, transfers from the utility funds accounted for 41.5% of total general fund revenue. Unaudited results for fiscal 2006 show utility fund transfers increasing to a high 51% of general fund revenues. Of the total amount transferred to the general fund, 70% was provided by the electric utility, 26% by the combined water, sewer, and gas utility, and smaller amounts by the solid waste and communications funds. Although the city has a policy limiting transfers to the general fund to 10% of each utility fund's operating budget, the amount transferred by each utility in fiscal 2005 was in excess of this threshold. Despite the increased support from the utility systems, unaudited results for fiscal 2006 show a small operating deficit of $1.4 million in the general fund, reducing the total fund balance to approximately 23% of spending and transfers. While reserves are still in excess of the city's policy requiring maintenance of a general fund balance equal to at least 20% of current year budget, total fund balance as a percentage of spending and transfers has declined for three consecutive years after peaking at from 36.3% in fiscal 2003.

The capital improvement revenue bonds are secured by a senior lien on proceeds of a public service tax (PST) levied on electric, water and gas services provided to city residents and a junior lien on the local government half-cent sales tax and guaranteed entitlement revenues. The city implemented the PST in April 2000 and currently levies the maximum 10% allowed by state law. A senior lien on the local government half-cent sales tax and guaranteed entitlement revenues, which provide the security for outstanding series 1999 capital improvement bonds, was closed in fiscal 2004. Coverage of maximum annual debt service (MADS) by fiscal 2005 revenues, subtracting revenue needed for debt service on the series 1999 bonds, is a strong at 3.5 times (x). Coverage of MADS solely by fiscal 2005 PST revenues is still solid at 2.6x. The city has no plans to issue additional debt backed by the pledged revenues.

Leesburg is located in Lake County in central Florida, approximately 40 miles northwest of Orlando. The economy is limited, and has historically been focused on citrus production. Recent annexations have fueled strong tax base growth in recent years as taxable assessed value has increased by an average of 12.5% annually over the last five years. Wealth levels in the city lag state and national averages and unemployment rates compare favorably to the state and nation.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.