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NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has affirmed the following Hollywood, Florida (the city) general obligation (GO) bonds at 'A':

--$50.5 million, series 2005.

The Rating Outlook remains Negative.

SECURITY

The bonds are secured by the full faith, credit and taxing power of the city.

KEY RATING DRIVERS

The Negative Outlook reflects uncertainty surrounding the maintenance of structural balance and the outcome of labor negotiations for fiscal 2013 upon the expiration of financial urgency. Fitch will continue to monitor the city's ability to manage its substantial operating challenges, such as its high fixed-cost burden and weak tax base, through sustainable solutions.

LONG-TERM SOLUTIONS REMAIN UNKNOWN: Financial flexibility remains tight as short-term budget-closing measures expire. Fitch will monitor the city's ability to achieve sustainable long-term solutions for its structural imbalance.

IMPROVEMENT OF FINANCIAL PROFILE PROJECTED: The city projects to restore reserve levels to satisfactory levels for fiscal 2012 through savings achieved via the declaration of financial urgency and the passage of pension referenda.

LOW RISK DEBT PROFILE: Overall debt levels are moderate, and future capital needs are modest. Amortization of outstanding principal is rapid.

HIGH FIXED-COST BURDEN: Although overall debt levels are moderate and amortization is rapid, a high and growing total fixed-cost burden exacerbates the city's already-pressured operating environment. Pension funding levels are low despite full funding of the annual required contribution for at least the past three years and the city's recent efforts to minimize its long-term liability.

LIMITED LOCAL ECONOMY: The city's local economy depends on tourism and service-based industries, such as healthcare. Unemployment levels are comparable to those of the nation, as are wealth levels.

WHAT COULD TRIGGER A RATING ACTION

DECLINE OF FINANCIAL CUSHION: The inability to achieve budget stabilization in fiscal 2013 could result in overall financial flexibility that is no longer consistent with the current rating category.

CREDIT PROFILE

The declaration of financial urgency for fiscals 2011 and 2012 enabled the city to renegotiate labor contracts for those fiscal years in which the contracts apply. Such a drastic step on the city's part was catalyzed by extremely poor budgeting practices, as large unfavorable variances to budget nearly drained the city's reserves, reducing fund balance to a low $4.3 million or 2.7% of spending at the end of fiscal 2011.

Fitch views positively the managerial and departmental changes that were also made in response to the city's budgeting crisis. In the summer of 2011, City Commission fired the city manager and budget director and merged the finance and budget departments to streamline operations and increase oversight of city finances. A seasoned finance director was hired and put in charge of overseeing the city's efforts to improve financial controls.

STABILIZATION PROJECTED IN FISCAL 2012, 2013

Fiscal 2012 projections based on results through May 31 show an operating surplus (after transfers) of $7.3 million, which compares positively to the $4.2 million budgeted. In addition, city management expects to add another $5 million to reserves due to a favorable variance for its pension contributions. Should the city's projections hold and the pension savings be realized, the city projects year-end unrestricted (the sum of assigned, unassigned and committed fund balance under GASB 54) fund balance to equal $16.5 million, which is slightly above the city's newly adopted 10% committed fund balance policy. The city increased its fund balance policy in fiscal 2012 from 5% and set a target level of 17%. Fitch will monitor the city's efforts to remain in compliance with its new, adequate fund balance policy.

The fiscal 2013 budget has not been adopted, but the city expects to maintain satisfactory reserve levels, assuming successful labor negotiations, which are currently in progress. Management reports that the budget will not increase the regionally competitive operating millage rate, which has been raised annually since fiscal 2009 to mitigate declines in the tax base. No layoffs are anticipated.

SAVINGS ACHIEVED THROUGH FINANCIAL URGENCY, PENSION REFORM

City Commission declared financial urgency in May 2011, which allowed the city to reopen labor contracts for which the city had already won voluntary concessions of $5 million at the beginning of the fiscal year. The city made additional salary cuts for public safety and general/non-union employees of 12.5% and 7.5%, respectively, and enforced two extra furlough days. These wage changes will carry forward into fiscal 2012. Pension benefits were also reduced via passage of three September 2011 voter referenda.

The city's three labor unions have responded to these cuts by levying five unfair labor cases against the city. City officials believe these legal challenges will be rejected by the courts as they have been in similar situations, such as with Miami. Several of these cases have been resolved pending appeals. Nonetheless, Fitch views the potential inability to implement concessions as a risk.

MODERATE DEBT LEVELS, MODEST FUTURE DEBT PLANS

Overall debt levels are moderate at $2,906 per capita and 2.8% of market value (MV). Fiscal 2011 debt service totaled $10.4 million or an affordable 6% of general fund and debt service funds spending. The majority of the city's debt is secured by the GO pledge, and the city has no exposure to variable-rate debt or derivative instruments. Fitch views the city's conservative debt structure as a credit positive.

Future debt plans are modest. The tax-supported fiscal 2013-2017 CIP totals $17.2 million (a low 0.1% of MV) and focuses predominately on infrastructure improvements. Financing will be provided by proceeds from the sale of non-ad valorem bonds ($12.5 million), issued in equal annual increments. Amortization of outstanding principal is rapid with over 65% retired in 10 years.

ELEVATED FIXED-COST BURDEN

Fitch notes the city's fixed-cost burden remains elevated despite the passage of the September referendum. Pension funding levels are low and growing costs will further pressure financial flexibility. The city maintains three single-employer defined benefit pension plans for general employees, fire and police personnel. Fiscal 2012 general fund pension contributions represent an elevated 20.7% of general fund spending levels and 14.2% across all governmental funds. Funding levels fall to a weak 53% for employees, 41% for fire, and 54.7% for police retirement funds when Fitch adjusts the return on investment down from the assumed 8% to a more conservative 7%. While the recent reduction in benefits should aid the city in containing growth in future costs, Fitch views the long-term liability picture as a credit concern.

The city had historically offered relatively extensive other post-employee benefits (OPEB) benefits compared to those offered by other localities in Florida and consequently has above-average OPEB obligations. The city has been funding its general government liability on a pay-as-you-go basis, with a general fund contribution of $5.9 million in fiscal 2011. Full funding of the $29.8 million annually required contribution (ARC) would equal a notable 12.8% of spending across governmental funds. As of fiscal 2011, the unfunded actuarial accrued liability of $433.3 million equaled a high 2.9% of MV.

TOURISM AND HEALTHCARE DOMINATE LOCAL ECONOMY

The city is located on the southeastern coast of Broward County (GO bonds rated 'AAA' by Fitch) and is largely residential, with an economy focused on tourism. A reported 3.3 million persons visited the city in 2011, showing growth over the year prior when the city had 2.6 million visitors. The local economy also has some concentration in the healthcare, trade and construction sectors. The city's top employer, Memorial Hospital, accounts for nearly 7% of total employment.

Economic development continues in the city, with several new developments in progress. Construction recently began on a $30 million shopping center, which will house a Publix, as well as on Margaritaville Resort Hotel, with roughly 350 planned rooms on Hollywood Beach, for a projected opening in 2014. A $1 billion Florida Power and Light power plant is also in construction. When complete, the plant will be able to convert fuel to natural gas and will add roughly $6 million to the tax base by fiscal 2017.

AVERAGE ECONOMIC INDICATORS, CONTINUED TAX BASE LOSSES

Economic indicators are average. Per capita income levels equal those of the nation, while median income levels are 12% lower than national averages. As of May 2012, the unemployment rate of 7.7% was on par with that of the nation.

The city's total assessed value (TAV) has declined by approximately 29% since fiscal 2007. TAV for fiscal 2013 shows a modest improvement of 0.83%. Millage rate increases over the past several years have been below revenue-neutral levels, and property tax revenues have consequently decreased by over 20% since fiscal 2007. However, current tax collection rates remain high at above 98%, and the city's tax rate remains competitive for the region.

Additional information is available at '[ www.fitchratings.com ]'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015 ]

U.S. Local Government Tax-Supported Rating Criteria

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314 ]

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