Proceeds will be used to refund various outstanding series for overall restructuring purposes, to fund various capital improvements, and to finance legal settlement payments. The bonds are expected to sell the week of
Fitch has also affirmed the following ratings:
The Rating Outlook is Negative.
The ULTGO bonds are secured by the city's full faith and credit and its ad valorem tax, without limitation as to rate or amount.
The sales tax bonds are secured by a first lien on the city's 1.25% home rule sales and use tax and the city's local share of state-distributed 6.25% sales and use tax. Additionally, there is a springing debt service reserve, funded over a 12-month period, that is triggered if coverage falls below 2.5x.
The bank bond rating for the commercial paper (CP) notes is based upon the city's general obligation pledge payable from any legally available funds without an ability or obligation to levy additional taxes. The CP notes are additionally secured by a letter of credit.
KEY RATING DRIVERS
LACK OF PENSION SOLUTION; LIMITED OPTIONS: The 'A-' and Negative Outlook reflect the lack of meaningful solutions to both the near- and long-term burdens associated with the city's underfunded pension plans. The city has been unsuccessful thus far in its attempts to negotiate a solution with labor unions and lobby the state legislature, which ultimately controls the benefit formula, although efforts to forge a solution persist.
OTHER IMPROVEMENT EVIDENT; BUDGET STILL TIGHT: Pension concerns overshadow recent improvement in other aspects of the city's credit profile. Recent budgets have been narrowly balanced with lesser reliance upon one-time items. Maintenance of significant long-term reserves is an important element of financial flexibility.
WEAK DEBT PROFILE & OVERLAPPING PENSION BURDEN EXACERBATES PRESSURE: Pension stress exacerbates the already weak debt profile, which features above-average debt burden and slow payout. Several overlapping area governments also have underfunded pension systems, which will require some measure of increased funding, presenting a stacked burden on residents and taxpayers.
ECONOMIC HUB; SLUGGISH RECOVERY:
PENSION REFORM: Maintenance of the 'A-' rating requires implementation of an attainable plan to put all city pension plans on a clear path towards adequate funding. Fitch believes a pension solution that enhances funding levels while preserving sustainable budgetary balance is necessary to stabilize the credit. Inaction, or affirmative steps to avoid actuarial-based funding of pensions, will have a negative impact on the rating.
ULTGO RATING SERVES AS A CAP TO SALES TAX AND CP (
PENSION RISKS OVERSHADOW RECENT FISCAL IMPROVEMENT
Fitch recognizes the current administration's notably improved financial and budgetary management which has brought the city closer to structural balance, following the prior administration's long-term trend of reliance upon asset sales and other non-recurring items to fund operations. This improvement, however, is inflated by the making of statutorily-based pension payments, which severely underfund the ARC. Fitch considers full ARC funding a necessary component of structural balance.
MANAGEMENT'S PENSION OPTIONS ARE LIMITED
Management has presented a plan to address the pension problem but lacks the legal authority to implement it unilaterally. Direct negotiations with labor groups have failed to yield a solution and attempts to lobby the legislature for benefit changes which would reduce the unfunded actuarially accrued liability (UAAL) have been unsuccessful thus far.
Any changes to the benefit structure would require an act of the state legislature, which recently passed legislation to address the
LONG-TERM PENSION RISKS
The combination of low funded ratios and a statutorily-based contribution requirement that funds approximately one-third of the ARC is unsustainable. Each year of sub-ARC funding results in an increase in the ARC for the subsequent year, and a widening distance between statutory and ARC payment.
The amount that would be required to amortize the unfunded liability grows larger as time passes, both in nominal terms and as a percent of governmental spending, threatening to crowd out other city spending priorities. The combined reported funding ratio for the four plans has declined steadily, reaching a low 35.2% at
NEAR-TERM PENSION RISKS
Management is focused on reducing the size of the liability, but any meaningful solution to the pension funding problem is likely to require significantly higher annual contributions from the city. Fiscal 2012 carrying costs for pension, OPEB and debt service would have amounted to a very high 35.0% of governmental fund spending if the ARC were fully funded, well above the 19.5% burden under the current statutorily-based payment structure.
State law requires dramatically increased annual funding requirements for two of the city's four pension systems beginning in 2016, which would need to be addressed in the fiscal 2015 budget. The new formula requires a contribution that would be sufficient to bring both the police and fire systems to 90% funding level by 2040.
The city estimates the annual requirement will rise by
LONG-TERM LIABILITY PRESSURE HEIGHTENED BY OVERLAPPING STRESS
The city's weak long-term liability profile is characterized by its underfunded pensions combined with its above-average overall debt burden of 8.5% of market value. Payout is slow at 37% and annual 'scoop and toss' restructurings continue to marginally weaken debt structure.
The widespread use of statutorily-based pension contributions for single employer plans in
The city's property tax comprises 20% of the overall property tax bill, so the increase to an individual property owner would be materially less at approximately 15%. Fitch estimates that if each area government including the city raised its property tax rate to cover the ARC (2012 level) with no corresponding reduction in the liability, the overall impact to an individual payer would be a 35% tax increase. Fitch believes such an increase could present stress to the local economy, which has been slow to recover from the recession. Both the city and the overall increase required under this scenario will rise each year as funding levels fall and the ARC grows.
ECONOMIC HUB; SLUGGISH RECOVERY
Employment contracted 0.1% in 2013 following a gain of over 20,000 jobs or 2.2% in 2012. Gains in professional and business services and transportation and utilities offset reductions in both manufacturing and government. The unemployment rate remains elevated. The
Overall income and wealth indices are mixed. Per capita income is at 95% of the state and 100% of the U.S. levels; however, the poverty rate remains elevated at 21.4%, much higher than the U.S. average of 14.3%. Economically sensitive tax revenues have recovered to pre-recession levels. The tax base, down 30% over the past four years, has not yet shown signs of recovery, due in part to the lagging assessment cycle.
NON-PENSION FINANCIAL PERFORMANCE IMPROVING
Management has made significant progress toward matching ongoing revenues with non-pension annual expenditures. Fitch views positively the city's stated commitment to ending the practice of using the corpus of its long-term reserves to balance the operating budget. Other recurring improvements over the past two years include a hiring freeze for non-essential positions, the elimination of 2,000 vacant positions and a marked reduction in retiree health care costs, although the latter is subject to litigation.
REVENUE FLEXIBILITY A STRENGTH
Fitch views the city's home rule status as a credit positive, fostering revenue independence and flexibility. The general fund derives support from utility taxes, state sales taxes, transaction taxes, and recreation taxes among others. The general fund does not rely upon property taxes for operations, as they are earmarked for pensions, library expenses and debt service.
The city's home rule status also exempts it from the state's Property Tax Extension Limitation Act. A self-imposed limit matches that of the state, limiting increases in the levy to the lesser of 5% or the CPI. In recent years, the city has kept its levy flat, without accessing the allowable growth. Fitch believes the self-imposed levy limit is relatively flexible and that increased property taxes may provide an important source of funding for potential future increases in pension payments.
FY2012 AUDITED DEFICIT; FY2013 ESTIMATES FAVORABLE
The general fund recorded a
Fiscal 2012 unrestricted general fund balance dropped to 6.8% from 10.2% of spending a year prior. Fitch views the approximately
Published preliminary fiscal 2013 results show revenues outperforming budget by a larger margin than expenditures exceeded budget. Detail is not yet available, but early projections indicate a net positive budgetary variance of
FY2014 BUDGET BALANCED WITH RECURRING AND ONE-TIME ITEMS
Fitch believes that these identified measures are achievable given the city's recent history of budgetary adherence; however, Fitch will not consider the city's financial operations to be structurally balanced until recurring revenues support recurring expenditures, including actuarially based pension costs.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope,
--'Tax-Supported Rating Criteria' (
--'U.S. Local Government Tax-Supported Rating Criteria' (
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
Source: Fitch Ratings
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