The bonds are expected to be sold via competitive sale the week of
In addition, Fitch affirms the following ratings:
The Rating Outlook is Stable.
The ULTGO bonds are secured by the city's full faith and credit and its ad valorem taxing power, without limitation as to rate or amount.
The TDD, STAR, and TIF bonds are secured by the city's pledge of any legally available funds, subject to annual appropriation, as well as a cash-funded debt service reserve for each series. The bonds are also secured by the following, which in each case are the intended sources of repayment:
The TDD bonds are special limited obligations secured by a pledge of, and lien upon, a 0.5% sales tax levied within the TDD (coterminous with a development known as the north project area).
The STAR bonds are special limited obligations secured by a pledge of the state sale tax (6.15%, down from 6.3% as of
The TIF bonds are special limited obligations secured by a pledge of city (1%) and local (.306%) sales tax collected within the north project area, and incremental property tax collected within the north and south project areas. Local sale tax revenues from the south project area are also available if the STAR bonds are fully repaid prior to final maturity.
KEY RATING DRIVERS
REGIONAL ECONOMIC ENGINE: The city serves as the economic and cultural center for the regional community, which includes
ROBUST RESERVES MITIGATE REVENUE CONSTRAINTS: The city's robust reserve position across governmental funds is the key credit strength supporting the high rating given the city's dependence on sales taxes and the above-average cost of carry for all tax-supported debt.
STRONG MANAGEMENT: The city's management is strong, with frequent and robust financial, economic, and debt reporting, careful cost controls, conservative budgeting of economically sensitive revenues, and a good expenditure cushion should revenues underperform.
HIGH DEBT BURDEN EXPECTED TO DECLINE: The city's debt burden is high. Fundamental to the rating is the expected reduction of debt levels over the intermediate term due to city issuance of new debt at a slower pace and the rapid amortization of outstanding debt. Pension payments are rising but will remain low.
APPROPRIATION DEBT RATING: The 'AA-' rating on the TDD, STAR and TIF bonds reflects the city's commitment to appropriate annually for debt service and the lack of a security interest in and non-essentiality of the financed projects.
FINANCIAL FLEXIBILITY: Fitch expects the city to maintain its long practice of conservative budgeting and maintenance of strong financial flexibility as a key mitigant to Fitch's concerns about high debt and dependence on economically sensitive revenues. Any deterioration in the financial profile would likely cause a downgrade.
SALES TAX PERFORMANCE: Appropriation debt service remains covered by dedicated, primarily sales tax, revenues. Sales tax underperformance could result in the need for general fund support which, even if modest, could pressure the rating given the city's heavy reliance on sales taxes to support general operations.
REGIONAL ECONOMIC ENGINE
The city's stable economy is anchored by
Taxable assessed valuation grew 4.8% in 2014 and weathered the housing market downturn well, up 17.2% since 2008. Approximately one fifth of the city's value is tax exempt due to KSU's notable presence in the city. Positively, year-to-date building permits values through April are up year-on-year by 6.7% after some softening last year. Property tax revenues represent a small 10% of general fund resources.
City income indicators are mixed and the city's poverty rate (27.6%) is above average compared to 12.6% for the state and 14.3% for the nation. The city's large student population skews the city's poverty rate and may not accurately reflect the students' full economic impact, with purchasing power garnered from external sources. This factor is an important contributor to the city's sales-tax dependent financial profile.
The city's unemployment rate is very low at 4% in
ROBUST RESERVES PROVIDE IMPORTANT FLEXIBLITY
The city's finances are marked by conservative budgeting and a reliance on economically sensitive sales tax revenues. Fund balance levels have declined from prior years and remain adequate; however, further deterioration in the city's financial flexibility may result in downward rating action.
The city beat its 2012 budget handily but reported results below break-even projections. Audited results show a
The city ended fiscal 2012 with a
The city's 2014 budget represents a largely steady-state budget, with an increase in spending driven by a full year of operations at two new fire stations. As with prior years, the city budgeted use of fund balance as well as contingency operational and debt service support. Further, the city assumes conservatively a 1% increase in 2014 from 2012 budget.
Performance year to date is positive, with expenditures coming in under budget and sales tax ahead of prior year despite flat prior-year performance. The city has additional budgetary flexibility from county sales tax renewed in late 2013, of which the city receives two-thirds. This additional revenue was not included in the county's 2014 budget. 30% of this source is dedicated to the city's bond and interest fund.
Fitch thinks the city will continue to manage its finances carefully given flat revenue performance for 2013. The rating is based on Fitch's expectation that the city will maintain a good financial cushion given the city's regular and comprehensive interim reporting coupled with strong cost controls, conservative budgeting, and a comfortable expenditure reduction cushion. Deterioration in the city's financial cushion may lead to negative rating action.
CONTINGENT OBLIGATION TO COUNTY POLICE DEPARTMENT
City taxpayers support almost all of the
HIGH DEBT BURDEN; MODERATE CAPITAL NEEDS
A key credit factor supporting the high rating is Fitch's expectation that rapid amortization of existing debt (82% of GO debt retired in 10 years) will outpace the magnitude of additional bond issues, thereby reducing the very high debt level over time. The city's overall debt load totals
Tax-supported debt service represents a considerable claim on resources at 25% of governmental fund spending in 2012. This number includes debt repaid from dedicated sources - local sales taxes, special assessments, and STAR, TIF, and TDD pledged revenues. Net of STAR, TIF, and TDD bonds, debt service represents a lower but still elevated 14.7% of governmental spending. Further, STAR bond prepayments reflect a required turbo structure which elevates debt service payments but supports quicker debt reduction.
The city has a
SELF-SUPPORTING APPROPRIATION-BACKED DEBT REQUIRES GROWTH
The various development project debt is first paid from sales tax revenues and incremental property tax revenues generated in the north and south project areas. The city has also pledged any legally available funds, subject to annual appropriation, if the primary security pledge proves insufficient. The bonds have been self-supporting since issuance.
An economic downturn could cause concurrent declines in the city's sales tax and sales-tax-supported special district debt that compound pressure on the city's finances. However, the university provides the city a great deal of insulation: retail sales grew in each year of the most recent economic recession. Further, Fitch believes that the city's healthy cash balances and property tax revenue raising flexibility, while not tapped during the recent downturn, have the potential to help the city manage ably an economic contraction.
The STAR bonds include a turbo repayment feature whereby all excess pledged revenues associated with the bonds must retire outstanding related principal, which continues to reduce outstanding principal. The feature has already prepaid
Coverage was thin for TIF and TDD bonds at 1.03x and 1.1x, respectively, in 2012. TDD bonds require 3.6% annual growth in pledged revenues to cover MADS in 2032. TIF bonds require 1.5% annual growth to cover MADS in 2025, assuming full use of DSRF at final maturity, and TIF coverage is reportedly depressed in 2012 because of a residential fire in 2011 the district. Management expects coverage to increase as reconstructions come on the tax rolls.
CONCENTRATED TAXPAYER BASE FOR CONTINGENT OBLIGATIONS
The north project area encompasses 20 acres that currently consists of 18 retailers including
The top retailer currently accounted for 35% of total sales tax revenues and the top 10 accounted for 97% in 2012. Sales tax concentration is expected to decline with the anticipated addition of new retail establishments. Taxpayer and geographic concentration, required lease renewals during the term of the debt and potential local competition create risk of future tax revenues declining, which could stress the city's finances, given its commitment to support these obligations.
UNDERFUNDED STATE PENSIONS; RECENT CHANGES CREDIT POSITIVE
The combined pension ARC and other post-employment benefit pay-as-you-go contribution was a low 1.8% of governmental spending in 2012. The ARC was fully funded by the state for both uniform and municipal employee pension plans in 2012, although state statute allowed for underfunding of the ARC in prior years.
Recent legislative changes at the state level will increase local contribution rates and introduce a new tier of employees. These changes should address poor funding levels and eventually result in more stable annual contributions, which will be shared by employers and employees, after the five-year ramp-up period. Fitch thinks that these increases will not present financial pressure to the city, as the city's annual cost is very low and projected to roughly double. The municipal and uniform plans are poorly funded at 60% and 66% as of
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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