News Column

Fitch Rates Olathe, Kansas ULTGOs 'AA+'; Outlook Stable

May 8, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AA+' rating to the following Olathe, Kansas (the city) bonds:

--Approximately $9 million GO improvement bonds, series 223;

--Approximately $4.3 million GO refunding bonds, series 224;

--Approximately $30.7 million GO notes, series 2014-B.

Proceeds will finance various capital projects, and refunding of certain outstanding maturities of the GO bonds, series 206 for interest rate savings. The bonds are expected to sell via competition on May 20.

Fitch has also assigned an 'AA+' rating to the city's outstanding GO bonds, listed by series at the end of this release.

The Rating Outlook is Stable.

SECURITY

The bonds and notes are secured by the city's unlimited tax general obligation pledge.

KEY RATING DRIVERS

GROWING, VIBRANT ECONOMY: Olathe benefits from its proximity to the Kansas City MSA in addition to its own vibrant and expanding commercial/industrial sector anchored by several national companies. Socioeconomic indices are favorable and unemployment is low.

CONSERVATIVE, SOLID FINANCIAL PROFILE: The city conservatively manages its financial operations, allowing for the maintenance of solid liquidity and reserve levels, despite significant reliance upon economically-sensitive revenues for operations. These positive results are the result of an adherence to formal debt and fiscal policies.

MIXED DEBT PROFILE: Overall debt, including that of overlapping entities, is high, due to substantial capital investment to support both population and economic growth. Carrying costs are currently high but projected to decline as the debt is rapidly amortized. Post-employment benefit obligations are manageable.

RATING SENSITIVITIES

MAINTENANCE OF SOLID FINANCIAL PROFILE: The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

Olathe is a suburban community within the Kansas City MSA located approximately 20 miles southwest of Kansas City, Kansas. It is the county seat of Johnson County. Approximately 70% of the tax base is residential and 30% is commercial/industrial. The city's population has experienced strong growth, doubling in size since 1990, and presently stands at 130,000.

GROWING, VIBRANT ECONOMY

Olathe residents enjoy access to employment opportunities within the larger Kansas City MSA but also benefit from growing employment within the city's own vibrant commercial/industrial sector. Large employers include Garmin and Farmers Insurance, each of whom maintains 3,000 employees within the city. Prospects for future growth appear strong, supported by a new nearby intermodal transportation center for freight and Google's announced intention to implement its new high speed internet service, Google Fiber, in the city.

Employment trends are positive. The city's unemployment rate remained below the state and nation throughout the recent recession, peaking at 7% in 2009. The December 2013 rate of 4.1% compared favorably to the state rate of 4.6% and that of the U.S. at 6.5%. The December 2013 unemployment rate represented a drop from the 4.6% recorded a year prior, attributable to both employment growth and a modest reduction in the labor force.

Resident socioeconomic indices are above average. Per capita income is approximately 119% of the state and 113% of the U.S., and the poverty rate is a low 6.1%, versus 12.6% for the state. Residents exhibit above average educational attainment levels with 45% completing a bachelor's degree, compared with 28% nationally. Officials report Olathe's well-educated population is a major factor cited by companies wishing to relocate to the city.

Market value per capita is moderately low at $75,000, reflecting affordability of the housing stock, although higher end housing is planned. Assessed value (AV) dropped during the recession, before returning to 2.6% growth in 2013. The city projects AV will recover to pre-recession levels in the near term, which Fitch believes is a reasonable forecast given development in progress, strong permit activity and expiring tax abatements.

CONSERVATIVE, SOLID FINANCIAL PROFILE

The city's financial profile is characterized by conservative budgeting practices, both on the revenue and expenditure side, and proactive management of budgetary variances. Finances remained sound throughout the recession, despite reliance upon economically sensitive sales taxes which provide approximately 50% of general fund revenues. Overall revenues did decline during the period, but the effect was moderated by the varying lag time in economic sensitivity of the city's revenue stream. By the time AV began to decline, sales tax revenues were rebounding. Operations also benefited from management's decision to rein in costs by reducing the workforce and delaying discretionary projects.

The city recorded a modest general fund operating deficit (net of transfers), equivalent to 1.5% of general fund spending, in 2010. Operating performance improved in 2011 as revenues recovered while expenditures remained constrained, resulting in a modest (0.4%) net operating surplus. In 2012, a further cut in expenditures and further revenue recovery contributed to a more robust net operating surplus of 4.6% of spending. The surplus lifted the unrestricted general fund balance from 26.2% to 30.8% of spending, which is at the upper-end of the city's policy range. Preliminary results for 2013 indicate the city will again add to the general fund balance, despite a one-time capital outlay for a new community center. Year-to-date results suggest a further addition to fund balance is likely for 2014.

MIXED DEBT PROFILE

Debt burden is high at 7% of market value, or $5,224 per capita. This is largely reflective of the infrastructure investments necessitated by the rapidly growing population. The city's own direct debt burden of 2.6% of market value is expected to decline as a result of moderating growth pressures, rapid principal amortization that is projected to exceed future issuance, and the funding of some major road projects on a pay-go basis with the proceeds of a 10-year, voter-approved 3/8th cent sales tax. The city anticipates issuing $12 million later this year in GO-backed special assessment debt for a conference center/hotel project and $9.5 million in water/sewer revenue bonds. Debt structure is conservative in accordance with formal policies; amortization is very rapid at 79.8% in 10 years.

The city participates in the weakly funded Kansas Public Employees Retirement System (KPERS) and Kansas Police and Firemen's Retirement System (KP&F); 56.4% and 66.5% funded, respectively. The city makes its full required contribution annually to the funds. The weak funded status raises the potential for rising future contributions. The effect of recently passed state pension reform legislation on the city's future payment requirements is not yet known. Other post-employment benefits (OPEB) are funded on a pay-go basis and the accrued liability associated with OPEB is very small at $6 million, well below 1% of market value; however, carrying costs for pension, OPEB and debt service are extraordinarily high at 31.5% of governmental spending. The high ratio is largely attributable to debt service costs, at 26.6%, which Fitch expects will moderate in future years.

Fitch has assigned an 'AA+' rating to the following outstanding bonds and notes:

--$375 thousand GO taxable improvement bonds, series 204;

--$2.1 million GO improvement bonds, series 205;

--$835 thousand GO improvement bonds, series 206;

--$5.3 million GO improvement bonds, series 207;

--$5.3 million GO improvement bonds, series 208;

--$11.9 million GO improvement bonds, series 209;

--$2.4 million GO improvement bonds, series 210;

--$23.4 million GO improvement bonds, series 211;

--$15.4 million GO improvement bonds, series 212;

--$0.9 million GO taxable improvement bonds, series 213;

--$335 thousand GO refunding improvement bonds, series 214;

--$38.4 million GO improvement bonds, series 215;

--$0.9 million GO taxable improvement bonds, series 216;

--$5 million GO taxable improvement bonds, series 217;

--$24.6 million GO improvement bonds, series 218;

--$6 million GO refunding improvement bonds, series 219;

--$15.9 million GO refunding bonds, series 220;

--$6.2 million GO refunding improvement bonds, series 221;

--$27.3 million GO refunding improvement bonds, series 222.

--$11.7 million GO temporary notes, series 2013-A;

--$5 million GO temporary notes, series 2014-A.

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, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors, Financial Advisor, Bond Counsel

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

Additional Disclosure

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Arlene Bohner

Senior Director

+1 212-908-0554

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Bernhard Fischer

Director

+1 212-908-9167

or

Committee Chairperson

Marcy Block

Senior Director

+1 212-908-0239

or

Media Relations

Elizabeth Fogerty, New York, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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