Implied general obligation (GO) rating at 'AA'.
The Rating Outlook is Stable.
The sales tax bonds are secured by the city's share of a voter-approved one-half-cent sales tax called the local option community investment tax (CIT).
The utilities tax and special revenue refunding bonds are secured by and first payable from tax increment revenues (TIR) derived from two community redevelopment areas within the city and to the extent tax increment revenues are insufficient, a senior lien and pledge of utilities services tax revenues.
The utilities tax bonds (junior lien bonds) are secured by a lien and pledge of the utilities services tax, subject to the prior payment of the city's outstanding senior lien bonds.
The taxable non-ad valorem revenue bonds and the occupational license tax (OLT) revenue bonds are secured by the city's covenant to budget and appropriate (CB&A), by amendment if necessary, legally available non-ad valorem (NAV) revenue in an amount sufficient to pay debt service. The OLT revenue bonds are initially secured by a pledge of the city's OLT revenue, derived from a business tax imposed throughout the city.
KEY RATING DRIVERS
HEALTHY RESERVES DESPITE DRAWDOWNS: The 'AA' implied GO rating reflects the city's solid financial position, despite drawdowns of reserves in each of the past three fiscal years, with a modest operating deficit projected for fiscal 2014. Available reserves are maintained well above the city's minimum target of 20% of combined general fund and utilities services tax fund spending.
STRENGTHENED ECONOMIC CLIMATE:
TAX BASE SHIFTS UPWARD: Taxable values have reversed prior losses with two consecutive years of substantial growth. Fiscal 2015 certified assessed values are up 6.9% following a 6.5% gain for fiscal 2014. The recent growth only partially restores losses in previous years.
WIDE SALES TAX DEBT SERVICE COVERAGE: The 'AA' rating on the sales tax bonds, on par with the implied GO rating reflects strong maximum annual debt service (MADS) coverage of nearly 3.0x in fiscal 2013, absent any plans to further leverage the pledged revenue stream coupled with an adequate additional bonds test (ABT), and the broad countywide sales tax base from which pledged revenues are derived.
TIR ADDS TO SENIOR BOND COVERAGE: The 'AA' rating on the senior lien utilities tax bonds primarily reflects the strength of the senior pledge of utility service tax revenue. While the initial pledge of tax increment revenues covered 94% of debt service in fiscal 2013, the combined TIR and utilities services tax revenues provided a notably high 5.2x coverage of senior lien bond debt service. The senior lien is closed and all senior bonds are retired by 2015.
WIDE MARGINS OFFSET REVENUE VOLATILITY: The 'AA-' rating on the junior lien utility tax bonds reflects strong coverage offset somewhat by a weak 1.25x ABT. Fiscal 2013 utility taxes totalled 2.6x maximum annual debt service (MADS) on junior lien utilities services tax bonds which offset recent volatility in tax collections.
ONE-NOTCH RATING DIFFERENTIAL: The 'AA-' rating on bonds secured by net asset value (NAV) revenues is one notch below the implied GO rating due to the absence of any requirement to raise revenues to pay debt service and the mandate that essential services and any debt secured by specific NAV revenue must be paid before CB&A debt service. OLT bonds benefit from an initial pledge of OLT revenues, which historically has been sufficient to pay OLT debt service costs.
RATINGS CAPPED AT GO: The 'AA' implied GO rating serves as a cap for the city's other rated bonds.
ACHIEVEMENT OF FISCAL BALANCE: The rating reflects Fitch's expectation that the city will return to fiscally balanced operations by fiscal 2015. Results that vary significantly from this expectation could lead to negative rating pressure.
FINANCIAL STABILITY COULD LIFT RATINGS: Reestablishment of balanced financial operations combined with further economic growth could lead to upward movement in the ratings.
DILUTION OF DEBT SERVICE COVERAGE: Depletion of coverage margins on any of the city's revenue bonds could pressure the ratings on those bonds.
RECENT DEFICIT OPERATIONS
Since fiscal 2010, the city has been utilizing its sizable reserves to offset declines in property tax revenues and ongoing spending pressures. The city reported operating deficits for the combined general fund and utilities services tax fund (the city's operating funds) in each year between fiscals 2011 and 2013, reducing operating fund balance by
At the time of Fitch's last review in
FINANCIAL RESERVES REMAIN ROBUST
Fiscal 2013 unrestricted operating fund balance at
The fiscal 2014 budget incorporated a
The proposed fiscal 2015 budget is balanced with a projected
DIVERSE SERVICE AREA; LOCAL EMPLOYMENT PICKS UP
The local economy, hit hard by the recession, continues its brisk expansion. Since 2010, employment within the city has grown by 10% or over 13,000 jobs, pushing the 2013 unemployment rate down to 7.7% from 9.3% the year before. The job expansion has continued into 2014.
Housing is also experiencing a sustained recovery.
MODERATE DEBT LOAD
Debt levels are manageable, with overall debt at 2.5% of current market value and
The city's capital needs are relatively modest with proposed funded non-enterprise fund capital projects totaling about
MANAGEABLE RETIREMENT OBLIGATIONS
City employees participate in one of two city-sponsored pension plans: the general employees retirement fund, which includes most employees, and the firefighters and police officers pension fund. According to recent reports, both plans report high funding levels at 98.9% for the general employees plan and 92.5% for the firefighters and police officers plan. Under Fitch's more conservative discount rate assumption of 7%, these estimated funding ratios are reduced to a still strong 89.1% and an estimated still adequate 74.6%, respectively.
The firefighters and police officers' plan uses an unusually high investment return assumption of 10%, exacerbating the funding decline under Fitch's 7% scenario. Officials had indicated that the firefighters and police officers' plan discount rate assumption would drop to 8.5% for fiscal 2012 reporting, but maintained the rate at 10%.
The city's pension contribution requirements are manageable, accounting for about 9% of fiscal 2013 governmental spending. This is due in part to state contributions to the firefighters and police officers fund, which modestly reduce the city's funding obligation. For retiree health care benefits, the city provides an implicit subsidy by allowing retirees to participate in the city's medical and prescription drug coverage plan at the group rate. The plan is funded on a pay-go basis and the city has not created a dedicated OPEB trust fund. The plan's fiscal 2013 OPEB unfunded actuarial accrued liability of
CIT REVENUES UP FOR THIRD STRAIGHT YEAR
Fiscal 2013 sales tax bond debt service coverage is robust at 2.9x MADS. CIT collections have grown in each of the past three fiscal years after a 19% drop between fiscals 2006 and 2010. CIT growth since fiscal 2010 totals 10.9%. Based on year-to-date distributions, officials project a sizable increase in fiscal 2014 of about 7%.
UTILITY TAX BONDS COVERAGE REMAINS AMPLE DESPITE DROP
Debt service coverage of both senior and junior utilities services tax bonds remains robust despite 6% declines in utilities services tax collections in two of the past three fiscal years. While the taxed utilities include essential services such as electricity, telecommunications and water, collections are subject to changes in demand or rates charged for those services. Recent downturns were partly due to rate reductions and local weather conditions, which respectively dampened the use of electricity in fiscal 2011 and reduced water usage in fiscal 2013. Based on year-to-date collections, utilities services tax revenues are forecast to increase by about 6% in fiscal 2014.
Senior bond debt service is over 90% covered by TIR, although these revenues have fallen significantly since fiscal 2009. Remaining senior bond debt service, which totaled less than
BROAD NAV REVENUE BASE, STRONG COVERAGE
The city's NAV revenue base is broad and diverse, including locally sourced sales-based revenues, state revenue-sharing funds, service charges and license and permit fees. In fiscal 2013, no individual revenue source constituted more than 16% of total NAV revenues. Revenues have fluctuated in recent years; however, in fiscal 2013 increased utility revenue transfers were offset by significantly lower interest earnings.
Occupational license tax revenues provide more than adequate coverage on occupational license tax bonds without additional NAV revenue support; in fiscal 2013 these revenues covered fiscal 2013 debt service by nearly 1.6x. NAV revenues are ample in relation with CB&A debt service, even when general government and public safety expenditures and prior lien debt service are taken into account. Anti-dilution tests limit additional NAV bonds.
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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