TEXT - Fitch rates Santa Fe, New Mexico

Thu Nov 8, 2012 11:46am EST

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Nov 8 - Fitch Ratings has assigned an 'AA' rating to the following Santa Fe,
New Mexico (the city) obligations:

--$5.135 million subordinate lien gross receipts tax (GRT) improvement revenue 
bonds, series 2012C.

The bonds are expected to price via negotiation as early as the week of Nov. 12,
2012 pending market conditions. Proceeds from the sale of the bonds will be used
to refund the city for the purchase and renovation of city office space and to 
pay issuance costs.

In addition, Fitch affirms the following:

--$28.95 million general obligation (GO) bonds at 'AA+';
--$47.73 million GRT revenue bonds outstanding, series 2010A, 2012A at 'AA+';
--$9.835 million subordinate lien GRT revenue bonds outstanding, series 2010B at
'AA'.

The Rating Outlook is Stable.

SECURITY 

The revenue bonds are secured by pledged revenues comprised of the 1.225% state 
shared GRTs; 0.5% municipal GRT; and 0.0625% infrastructure GRT; any portion of 
the above-mentioned GRTs that would have been remitted to the city but 
previously exempted; and any other GRT received by the city pledged for payment 
of the bonds. 

The lower rating for the series 2012C bonds reflects their subordinate position 
in the flow of pledged revenues for bond repayment.

KEY RATING DRIVERS

PROMINENCE OF GROSS RECEIPTS TAXES: Given the importance of GRT revenues to 
general fund operations (represents 81% of general fund revenues), the credit 
rating for the GRT revenue bonds is inextricably tied to the city's overall 
financial performance and general obligation bond rating.

STRONG DEBT SERVICE COVERAGE: Debt service coverage is favorable and legal 
covenants, particularly the additional bonds test (ABT), are strong.

THINNED BUT STILL SOLID RESERVES: Despite the recent contraction in GRTs, 
general fund reserve levels remain favorable. Most recent monthly collections of
GRTs indicate ongoing recovery in revenues but, if revenue recovery falters, 
modest cash transfers from the wastewater fund may be used to balance operations
in the next few years.

AVAILABLE TAXING MARGIN AVAILABLE: The city maintains some revenue-raising 
flexibility through its GRT and property tax rates.

ELEVATED BUT MANAGEABLE DEBT PROFILE: Debt levels are above average, reflecting 
the infrastructure challenges of an older city.

SOUND ECONOMY: Economic stability is provided by the large state government 
presence and unemployment rates remain below state and national averages. Wealth
indices are also above average.

WHAT COULD TRIGGER A RATING ACTION

STRONG RESERVE LEVELS: The continuance of solid reserves remains integral to 
maintaining the city's high-grade credit quality given the heavy reliance on 
economically sensitive sales tax revenue.

CREDIT PROFILE

HEALTHY REGIONAL ECONOMY

Santa Fe serves as the county seat and state capital and is located in north 
central New Mexico. The local economy is anchored by the large state government 
presence. Other important sectors include tourism and recreation, retail trade, 
healthcare, and some industry. In addition, the recent completion of the 
commuter rail line between Santa Fe and Albuquerque enhances employment and 
tourism opportunities for the region.

Historically, Santa Fe unemployment rates have been below those of both the 
state and nation. However, the city was not immune to the recent economic 
downturn, as evidenced by a rising unemployment rate that peaked at 6.5% in 
2009. The unemployment rate has trended down since then and totaled a moderate 
4.8% as of August 2012, still well below the rates of the state (6.4%) and 
nation (8.2%).

Wealth indices for the city are above the statewide average. In addition, 
property wealth is evident in the city's high market value per capita ratio, 
which is over $160,000, despite the large amount of tax-exempt values. After 
years of healthy annual gains in taxable assessed valuation (TAV), growth slowed
over the last few years, with preliminary information for fiscal 2013 indicating
another modest increase. Independent housing information points to below-average
mortgage delinquencies and foreclosures, and property tax collections continue 
to be solid.

STABALIZING REVENUES

Typical of municipalities in New Mexico, the city's general fund is heavily 
dependent on state and local GRTs for general fund support. In fiscal 2011, 
combined GRTs accounted for approximately 81% of revenues. Property taxes, on 
the other hand, represented less than 4% of operating support. GRT collections 
declined by 3.2% and 6.6% in fiscal years 2009 and 2010, respectively. Audited 
fiscal 2011 results indicate GRT collections stabilized, growing by less than 
1%. Unaudited fiscal 2012 results show improved growth of GRT collections at 3% 
over the prior year, which Fitch views as reasonable. Year to date GRT receipts 
for the first four months of fiscal 2013 have grown by 1%. 

RESERVE FUND DECLINES BUT BEGAN TO STABILIZE IN 2011

The city's general fund reserves have thinned due to the GRT declines but remain
solid. The city posted general fund drawdowns of $5.9 million and $5.3 million 
in fiscal years 2009 and 2010, respectively, each equal to over 7% of spending. 
Aided by stabilized GRT collections, audited fiscal 2011 results were positive 
with a modest addition to fund balance, bringing the unrestricted fund balance 
(sum of assigned, unassigned, and committed per GASB 54) to $9.5 million or 13% 
of spending and transfers out.

INCREASING REVENUES; FURTHER REDUCED EXPENDITURES IN 2012

Preliminary fiscal 2012 results indicate another modest surplus, achieved 
through $2 million in salary and benefit savings, $942,000 in program savings 
and efficiencies, and $948,000 in revenue enhancements. Fiscal 2012 revenues of 
$83 million were up 3% over 2011, beating the conservative budget assumes for 
flat revenue growth. The $75.7 million fiscal 2013 budget is balanced assuming 
flat revenue growth and includes a 2% salary increase for all city employees.

The general fund regularly receives cost recovery from the wastewater fund for 
related environmental expenses. $1.7 million in transferred reimbursements for 
fiscal 2012 totaled 2% of revenues and transfers in. The city expects transfers 
to return to lower historical levels by 2013 as associated costs are planned to 
roll off. 

The city is fortunate in that it maintains some important revenue raising 
flexibility with the availability of an additional 1/4% on the municipal GRT 
rate as well as substantial property tax margin. Reportedly, the city maintains 
the second lowest property tax rate in the state, behind Albuquerque. However, 
given the current economic climate, raising the GRT or property tax rates may 
prove to be politically challenging.

STRONG DEBT SERVICE COVERAGE

Debt service coverage on senior and subordinate lien bonds and New Mexico 
Finance Authority loans is strong as expected given the importance of GRTs to 
operations. Fiscal 2011 pledged revenues provide 4.2 times (x) coverage of 
senior lien maximum annual debt service (MADS) and 2.4x coverage on senior and 
subordinate lien MADS (including debt service paid in practice from other 
sources but secured by subordinate GRT revenues).

Legal provisions are solid. A multi-tiered additional bonds test that, among 
other provisions, calls for a 1x coverage requirement of senior lien MADS by 
municipal and infrastructure GRTS only (state shared GRTs represent the bulk of 
pledged revenues) and a subordinate lien bonds test of 2x combined senior and 
subordinate MADS. While included in some of the prior GRT debt issuances, there 
is no reserve fund established for the 2012C bonds.

ABOVE AVERAGE DEBT BURDEN

The majority of the city's outstanding tax-supported debt is secured by GRTs. GO
debt outstanding, however, is limited. At 400 years old, the city's age and 
infrastructure needs are driving the overall debt ratios to above average levels
(4.2% of taxable market value and $6,811 per capita). Given the city's 
stabilized GRT collections, management's goal is to return to a two-year cycle 
for GRT issuance. The city also plans to issue a modest $17 million in GO bonds 
later this year approved from a recent bond election authorizing various public 
improvements. 

Carrying costs for debt service, pensions and OPEB are elevated at 27% of 
general fund and debt service fund spending. Pensions and OPEB for city 
employees are adequately funded and provided through the state-administered 
Public Employees Retirement Association defined benefit plan.
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