TEXT-Fitch affirms North Las Vegas GOs at 'BBB'

Mon Nov 12, 2012 2:50pm EST

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Nov 12 - Fitch Ratings has affirmed and removed from Watch the 'BBB' rating
on the following series of bonds for North Las Vegas, NV (the city):

--$1.475 million limited tax general obligation (LTGO) bond series 2002B;

--$136.57 million LTGO bonds (additionally secured by consolidated tax pledged 
revenues);

--$298.6 million LTGO water and wastewater improvement bonds (additionally 
secured by water and wastewater system pledged revenues). 

The Rating Outlook is Negative. 

SECURITY 

The bonds are secured by the full faith and credit of the city, subject to 
Nevada's constitutional and statutory limitations on the aggregate amount of ad 
valorem property taxes. Additional security is provided to $136.57 million of 
the bonds by an irrevocable pledge of and lien on certain consolidated tax 
revenues (15% of these revenues) and to $298.6 million of the bonds by pledged 
water/wastewater system net revenues. 

KEY RATING DRIVERS

CONTINUED BUDGET UNCERTAINTY: The Negative Outlook reflects budget uncertainty 
over the next one to two years. Fiscal year 2014 revenue is vulnerable, 
requiring a change in the distribution of consolidated tax revenues via 
legislation or a memorandum of agreement with surrounding municipalities. Also 
looming are spending increases associate with potential back-pay if an 
outstanding union lawsuit goes against the city. An unsuccessful outcome would 
likely require substantial additional concessions from unions, which may be 
unlikely given the poor labor relations. 

FISCAL DISTRESS: The rating further reflects the city's fiscal distress driven 
by a steep drop in revenues coupled with costly long-term labor contracts. The 
city closed one-third of its fiscal 2013 $33 million budget gap by declaring a 
state of emergency for one year and suspending public safety labor contracts. 
The state statue permitting this declaration does not include a fiscal 
emergency; however, the city contends that in the wake of failed concessions, 
offsetting layoffs would have created a public safety emergency. 

VOLATILE REVENUE; REDUCED CUSHION: Economically sensitive consolidated taxes 
comprise 43% of general fund revenues before transfers and remain a 
vulnerability despite modest recovery in fiscal 2011. Reserve levels previously 
viewed as a cushion against revenue fluctuations have been used to balance the 
budget and are narrow at 4.9% of general fund spending and illiquid with cash 
just 0.2x fiscal 2011 current liabilities. 

DECLINING REVENUE FROM UTILITY TRANSFER: The general fund is heavily reliant 
upon large water/wastewater fund transfers, which account for a quarter of 
general fund revenues.  Per state law, these must be reduced by about 47% over 
the next nine years. The financial positions of the utility funds have declined 
substantially over the past several years due to their support of the general 
fund, calling into question the feasibility of continued transfers even at the 
reduced level.   

PRESSURED ECONOMY, HOUSING MARKET: The city and region's economy were among the 
hardest hit by the collapse of the housing market, resulting in a combined TAV 
decline of 52% from fiscal 2009 to 2013. The North Las Vegas market performed 
weaker than the region and with high foreclosure rates, Fitch expects persistent
weakness for the foreseeable future.

INDUSTRY CONCENTRATION: The regional economy is dominated by tourism and gaming 
which experienced significant revenue and employment declines but appear to be 
stabilizing. Meanwhile, the construction industry, once a major economic driver,
has shrunk to a more sustainable level. 

MANAGEABLE LONG-TERM LIABILITIES: Debt levels are moderate to high, but the 
city's five-year capital plan includes very limited additional debt. However, 
amortization is extremely slow with only 24% of principal retired in ten years. 
The city makes 100% of its annual required contributions to the state's pension 
system, which is adequately funded.

ADDITIONAL PLEDGE; NO ENHANCEMENT: Fitch's rating strictly reflects the city's 
LTGO pledge although the city intends to pay a portion of debt service from tax 
and utility pledged revenues. Dedicated pledged revenues do not enhance the 
rating because consolidated tax revenues support a high proportion of general 
fund operations and water/wastewater revenues provide less than 1.0x debt 
service coverage after transfers to the general fund. 

WHAT COULD TRIGGER A RATING ACTION 

UNFAVORABLE LAWSUIT RULING: An unfavorable opinion on the breach of contract 
lawsuit requiring the city to provide back wages would likely result in a 
downgrade.

INABILITY TO BALANCE BUDGET: The city's inability to balance its fiscal year 
2014 budget with either revenue increases or additional spending cuts would 
likely result in  negative rating pressure. 

CREDIT PROFILE

Steep Revenue Declines and Rising Costs Result in Declaration of Emergency

General fund revenues have declined to an estimated $89.6 million for fiscal 
2012 not including utility transfers; a drop of 45% since peaking in fiscal 2008
at $164.5 million. Despite two years of small upticks in consolidated tax 
revenues, property taxes and charges for services continued to decline in fiscal
2013. Property taxes now make up only 9% of revenues compared to18% in fiscal 
2010. 

The city has closed several years of budget gaps by eliminating about 800 
positions through attrition and voluntary separation and layoffs. In addition, 
the city negotiated temporary memoranda of understanding (MOUs) with various 
unions providing concessions but precluding layoffs through fiscal 2012. 

The fiscal 2013 budget estimates an additional 1% decline in revenue and had an 
initial $33 million shortfall. On May 15, city council approved a fiscal 2013 
budget closing the general fund gap with a large number of public safety 
layoffs, among other ongoing and one-time solutions. This followed unsuccessful 
negotiations with bargaining units to extend concessions under the temporary 
MOUs. Notwithstanding the temporary MOUs, the multi-year contracts extend 
through fiscal 2014 and fiscal 2015. Savings from layoffs totaled $17 million 
from public safety and $3.9 million from general government. 

In June 2012 the city council approved a resolution permitting the city to 
declare an emergency under Nevada Revised Statue (NRS) 288.15 which permits the 
one year suspension of labor contracts in 'situations of emergency such as a 
riot, military action, natural disaster or civil disorder.' The city's 
resolution declaring an emergency stated that the 'mass layoffs of public safety
personnel that would otherwise be required to balance the budget would result in
a public safety emergency.' Pursuant to NRS 288.15, the city would not be 
required to pay back suspended wages. The emergency declaration resulted in 
about $9.9 million in fiscal 2013 savings.

The police supervisor's union filed a breach of contract lawsuit and the fire 
fighters and police officer's union filed a formal grievance following the 
city's declaration of emergency. Until a resolution is reached, the city 
continues to operate as if the labor contract suspension holds. Resolution could
take as long as two years according to the city.  

Limited Financial Cushion 

The city's financial position weakened after many years of large net deficits. 
Fiscal 2011 ended as expected with a $15.3 million net deficit after transfers 
resulting in an unrestricted (committed, assigned and unassigned as per GASB 54)
ending fund balance of $7.3 million equal to 4.9% of spending. This is under the
city's target of 6% and well under the original board policy of 18% which was 
revised during fiscal 2011. 

Fiscal 2012 projections show an additional 9.5% decline in revenues and 16% 
decline in expenditures resulting in a projected net surplus of $2.1 million. 
The result is an unrestricted general fund balance of $4 million, or 3.2% of 
spending. The city retains 20% flexibility under the tax rate cap but has no 
plans to use it reporting it politically infeasible.

General fund liquidity has declined significantly from an average of $15.5 
million from 2006 to 2009 to $4.1 million in fiscal 2010 and just $1.28 million 
at the end of fiscal 2011. 

PILT Transfers to Decline; Water/Wastewater System Pressured

The general fund receives payments in lieu of taxes (PILT) from the water and 
wastewater systems, capped at $32 million per year and representing 24% of total
revenues in fiscal 2011. Council recently passed a resolution to reduce the 
transfer by $500,000 annually to comply with state law mandating the city reduce
income from such transfers to $17 million by 2021.

Water and wastewater system unrestricted cash reserves continue a declining 
trend, creating uncertainty regarding availability of cash for future transfers.
Days cash on hand fell from $179 million, or 1,347 days cash on hand in fiscal 
2009, to $44.8 million, or 380 days in fiscal 2011, less than the estimated 
$50.7 million. As of October 2011, the city had projected that water and 
wastewater system reserves would bottom out at $18 million in 2015 before 
increasing in subsequent years.

Combined water/wastewater debt service coverage (DSC) equaled 2.3x in fiscal 
2011, or just 0.84x after transfers to the general fund. Projections including 
3% annual increases in water and wastewater rates show coverage declining to 
0.6x in 2013 net of transfers before increasing to just over 1.0x by 2016.

Given the general fund's reliance on the utility transfers and the below one 
times DSC generated by utility revenues after such transfers, Fitch does not 
believe the water and wastewater revenues provide additional credit enhancement 
for such bonds additionally secured by these revenues.  Furthermore, sustained 
draws on reserves could pressure the general fund's credit if the utility is 
unable to make the planned transfers.  

Potential State Involvement if Budget Problems Not Solved

State law authorizes the Department of Taxation (Taxation) to take over the 
management of a local government if the entity is not able to successfully deal 
with budget shortfalls. Taxation has broad financial powers, including approving
all expenditures, negotiating with creditors, negotiating contracts and 
collective bargaining agreements, and increasing the ad valorem tax rate 
available to pay local government obligations from $3.64 to $4.50 per $100 of 
AV.

After fiscals 2010 and 2011, the city has now met two of twenty-seven conditions
listed in the statute under which Taxation may consider action. The city's 
two-year cumulative 48% decline in AV through fiscal 2011 (or 33% through fiscal
2012) exceeds the statute's 10% benchmark and two consecutive fund balance 
reductions of 38% and 80% exceed the state's benchmark of 20% or more for the 
past two fiscal years. According to city management, thus far Taxation has 
requested monthly updates on financial status and has not indicated any 
intention of significant additional steps, including taking control of the 
city's financial management. 

High Debt Levels

Overall debt levels are high at $3,761 per capita and 6.1% of market value with 
slow amortization. The city's five-year capital improvement plan through fiscal 
year 2016 includes about $300 million in projects, the majority of which have 
identified outside funding sources. Amortization of debt is very slow with a 
ten-year principal pay out of only 24%. 

Carrying costs are moderate to high. Debt service is 9.3% of general fund 
spending. Pension annual required contribution and other post-employment benefit
pay-go is a very high 24% of general fund spending or moderate 9.9% of total 
governmental spending.  

Stressed Economy

North Las Vegas encompasses approximately 100 square miles in Clark County with 
a population of 217,482. The city's housing market has been very hard hit and 
continues to experience high foreclosure rates and housing price declines. In 
fact, Clark County housing prices are down 62% from their peak, making it fifth 
nation-wide in housing price declines according to Case-Shiller.

The city's tax base grew rapidly through fiscal 2008 before declining 
precipitously by 47% between 2009 and 2012. TAV continues to decline, falling an
additional 10% in 2013. 

The city's economy is reliant upon gaming with most major employers and 
taxpayers hotel/casinos. The top 10 taxpayers, of which three are hotel/casinos,
make up a moderately concentrated 8.4% of TAV. August 2012 unemployment remains 
elevated at 14.4%, though down from 16.4% year over year due to a 1.5% increase 
in employment outpacing a 0.8% contraction in the labor force. Median household 
income is about even with the state average, but per capita income is only about
79% of the state and nation.

The state's economic forum, responsible for providing forecasts each biennium, 
recently highlighted some positive factors, including state sales tax revenue 
increases every month for more than two years and an increase in both volume and
prices of homes in the Las Vegas area. However, it also noted the continued loss
of construction jobs with no recovery expected in homebuilding for several 
years. Tourism is beginning to recover with the Las Vegas Convention and 
Visitors Authority reported an increase in visitors of 1.8% for the first three 
quarters of 2012.  

Additional information is available at 'www.fitchratings.com'.  The ratings 
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has 
been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Tax-Supported 
Rating Criteria, this action was additionally informed by information from 
Creditscope, S&P/Case-Shiller Home Price Index, IHS Global Insight, National 
Association of Realtors. 

Applicable Criteria and
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