TEXT-Fitch affirms Bullhead City, Ariz. MPC excise tax revs at 'A+'
Nov 13 - Fitch Ratings affirms the 'A+' rating on the following Bullhead City Municipal Property Corp., Arizona (the city's) debt obligations: --$14.3 million excise tax revenue and refunding bonds, series 2009; --$24.4 million excise tax revenue bonds, series 2006; --$3.6 million excise tax revenue bonds (wastewater treatment plan improvements - phase two), series 2003. The Rating Outlook is Stable. SECURITY Excise tax bonds are payable from rental payments from Bullhead City secured by a priority lien and pledge of the city's excise taxes. The city's obligation to make lease payments under the use agreement is absolute and unconditional and is not subject to appropriation or abatement. KEY RATING DRIVERS ADEQUATE RESERVE LEVELS: General fund reserves are ample, although reduced from robust historical levels as planned draws were used for capital spending in the recent past. TOURISM BASED ECONOMY: Sound reserves represent an important credit strength mitigating general credit weakness associated with the city's reliance on tourism related activity and the gaming industry in nearby Laughlin, Nevada. Persistent employment and labor force declines keep unemployment above the national average. Income levels are below average and growth in the poverty rate outpaces regional, state and national averages. REVENUE FLUCTUATIONS; LIMITED FLEXIBILITY: Excise tax revenues posted material declines throughout the recession, although collections have since stabilized and are currently trending upwards. Revenue control and flexibility is limited, given the city's inability to impose new or increased taxes or assessments without voter approval. SOUND COVERAGE: The 'A+' rating on the excise tax revenue bonds reflects the general creditworthiness of the city, solid coverage of maximum annual debt service (MADS) from pledged revenues, and strong legal protections. Practical limitations to leveraging exist as the city relies heavily on surplus excise tax revenue to fund general government operations. LOW DEBT; RISING PENSION COSTS: The city is an infrequent issuer with low debt levels and rapid amortization. No new debt issuance is anticipated in the near term. Growth in pension costs will likely continue for the foreseeable future given below average funding levels. WHAT COULD TRIGGER A RATING ACTION: REDUCED FINANCIAL FLEXIBILITY: Further material decline in the gaming and resort industry in nearby Laughlin or significant reduction in the city's reserves could place pressure on the current rating. CREDIT PROFILE Bullhead City is located along the Colorado River in west-central Mohave County approximately 20 miles east of U.S. Interstate 95 and an estimated 100 mile driving distance to Las Vegas. TOURISM BASED ECONOMY The city has a year-round population of approximately 40,000 which has leveled off after experiencing strong growth from 2000 - 2006. Seasonal and short-stay visitors are believed to increase the city's winter population above 50,000, drawn to the area by the warm weather climate, casino/gaming industry in Laughlin and nearby Lake Havasu. The city is a frequent host to a variety of tournaments and special events, the most notable of which is the annual River Regatta. Bullhead City is the population, retail, and service center for the region. Laughlin, located across the Colorado River from Bullhead City, is home to ten casino resorts including Harrah's, River Palms, Golden Nugget, Edgewater, and Tropicana. Bullhead City provides the bulk of the labor force for the Laughlin casinos, whose estimated full-time employment is currently estimated at 9,000. The largest employers in Bullhead City, in addition to those in the government and education sectors, are Western Arizona Regional Medical Center (680 employees), Wal-Mart (420), and Sam's Club (172). The city's employment base appears to be stabilizing after registering a cumulative 20% loss over the five years ending in fiscal 2011, although unemployment remains elevated at 9.0% as of August 2012. The city reports sizable developments underway which would foster job creation in the next several years upon completion. The tax base, reflecting a two year lag and indicative of local economic health, more than doubled between fiscal 2006 and 2009 reflecting the economic boom that benefited much of Arizona, before suffering a cumulative 63% loss through fiscal 2012, with stabilization expected over the next couple of years. Management reports stabilized housing values and a year-over-year increase in commercial and residential building permits, although still below the recent fiscal 2007 peak. MAINTENANCE OF ADEQUATE RESERVES DESPITE REVENUE PRESSURE The city ratcheted down general fund spending by $5.7 million (20%) between fiscal 2008 and 2011 in response to a cumulative 40% decline of excise tax collections which constitute the largest source (approximately 90%) of the city's operating revenues. Cost cutting measures included workforce reductions, elimination of pay raises and use of unpaid furlough days. The city has eliminated more than 18% of its workforce since fiscal 2008 with development and community services most affected. Management indicates that the cuts enacted to date have had little impact on the level of service provided to residents, but leave less margin to accommodate future revenue underperformance. Fitch views the city's draw on reserves for capital needs as a prudent use of one-time funds but notes that the city now retains less relative financial flexibility. Available fund balance declined from $12.4 million in fiscal 2008 (37.1% of spending and transfers out) to $6.1 million in fiscal 2011 (27.6%). The city achieved modest operating gains in fiscal 2011 and 2012 through continued cost savings supporting maintenance of unrestricted general fund balance in line with a policy target equal to 30% of spending. A balanced fiscal 2013 budget includes a $1.4 million increase in excise tax collections, primarily driven by higher state shared revenues (distributed to the city with a two-year lag), further workforce reductions, and the fourth consecutive year of foregone pay increases. Credit concerns center on the city's ability to maintain a structurally balanced general fund budget going forward, although the city represents an ability to sustain further cost reductions if necessary to maintain current reserve levels. STABILIZING EXCISE TAX COLLECTION Excise tax revenues include the city sales tax, state shared sales and income tax revenues, charges for services, fines and forfeitures, and franchise taxes, with the city sales tax and state shared revenues representing 47% and 30% respectively of total fiscal 2011 collections. Recovery of pledged revenue collections began with a leveling out of the city's sales tax revenues in fiscal 2009. State shared revenues began to stabilize in fiscal 2011 with a fiscal 2013 increase (representing a 2-year distribution lag) of $1.1 million year-over-year. The city reports further improvement in state shared revenues for fiscal 2014, consistent with state-wide trends. LOW DEBT / ADEQUATE COVERAGE Debt levels are very low with overall debt equal to only $1,223 per capita or 2% of market value. The bulk of the city's debt service costs are funded from special assessments against benefited parcels and revenues of the water and sewer enterprise fund. Debt service payable from general revenues consumes a reasonable 6.7% of total spending. The city's outstanding debt structure is very conservative, with 84.5% of outstanding principal repaid within 10 years, and no exposure to variable rate or short-term debt. The city does not anticipate near term debt issuance. Pledged excise taxes continue to provide ample coverage in excess of 3.9x maximum annual debt service (MADS) on all outstanding excise tax revenue bonds based on fiscal 2011 audited revenues. An additional bonds test of 2.25x and requirements to fund a standard reserve in any year that fiscal excise taxes received by the city are less than 225% of MADs enhance the security. Fitch estimates that fiscal 2011 excise tax collections would need to decline by more than 40% to trigger the springing reserve. BELOW-AVERAGE PENSION FUNDING Pension contributions consume a manageable 7.6% of the budget. Pension costs represent 100% of the actuarial required contribution (ARC) to an agent-multiple employer defined benefit pension plan for public safety employees (PSPRS) in addition to the annual contribution to the city administered defined contribution 401(a) plan for all other employees. The city's PSPRS annual costs grew by 33% over the last three years and will likely continue given the below average funding levels. The city's PSPRS funding level is 63.8% using Fitch's more conservative 7% discount rate assumption (PSRPS assumes an 8.5% return). Other post-employment benefits are funded on a pay-as-you-go basis, with $32,235 paid in fiscal 2011. The combined unfunded actuarial accrued liability (UAAL) for pension and OPEB approximates $9.4 million or 0.4% of market value. 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 the 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, Zillow.com, National Association of Realtors. Applicable Criteria and