TEXT-Fitch revises Kansas City, Mo. outlook to stable, ratings affirmed

Mon Feb 11, 2013 11:05am EST

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Feb 11 - Fitch Ratings has affirmed the following Kansas City, Missouri (the
city) bond ratings:

--$449.3 million in outstanding unlimited tax general obligation (ULTGO) bonds
at 'AA';
--$317.9 million Kansas City Industrial Development Authority (KCIDA) at 'A+';
--$200.0 million Kansas City Municipal Assistance Corp. (KCMAC) at 'A+'; and
--$421.0 million special obligation bonds at 'A+'.

The Rating Outlook is revised to Stable from Negative.

SECURITY

The ULTGO bonds are secured by the city's full faith and credit and its ad
valorem tax, without limitation as to rate or amount.

The special obligation bonds are payable from any legally available funds of the
city, subject to annual appropriation.
The KCMAC and KCIDA bonds are ultimately payable from any legally available
funds of the city, subject to annual appropriation. Certain transactions
additionally have cash funded debt service reserves or sureties, leasehold
interests in the pledged assets and/or dedicated revenues.

KEY RATING DRIVERS

IMPROVING LONG-TERM LIABILITY DRIVES OUTLOOK: The change to Stable Outlook
reflects the city's revised capital plans, which are much more modest in scope
than previously contemplated, as well as progress made towards improved pension
funding.

STRONG ECONOMIC BASE: The city has a deep and diverse economic base that serves
as the economic engine for the surrounding region.

AVERAGE SOCIOECONOMIC PROFILE: The city's population is expanding. Wealth levels
and unemployment rates are roughly average.

STABLE FINANCIAL PERFORMANCE: The city has generated breakeven or positive
general fund operating results for the past several years and reserve levels are
adequate. However, the city's primary revenue source must be re-authorized by
voters every five years.

PENSION UNDERFUNDING: Lack of full funding for the annual required contribution
(ARC) has reduced pension funding ratios from previously strong to more moderate
levels. Officials have made progress by negotiating agreements with employee
groups participating in two of the city's four pension plans, although these are
still subject to approval by the state legislature. These agreements include
higher employee contributions and lower projected benefit costs and liabilities

APPROPRIATION RATING DIFFERENTIATION: The two-notch rating distinction between
the city's ULTGO bonds and the KCIDA, KCMAC and special obligation bonds
reflects the inherent appropriation risk and the less essential nature of the
assets financed.

RATING SENSITIVITIES

STALLED PROGRESS TOWARD FULL FUNDING OF PENSION ARC: The city's inability or
unwillingness to initiate a plan to increase funding of its annual pension
liability could place negative pressure on the rating.

CREDIT PROFILE

REGIONAL ECONOMIC ENGINE

Kansas City has a deep and diverse economic base that serves as the economic
engine for western Missouri and eastern Kansas. The economy is anchored by a
stable employment mix of government, utilities, and health care, but also by the
more economically sensitive telecommunications and auto manufacturing sectors.

AVERAGE SOCIOECONOMIC PROFILE

Wealth levels are on par with the state and slightly below the national average.
The December 2012 unemployment rate of 7.5% represents an improvement over the
8.1% recorded a year prior, but this gain comes mainly as the result of a
shrinking labor force. The rate is about the same as the national rate of 7.6%
and above the state's rate of 6.5%.

Kansas City is a host city for Google Fiber, which is an ultra high-speed
broadband network up to 100 times faster than current broadband. The network is
already attracting a number of smaller internet and data companies to the city
and has the potential to make a significant economic impact.

DIVERSE REVENUE STREAM VULNERABLE TO PERIODIC VOTER APPROVAL

The city's general fund operations are primarily supported by an earnings tax,
which accounted for 30% of general and debt service fund revenues in fiscal
2012. The earnings tax is subject to voter approval every five years. Although
city residents overwhelmingly approved its continuation on April 5, 2011, the
city's primary revenue source is still at risk of a permanent phase-out if voter
support wanes. However, since roughly 50% of the earnings tax is paid by
non-city residents, who cannot vote, city residents may be inclined to preserve
this revenue source and the services it funds. Other major sources of operating
fund revenue include licenses and permits, which generate 19.6% and the property
tax, which accounts for 9.4% of revenues.

STABLE OPERATING RESULTS

The city's general fund recorded essentially break-even results in fiscal 2012,
with a net operating deficit after transfers equivalent to 0.5% of spending.
Unrestricted general fund balance improved at 9.1%, versus the 7.1% unreserved
balance recorded a year prior. Fitch notes that the financial results would have
been less positive if the full pension ARC had been funded.

The fiscal 2013 budget includes significant cost containment measures, including
a 105 position reduction in workforce and an early retirement incentive. Year to
date results indicate positive trends in earnings tax collections and officials
anticipate ending the year with a modest addition to general fund balance. While
the budget includes an increase in annual pension payments, they remain
significantly below the ARC. Officials project that significant increases in
pension ARC funding will not occur prior to fiscal 2015.

ELEVATED LONG-TERM OBLIGATIONS

Debt levels are above average, measuring $5,071 per capita and 8.1% of market
value. Debt service claims a large 20% of general and debt service fund
spending. However, Fitch notes that much of the debt service payments are
supported by identified revenue streams, reducing the pressure on operations.

Future capital plans have been scaled back from previously reported levels and
now mainly center on combined sewer overflow solutions (expected to be funded
from enterprise operations) and the downtown streetcar project. The city
anticipates issuing $83 million of special obligation bonds to fund the starter
route for the street car project; $15 million of federal grants is also
expected. The bonds will be paid from the proceeds of voter approved sales tax
and property assessments within the transportation development district.
Overall, Fitch does not expect debt levels to materially rise given the more
moderate borrowing plans and the average payout of existing debt.

Previously strong pension funding levels have dropped in recent years as the
city has not fully funded the pension ARC. As recently as 2008, the combined
funding level of the city's four plans was a strong 90%. By 2011, reduced
contributions and investment losses reduced the combined funding ratio to 78.6%,
or 75.6% when adjusted by Fitch to reflect a 7% discount rate. The city paid 70%
of its annual pension cost (APC) in fiscal 2012. The entire required amount, if
it had been paid, would have amounted to 11.8% of operating fund spending. The
city provides an implicit rate subsidy for post-employment healthcare, which has
a modest unfunded actuarial accrued liability of $52 million.

The city has been working towards a plan to address the pension funding levels
and its benefit structure. Agreements have been reached with employees covering
two of the plans, with the agreements including increases to employee
contributions and a tiered benefit structure for new employees. These agreements
must be approved by the state legislature before they can be implemented.
Negotiations with employee groups covering the remaining two plans are ongoing.
The city anticipates material progress toward full funding of the ARC in the
fiscal 2015 budget year, assuming state approval of the plan.

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

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
U.S. Local Government Tax-Supported Rating Criteria
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