Fitch Rates Santa Fe, NM GRTs 'AA+' and Sub Lien GRTs 'AA'; Outlook Stable
Fitch Ratings has taken the following rating action on Santa Fe, New Mexico (the city) obligations:
--$12.2 million gross receipts tax (GRT) refunding revenue bonds, series 2013A, assigned 'AA+';
--$14.2 million subordinate lien GRT refunding revenue bonds, series 2013B, assigned 'AA'.
Both series of bonds are expected to price via negotiation during the week of May 6. Proceeds from the sale of the bonds will be used to refund outstanding bonds for interest cost savings.
In addition, Fitch affirms the following:
--$27.7 million general obligation (GO) bonds at 'AA+';
--$47.73 million GRT revenue bonds outstanding, series 2010A, 2012A at 'AA+';
--$14.7 million subordinate lien GRT revenue bonds outstanding, series 2010B, series 2012C at 'AA';
--$13.4 million subordinate lien GRT/wastewater system revenue bonds outstanding, series 2012B at 'AA';
The Rating Outlook is Stable.
The GRT 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 2013B bonds reflects their subordinate position in the flow of pledged revenues for bond repayment.
The GO bonds are secured by an unlimited property tax levy on all taxable property within the city.
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.
STRUCTURAL BALANCE RESTORED: Despite the slow recovery of GRTs, the city achieved structural balance through budget cuts and conservative budgeting. The city's financial cushion is favorable but remaining expenditure flexibility is limited, leading management to emphasize efficiencies and cost savings in providing city services.
TAXING MARGIN AVAILABLE: The city maintains revenue-raising flexibility through its GRT and property tax rates.
ELEVATED DEBT; RAPID PAY OUT: Debt levels on a per capita basis are above average, reflecting the infrastructure challenges of an older city. However, the principal pay out rate for all bonds remains rapid.
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.
RETURN TO STRUCTURAL IMBALANCE: The continuance of solid reserves remains integral to maintaining the city's high-grade credit quality given the heavy reliance on economically sensitive gross receipts tax revenue. A return to structural imbalance and reduced reserves could lead to negative rating action.
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 6.1% in 2010. Employment gains remain sluggish, resulting in a 5.7% jobless rate as of February 2013, still well below the rates of the state (7.3%) and nation (8.1%).
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 flattened over the last two years, although Fitch notes the city did not experience any recessionary declines.
CONCENTRATED REVENUES RECOVER SLOWLY FROM LOSSES
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 2012, combined GRTs accounted for approximately 74% of revenues. Property taxes, on the other hand, represented 4% of operating support. Combined state-shared and municipal GRT collections declined by 9% and 5% in fiscal years 2009 and 2010, respectively, and subsequently posted modest gains in fiscal years 2011 and 2012. Year to date GRT receipts for the first nine months of fiscal 2013 are essentially flat as budgeted.
STRUCTURAL BALANCE RESTORED
The city's general fund reserves thinned during the recession but remained 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 and budget cuts, operating results were positive with a modest addition to fund balance in fiscal years 2011 and 2012. The fiscal 2012 financial cushion, comprised of the $12.2 million unrestricted fund balance and the state-required 30-day reserve for operations, totaled $17.6 million or a solid 25.2% of spending and transfers out.
The fiscal 2013 budget is balanced assuming flat revenue growth and includes a 2% salary increase for all city employees. Year to date revenues and expenditures are on track and management projects balanced results for fiscal year end. For the proposed fiscal 2014 budget, management closed a $6.3 million (10% of spending) budget gap in order to produce a balanced spending plan based on flat GRT revenues which Fitch views favorably. However, Fitch notes limited spending flexibility remains as additional cuts will begin to affect city services.
AMPLE REVENUE FLEXIBILITY REMAINS
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. The combined revenue margins equal a large $14 million or 20% of fiscal 2012 spending. 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 2012 pledged revenues provide 4.3 times (x) coverage of senior lien maximum annual debt service (MADS) and 2.5x 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 2013 A&B bonds.
ELEVATED DEBT LEVELS; RAPID PAY OUT
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 have driven the overall debt per capita ratio to a high $6,103 although debt per market value remains moderate at 3.8%. Given the city's stabilized GRT collections, management's goal is to return to a two-year cycle for GRT issuance in 2014. The city also plans to issue $12 million of GO bonds in June - the first installment from the $17 million bond authorization approved by voters in March 2012. The combined pay out rate for GO bonds and GRT bonds remains rapid with 72% of principal maturing in ten years.
PENSION REFORM EXPECTED TO IMPROVE FUNDED POSITION
The city's defined-benefit pension plan and OPEB services are provided through the state-administered Public Employees Retirement Association. After adjusting for a 7% rate of return, Fitch notes the pension's funded position is low at 64.2% as of June 30, 2012. Although the city has fully funded its annual required contributions, the funded position has declined due to recessionary losses that are still rolling on.
New pension reforms, signed into law in April 2013, are expected to improve its funded position, and will not materially increase the city's pension costs. Pension benefits are negotiated annually with its three unions which comprise 71% of city staff. Fitch notes that the large majority (75%) of current pension contributions for regular employees are paid for by the city as allowed by state statute. Total carrying costs for debt service, pensions and OPEB are moderate at 21% of governmental spending (net capital outlays).
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, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, and the 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
Jose Acosta, +1-512-215-3726
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