BRIEF-Moody's says outlook on Vietnam's ratings changed to positive from stable, ratings affirmed
* Moody's changes the outlook on Vietnam's ratings to positive from stable, ratings affirmed
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
* Moody's changes the outlook on Vietnam's ratings to positive from stable, ratings affirmed
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