Jan 31 - Fitch Ratings has assigned a rating of 'AA' to the following
general obligation (GO) bonds to be issued by the city of Birmingham,
AL (the city):
--$72.8 million GO convertible capital appreciation bonds, series 2013-A;
--$2.2 million GO convertible capital appreciation bonds, series 2013-B.
The bonds are scheduled for negotiated sale around the third week in February.
Proceeds will fund various general government capital projects. The bonds are
structured as capital appreciation bonds that convert to pay interest on a
semi-annual basis commencing March 1, 2017.
In addition, Fitch affirms the 'AA' rating on the following debt obligations:
--$256 million GO bonds;
--$196 million GO warrants;
--$72 million revenue bonds (civic center improvements project), series 2011-A
and 2011-B (taxable) of the Commercial Development Authority of the City of
Birmingham (the authority).
The Rating Outlook is Stable.
The bonds are GOs of the city for the payment of which its full faith and credit
is irrevocably pledged. The bonds are payable from all legally available
revenues of the city, however, no such legally available revenues are
specifically pledged to bondholders. The city does levy certain limited ad
valorem taxes which may only be used for the payment of debt service on the GO
The GO warrants and authority revenue bonds also constitute a full faith and
credit obligation of the city payable from the city's legally available
revenues, but are not backed by the levy of ad valorem taxes.
STABLE OPERATING HISTORY: The city has maintained a relatively stable financial
profile through the stress of the recession. The city's broad revenue raising
authority and tendency for careful spending control bode well for future
HIGH RESERVES PRUDENTLY MAINTAINED: The city's financial policy requires a
reserve equal to at least three months spending which Fitch considers sound
practice and protection against risk associated with the volatile nature of
several economically dependent revenue streams.
MAJOR ECONOMIC CENTER: Birmingham anchors a deep and diverse employment base
built around the education and health service sector that should serve to
promote long-term stability despite recent sluggish job growth.
ANNUAL PENSION FUNDING DEFICIT: Of greater concern is the city's practice of not
fully funding its pension at the actuarial required contribution (ARC), which
has contributed to a steep decline in pension funding levels.
HIGH DEBT BURDEN: Debt metrics are high in part due to recent issuances for
recreation and economic development projects considered by Fitch to be outside
the scope of traditional general government projects. Annual carrying costs
remain affordable however, and debt service requirements decline significantly
in the near term.
Birmingham is located in north central Alabama, mainly within Jefferson County.
The city has a population of 212,413 making it the most populous in the state.
VERY STRONG RESERVES
At the close of fiscal 2012 the unrestricted general fund balance was $90.2
million or 23.6% of spending (operating expenses plus transfers out). Almost $83
million of funds or an additional 21.7% of spending were separately recorded in
the Birmingham fund. This account is set aside for unanticipated budgetary
shortfalls or emergency situations, and funded from proceeds of the sale of the
city's Industrial Water Board assets several years ago.
GENERALLY STABLE OPERATING PERFORMANCE
General fund operations have essentially been balanced over the fiscal period
2007-2012. However, Fitch notes that the city's pension contributions, which are
established by the legislative acts creating the city's pension plans, varied
from $1.4 million to $9 million lower than the ARC (this funding difference
compares to Fitch-adjusted governmental fund spending of approximately $430
million in fiscal 2012).
The city adopted a balanced budget for fiscal 2013 that does not appropriate
existing reserves or rely on one-time sources. Operating revenues are about 4%
ahead of last year's pace through the first six months of the year, and
management is hopeful to add an additional $500,000 to $1.5 million to fund
balance at year-end.
General fund operations are funded by a combination of sales and use tax (36% of
revenue), occupational tax (21%), and various business licenses and permits
(23%). The city has fairly broad revenue raising authority with the exception of
ad valorem taxes which are constitutionally limited but account for only 6% of
FITCH WILL MONITOR PENDING SALES TAX EXPIRATION
Fitch notes a portion of the city's sales tax expires on Dec. 31, 2013 which, if
not extended by city council, would create a budget gap of about $16 million for
fiscal 2014 and $33 million in fiscal 2015. A non-binding preliminary vote to
extend the tax was unanimously approved by city council this week, and
management expects formal extension to occur soon.
FAVORABLE DEBT SERVICE TRAJECTORY TEMPERS HIGH BURDEN
Overall debt ratios are considered above-average by Fitch at 6.2% of market
value and about $4,800 per capita. Approximately $136 million in bonds, or 20%
of the city's direct debt, are related to the funding of a hotel and baseball
stadium, projects Fitch considers outside the city's core governmental purpose.
Although presently affordable, these projects can potentially divert critical
general fund resources in periods of fiscal distress.
The proposed issuance is part of a $150 million GO bond authorization approved
by voters in the fall. The remaining $75 million will only be issued when
sufficient revenue exists from a dedicated property tax levy for GO bonds
currently at its constitutional limit.
Annual debt service on the city's GO bonds will decline by $19.6 million through
fiscal year 2020 providing ample capacity for new borrowing. Debt service on the
city's GO warrants, which are not paid from the dedicated tax, will be lower by
almost $12 million over the same period.
Debt and other long-term liabilities related to pension and other
post-employment benefits (OPEB) consume less than 20% of governmental fund
spending which Fitch considers moderate. The city's pension plans are
satisfactorily funded at about 75% on an aggregate basis but this is down from
93% in 2007 due largely to market performance. Pension contributions below the
ARC (as noted above) exacerbates the trend, and is viewed by Fitch as a serious
concern that will ultimately lead to a higher liability and funding costs.
Management expects to implement in the next budget several pension reform
measures currently under study to improve the funded ratio.
CRITICAL EMPLOYMENT AND ECONOMIC CENTER
Birmingham anchors the seven-county Birmingham-Hoover metropolitan statistical
area (MSA) which has a population of more than 1.1 million people and accounts
for approximately one-quarter of Alabama's total non-farm employment and gross
Numerous higher education and health care institutions, including the University
of Alabama at Birmingham, St. Vincent's Health System, Baptist Health and
Trinity Medical Center serve as stable employment anchors for the city and
stimulate significant investment in capital and research and development.
Regions Bank ranks among the city's largest employers and solidifies the city's
role as the banking center of the state, and the proximity to Honda,
Mercedes-Benz, and Hyundai assembly plants fuels a growing parts supply business
and provides employment opportunities for the region.
Despite its strong economic presence and expected growth, the city has
experienced only lackluster job gains of 0.5% over the prior 24 months. The
October unemployment rate of 9.3% remains elevated relative to the MSA (7%),
state (7.8%) and nation (7.5%). Income levels in the MSA measure comfortably
above state averages and slightly below those of the U.S. City income levels
remain considerably below average, but experiencing positive rates of growth.