Fitch Rates Municipality of Anchorage, Alaska's $97.3MM GO Bonds 'AA'SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA' rating to the following Municipality of Anchorage, Alaska's 2010 general obligation (GO) bonds:
--$55 million 2010 GO bonds (general purpose), subseries A-1 and subseries A-2 (taxable build America bonds - direct payment);
--$20 million 2010 GO bonds (schools), subseries B-1 and subseries B-2 (taxable build America bonds - direct payment);
--$22.3 million 2010 GO refunding bonds (general purpose) series C.
The bonds are expected to sell via negotiation on March 11, 2010.
In addition, Fitch affirms the following Municipality of Anchorage's (municipality) outstanding obligations:
--$443.8 million GO bonds (general purpose) at 'AA';
--$728.4 million GO bonds (schools) at 'AA'.
The Rating Outlook is Stable.
--The municipality's financial position is under pressure from stagnating revenues and increasing fixed costs, but reserve levels remain sound and the municipality has a plan in place to return to structural balance.
--The Anchorage economy remains healthy, albeit slowing, and is diverse, serving as a hub for government, trade, business, education and tourism hub for much of the state.
--The Anchorage economy is indirectly exposed to the cyclical oil/gas sector since many company headquarters are located in Anchorage and the economy relies to some extent on its role as an economic center to residents more directly tied to oil/gas.
--Until recently, Anchorage had experienced a large amount of new construction, including hotels, hospitals and the municipality's downtown; this has slowed as was expected. The limited new building coupled with some softness in residential home prices resulted in only a very small gain in AV and projections for limited growth in the near term.
--The municipality has a large combined pension and OPEB liability; however, as a state cost sharing system with the state capping the municipality's share at 22% of payroll, the municipality benefits from the certainty of its exposure, though it is large. Further pressure exists from the municipality's own police and fire pension and OPEB with additional liabilities facing rising costs due to investment losses in 2008.
--The municipality's debt burden is moderate, including the state's commitment to reimburse over half of the school district's debt. Principal amortization is rapid, permitting the municipality to continue to issue moderate amounts of new debt annually while maintaining a moderate debt level.
KEY RATING DRIVERS:
--Maintaining balanced operations and rebuilding fund balance as revenues stagnate or decline will be key to preserving the municpality's strong credit quality.
--Performance of the local and state economy is important to maintaining credit quality.
General obligation bonds are secured by the full faith, credit and taxing power of the municipality and the municipality irrevocably pledges and covenants to levy and collect taxes without limit to pay debt service.
Anchorage's current financial position remains sound in spite of diminished reserves. Due to a $12 million investment write-down which has since been recovered, and $5 million less in state revenue sharing than budgeted, the municipality ended 2008 with a $16 million deficit, lowering its total fund balance to $26 million, or 4.3% of spending. The municipality's legal financial operations include the school district, which operates under a separately elected board and maintains its own budget and reserves. Not including the school district, total fund balance rises to 6.6% of spending. The unreserved fund balance was a good 6.3%. The municipality reports that it cut spending in 2009 and expects to add about $13 million to its ending fund balance, which would bring the total back up to a sound 10.4% not including the school district operations.
The bulk of Anchorage's revenues are property taxes; however, the municipality also benefits from sizeable amounts of state revenue sharing. In each year since 2005, Alaska has approved one-time revenue sharing distributions to communities; for 2007, 2008 and 2009 Anchorage's share was about $15 million, and is budgeted for $15 million in 2010 as well. The municipality uses these funds to lower property taxes. While each year's state revenue sharing is considered one-time by Anchorage, Fitch notes it could be difficult to offset the revenue loss if Alaska discontinues this practice as the municipality does not plan to raise property taxes. A 2009 voter-approved amendment limits the municipality's property tax increase (levy may increase by Anchorage CPI plus average population growth) by adding the utilities' in lieu taxes to the definition of total local taxes to be collected. This adjustment essentially lowers the allowable tax levy by the in lieu tax amount and will be phased in over three years. As a result, the municipality must offset a $5 million reduction in total revenue in 2010, $11 million in 2011 and the full $17 million in 2012. The municipality's six-year financial forecast cuts $20 million in spending from 2010, $25 million in 2011 and an additional $5 million in 2013. These adjustments are necessary to return the municipality's financial operations to structure balance amid this large reduction in revenue as well as the stagnating growth of other economically-driven revenue.
Anchorage's property tax base growth has been strong in recent years, averaging 8.4% annual growth from 1997-2007, but slowing to 4.5% in 2008 and 2.9% in 2009. In 2010, AV is expected to be flat. Reflecting the diverse economy, the top ten taxpayers represent just 4% of total AV. Property taxes made up about 68% of Anchorage's 2008 general fund revenues (80% including school revenue). However, in spite of the strong AV growth, allowable tax revenue increases are limited, moderating the benefit of the strong AV gains but could also provide protection to the municipality if AV declines. More importantly, pressure to reduce the tax burden on residential property taxpayers may limit Anchorage's ability to add substantially to its fund balance, especially as revenues are declining due to the new property tax amendment. Fitch believes that the policy of maintaining reserves equal to at least 10.25% of revenues provides sufficient financial flexibility for the rating category considering the stable economy and revenue sources.
Anchorage's 2008 population of 287,000 represents about 41% of Alaska's population. Anchorage is the center of business, trade, transportation, healthcare, education, government and tourism for the Gulf of Alaska region and accounts for about 50% of the state's economic activity in terms of income, employment and retail sales. Anchorage unemployment rates had typically trended above the national level, but since the Anchorage economy has been only moderately impacted by the recession, by December 2008 the jobless rate in Anchorage of 7.0% was well below the national average of 9.7%.
Including expected state reimbursements for school debt, direct debt is moderate, totaling about $3,300 per capita and 2.8% of market value. Without state reimbursement, debt ratios would trend high at $5,000 and 5.4%, respectively. Anchorage's six-year capital improvement plan is comparable to past years, although the projected amount of GO bonds is lower at $340 million. Given the rapid principal repayment (67% in ten years) and if some population and AV gains return, debt ratios are expected to remain moderate.
Applicable criteria available on Fitch's web site at www.fitchratings.com:
--'Tax-Supported Rating Criteria', dated Dec. 21, 2009;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Dec. 21, 2009.
Considerations for Taxable/Build America Bonds Investors
The following sector credit profile is provided as background for investors new to the municipal market.
Local Government General Obligation Bonds:
The unlimited taxing power of most local government general obligation pledges is the broadest security a U.S. local government can provide to the repayment of its long-term borrowing, and therefore is the best indicator of its overall credit quality. The average local government general obligation rating is 'AA-' with approximately 56% rated at or above 'AA-' and 7% rated 'BBB+' or below. The relatively high ratings reflect local governments' inherent strengths: the authority to levy property taxes, nonpayment of which can result in property foreclosures; additional taxing power that can include sales, utility, and income taxes; and essentiality of and lack of competition for services provided by local governments. Those with low investment-grade or below-investment-grade ratings generally have a combination of a limited or highly volatile economic base, high levels of long-term liabilities including debt and post-employment benefits, and/or unusually limited financial flexibility. For additional information on these ratings, see 'U.S. Local Government General Obligation Rating Guidelines' dated March 22, 2007.
Additional information is available at www.fitchratings.com.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
Posted: March 3, 2010
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