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Fitch Rates Anchorage, AK's GOs 'AA+'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has assigned an 'AA+' rating to the following municipality of Anchorage, Alaska (the municipality) general obligation (GO) bonds:

--$41.1 million GO bonds (schools) series 2013A.

The bonds are scheduled to sell via competition on or about Nov. 6, 2013. Proceeds will finance the Anchorage School District's ongoing capital improvement program.

In addition, Fitch affirms the ratings on the following Anchorage, Alaska bonds at 'AA+':

--$602 million outstanding GO bonds (schools);

--$473.5 million outstanding GO bonds (general purpose).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by an unlimited ad valorem property tax.

KEY RATING DRIVERS

STRONG FINANCIAL PERFORMANCE: The municipality's financial profile has improved after significant efforts to slow expenditure growth and restore structural balance. Reserves have returned to a healthy level.

STRONG ECONOMIC BASE: The Anchorage economy serves as a hub for government, trade, business, education and tourism in the state of Alaska and solidly outperformed the nation during the recent economic downturn.

ENERGY SECTOR EXPOSURE: The economy is somewhat concentrated due to dependence on the cyclical oil and gas sectors and is likely to continue to see periods of volatility.

DIVERSE, STABLE TAX BASE: The tax base is large and diverse. Assessed value (AV) exhibited considerable stability during the national real-estate downturn.

MANAGEABLE LONG-TERM LIABILITIES: The municipality's debt profile is healthy with a moderate debt burden and rapid principal amortization. Pension and other post-employment benefit (OPEB) liabilities are moderate, and the municipality benefits from significant state support for local pension obligations.

CONSERVATIVE, PROFESSIONAL FINANCIAL MANAGEMENT: The municipality benefits from strong financial oversight, good long-term planning and conservative budgeting.

RATING SENSITIVITIES

FUND BALANCE RISK: The rating could come under downward pressure if unrestricted fund balance declined meaningfully, particularly if it fell below the municipality's fund balance policy. The Stable Outlook means that Fitch does not expect that to happen over the next two years. The rating is unlikely to rise due to the concentrated economic base.

CREDIT PROFILE

HEALTHY FINANCIAL POSITION

Anchorage's financial position has improved markedly over the past four years. The municipality's general fund posted a $17 million net operating surplus after transfers in the fiscal year (FY) ended Dec. 31, 2012, increasing its total general fund balance to $81.8 million, or 11.8% of expenditures and transfers out. The municipality's fiscal 2013 budget appears balanced with some addition to reserves likely, while the recently proposed fiscal 2014 budget is structurally balanced and maintains fund balance levels.

Unrestricted fund balance was solid at 17.5% of non-educational expenditures and transfers out. The Anchorage School District's property tax levy is booked as a revenue and expense of the municipality, but the school district's property taxes are raised via the district's separate taxing power and do not put any additional strain on the municipality's budgets. As such, Fitch considers the municipality's unrestricted fund balance as a percentage of non-educational expenditures the best measure of its financial cushion. The school district, reported as a component unit, had its own, healthy 14.4% unrestricted general fund balance at the end of the fiscal year ended June 30, 2012.

The municipality also maintains a permanent trust fund with a balance of $127.6 million, or 29.6% of general fund spending, at the end of 2012. The trust fund is restricted as to use and could only be transferred to the general fund with voter approval, but it adds an additional level of financial flexibility that is unusual among U.S. local governments.

The municipality benefits from very stable revenues. Property taxes provide about 60% of general government revenues. The revenue stream was very stable throughout the recession. Policymakers and the public are somewhat tax averse, but the municipality has made minor adjustments to tax rates as needed to maintain gradual revenue gains through a period when many other communities suffered declines in revenues. The municipality maintains limited flexibility to raise additional property tax revenues under its property tax cap (about $8.2 million, or 2% of non-educational spending).

Rising labor costs, particularly health benefit spending, have been a significant spending pressure in recent years; however, the municipality has used headcount reductions to keep expenditure growth below the growth in revenues. Recent legislation aims to keep expenditure growth in line with revenue growth by limiting wage increases to inflation plus one percentage point, eliminating binding arbitration requirements and limiting the right to strike. But the law has been put on hold until legal and electoral challenges from labor groups are resolved. The outcome of these challenges remains very uncertain, suggesting labor cost pressures will remain significant cost pressure over the next few years.

STRONG ECONOMIC BASE

Anchorage's economy and tax base are healthy, having exhibited notable stability through the recent recession. Anchorage's 2012 population of 298,842 represents about 41% of Alaska's population and has grown steadily over the past decade. The municipality is the center of business, trade, transportation, healthcare, education, government and tourism for the Gulf of Alaska region and accounts for about 55% of the state's economic output. While the economy is strong, it is also concentrated due to heavy reliance on the energy extraction sectors.

Tax base growth slowed during the recent economic downturn, but the municipality's tax base never declined. The $32.2 billion tax base is a modest 5.4% larger than in 2008 after growing 1.6% in 2013. It is largely residential and benefits from a healthy diversity of payers. The top 10 taxpayers accounted for just 4.4% of 2013 AV.

The Anchorage employment market has significantly outperformed the nation in recent years. The municipality's unemployment rate was 4.8% in August, 2.5 percentage points below the national average of 7.3%. Median household income is high at 143% of the national level, and the poverty rate is low at just 7.8%.

MANAGEABLE LONG-TERM LIABILITIES

Adjusted for expected state reimbursements of school and jail debt, the municipality's direct and overlapping debt burden is moderate at about $2,975 per capita or 2.8% of market value. Without state reimbursement, the debt burden would be above average on a per capita basis at $4,078, but remain moderate as a percent of AV at 3.8%. Given rapid amortization of bonds (about 82% in 10 years) and moderate debt issuance plans, the municipality's debt burden is likely to fall to 2.2% of AV over the next five years.

The municipality's pension and OPEB liabilities are significant, but state support is also significant. State pension reforms have required newly hired employees since 2006 to take part in defined contribution pension plans instead of traditional defined benefit plans, which will slowly relieve pension funding concerns over the next several decades. The municipality's combined debt service, pension and OPEB expenditures - the carrying cost of its long-term liabilities - are manageable at about 15.7% of governmental funds spending.

The municipality's main current pension plans are offered through the Alaska Public Employees' Retirement System (PERS), which provides both pension and OPEB benefits. The plans have large unfunded liabilities, but the burden of increases in pension contributions and investment risks are largely borne by the state. The state reimburses the municipality for pension payments over 22% of payroll for PERS members, providing stability and predictability in pension obligations for most current employees.

The municipality's three closed Police and Fire Pension System plans are the primary local pension and OPEB concern, but the long-closed local plans are small relative to the larger liabilities that benefit from state support. The police and fire system had unfunded pension and other post-employment liabilities of $216.6 million, or 0.7% of AV, as of Jan. 1, 2013. The pension plans are about 73.4% funded when adjusted for Fitch's 7% rate of return adjustment, which is just adequate. The plans' funded status and required contributions vary significantly as shifts in market values of plan assets are reflected. Contributions rose sharply in the economic downturn, putting pressure on the general fund, but they have begun to recede with recovery in the value of plan assets.

Additional information is available at 'www.fitchratings.com'.

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