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:
--$24.4 million 2012 GO bonds series A (general purpose);
--$31.1 million 2012 GO refunding bonds series B (general purpose);
--$13.6 million 2012 GO bonds series C (schools);
--$24.1 million 2012 GO refunding bonds series D (schools).
The bonds are scheduled to sell via negotiation on or about the week of Sept. 10. Proceeds will refund outstanding GO bonds and fund the municipality's ongoing capital improvement program.
In addition, Fitch affirms the ratings on the following Anchorage, Alaska bonds at 'AA+':
--$730.6 million outstanding GO school bonds;
--$488.9 million outstanding GO general purpose bonds.
The Rating Outlook is Stable.
The bonds are secured by an unlimited ad valorem property tax.
KEY RATING DRIVERS
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. Concentration concerns are slowly decreasing with population growth and diversification.
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 large, but the municipality benefits from significant state support for local pension obligations.
SOLID FINANCIAL POSITION: The municipality's financial profile is healthy and improving after significant efforts to slow expenditure growth and to restore structural balance. Budget pressures remain due to increasing labor costs and slow revenue growth.
CONSERVATIVE, PROFESSIONAL FINANCIAL MANAGEMENT: The municipality benefits from strong financial oversight, good long-term planning and conservative budgeting.
HEALTHY FINANCIAL POSITION
Anchorage's financial position has improved over the past three years despite economic pressure. The municipality's general fund posted a $1.5 million net surplus in the fiscal year (FY) ended Dec. 31, 2011, increasing its total general fund balance to $64.8 million, or 9.9% of expenditures and transfers out. Unrestricted fund balance (the sum of committed, assigned and unassigned fund balances under GASB 54) was 7.3% of expenditures. Reserves as a percent of spending are somewhat understated because the portion of the Anchorage School District's spending funded by property taxes passes through the municipality's general fund. Excluding this line item, the unrestricted fund balance improves to 11.5% of spending.
The school district, reported as a component unit, ended fiscal 2011 with a strong 16.1% unrestricted general fund balance. The municipality also maintains a permanent trust fund with a balance of $116.8 million at the end of 2011. While Fitch considers these offsetting resources, it believes that the current reserve position is somewhat below average for this rating level. The municipality has recently increased its reserve targets and should build somewhat better reserves over time, but any decline in reserves would likely put downward pressure on the rating.
The municipality benefits from very stable revenues and adequate revenue raising flexibility, despite state and local tax limitations. Property tax revenues provide about 60% of general government revenues. The revenue stream has been 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.
LABOR COST PRESSURES
Rising labor costs are likely to pressure expenditures over the next several years. Expenditures have grown more rapidly than revenues in recent years, pressuring the municipality's generally positive margins and causing deficit spending in 2007-08. The municipality took significant corrective action in 2009 and posted positive margins over the past three years. However, margins thinned considerably in 2011, as public safety spending surged 8% (compared to revenue growth of 4.8%). The municipality faces ongoing budget pressures due to long-term labor contracts that offer pay raises and significant performance bonuses for police and fire fighters through 2014. Fitch believes the municipality has adequate expenditure flexibility in other areas to maintain budget balance, and policymakers have shown a willingness to use such options even when they were painful, such as layoffs.
STRONG ECONOMIC BASE
Anchorage's economy and tax base are healthy, having exhibited notable stability through the recent recession. Anchorage's 2011 population of 295,570 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 more than 55% of the state's economic output. While the economy is strong, it is also concentrated with heavy reliance on the energy extraction sectors.
AV rose through 2009 and remained essentially unchanged from 2010 to 2012 due to continued, modest development activity that offset declines in home prices. The municipality's tax base is large at $31.5 billion and diverse with the top 10 taxpayers accounting for just 4.3% of 2011 AV. While the municipality has not been immune to the pressures affecting the national economy, the local economy has outperformed the nation in recent years. The municipality's unemployment rate was 6.4% in June, two percentage points below the national average.
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 $3,040 per capita or 2.8% of market value. Without state reimbursement, the debt burden would be above average on a per capita basis at $4,150, but remain moderate as a percent of AV at 3.9%. Given rapid amortization of bonds (about 70% in 10 years) and moderate debt issuance plans, the municipality's debt burden is likely to remain quite manageable.
The municipality's pension and other post-employment 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 18% of general fund revenues. (Not all contributions are paid from the general fund.)
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 closed Police and Fire Pension System is the primary local pension and OPEB concern. The system had unfunded pension and other post-employment liabilities of $216.6 million, or 0.7% of AV, as of Jan. 1, 2012. The pension plans are about 70% funded when adjusted for Fitch's 7% rate of return adjustment, which is just adequate. The plan's funded status has declined sharply over the past five years due to investment losses during the recession. The losses have put increased pressure on general fund resources, as a swing from over-funded status to under-funded status forced Anchorage to begin making significant annual contributions to the pension plans, which are likely to continue for the foreseeable future.
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, Zillow.com, National Association of Realtors, Underwriter, Bond Counsel, and Underwriter Counsel.
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