AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has taken the following rating actions on outstanding Kingman, AZ (the city) bonds:
--$1.80 million excise tax revenue bonds series 2005 affirmed at 'AA-';
--$1.01 million Kingman Municipal Property Corporation (MPC) excise tax revenue bonds, series 1997 affirmed at 'AA-'.
In addition, Fitch affirms the city's implied general obligation (GO) rating at 'AA-'.
The Rating Outlook is Stable.
SECURITY
City and MPC-issued excise tax bonds are parity obligations secured by a first lien on excise tax revenues including city sales and franchise taxes, licenses and permits, fines, and state-shared sales and income taxes. The city's obligation to make lease payments to the MPC is absolute and unconditional and is not subject to appropriation or abatement.
KEY RATING DRIVERS
EXCISE TAX REVENUE CONCENTRATION: Government operations are heavily reliant on economically sensitive sales and excise tax revenues fund government operations, although diversification within this source exists. Collections are improving subsequent to a sharp multi-year decline precipitated by the recession and housing collapse.
SOUND FINANCIAL PROFILE: Strong financial flexibility is aided by conservative budgeting and exhibited by solid fund balance levels. Maintenance of reserves at or above the city's policy minimum is a key credit strength which mitigates the inherent risk associated with a revenue base dependent largely on sales taxes.
LOW DEBT / RISING PENSION COSTS: The city's debt profile is characterized by low debt levels, rapid amortization, and manageable capital needs. Growth in pension costs will likely continue for the foreseeable future given below average funding levels.
STRONG COVERAGE: The 'AA-' rating on the excise tax revenue bonds reflects the general creditworthiness of the city and high coverage of maximum annual debt service (MADS) from pledged revenues. No new debt issuance is anticipated in the near term. Robust debt service coverage from pledged revenues is expected given that excise tax revenues represent the primary source of the city's operating revenues.
CREDIT PROFILE
The city of Kingman is roughly three hours northwest of Phoenix and 90 minutes southeast of Las Vegas and benefits from commercial traffic between the two cities. While Kingman is somewhat remote it serves as the commercial center for the region. The 2010 census population totaled 28,279 reflecting a greater than 40% increase since 2000. Retail, healthcare and government entities make up a large portion of the city's top employers and taxpayers with no concentration.
ECONOMICALLY SENSITIVE REVENUES / SLOW ECONOMIC RECOVERY
The city's income is largely dependent on economically sensitive revenues including local and state sales taxes as well as state income tax distributions, together approximating 90% of the budget. Mirroring the local and state-wide economy, excise tax collections grew by 45% between fiscal years 2004 and 2007, before declining by a total of 23% in the subsequent four years ending in fiscal 2011.
Unaudited fiscal 2012 revenues registered an overall 1% increase, with a 7% increase budgeted for fiscal 2013. The budget includes a 6% gain in local sales tax collections (based on a newly implemented 2% restaurant and bar tax) and recovery of state-wide receipts, distributed to the city with a 2-year lag. Fitch anticipates local sales tax receipts to strengthen based on management's reports of new and expanded commercial and retail development within the city.
While Kingman's housing market remains pressured, the direct effect on the budget has been minimal when compared to some AZ localities. The city does not levy a property tax and construction sales tax receipts peaked in fiscal 2006 but still totaled only 15% of for that year.
The unemployment rate of 9.4% in September 2012 reflects improvement from a year prior, but remains above state and national averages of 8% and 7.6% respectively. Income levels are roughly 85% of state and national averages.
RESERVES MITIGATE EXCISE TAX VOLATILITY
Finances remain well managed, with a high level of financial flexibility demonstrated by general fund balances consistently in excess of the city's 25% policy target. The city has maintained reserves despite revenue declines by reducing costs through reductions in force, deferred minor capital spending, and foregone pay increases, as well as by enhancing revenues. A newly implemented 2% restaurant and bar tax is estimated to generate $1.2 million annually, half of which will supplement general fund revenues, with the other half to the city's highway user fund to support road maintenance. Additionally, the city implemented a 2% room tax rate (February 2010) to fund capital projects.
Kingman outperformed the fiscal 2011 budget with a small net deficit of $683,000 (3% of expenditures and transfers out), bringing the unrestricted general fund balance to $7.3 million or 33.1% of spending and transfers out. Unaudited fiscal 2012 results and the fiscal 2013 budget reflect break-even operations. The city has expressed its commitment to adhering to its fund balance policy which seems achievable given the city's history of conservative budgeting.
MANAGEABLE DEBT BURDEN
Overall debt levels are low at $1,306 per capita and 1.6% of full market value. Amortization is rapid with 87% retired in 10 years. The city's debt burden on the general fund is moderate at 10.5%. Near term capital plans focus on transportation and drainage projects and are expected to be funded with a combination of fees, tax collections and third party sources.
The city pledges its excise taxes to bondholders of both city and MPC issued debt. Very high MADS coverage of 18.3 times (x) reflects the use of pledged revenues as the city's primary operating source.
RISING PENSION COSTS
The city participates in the Arizona State Retirement System (ASRS), a cost sharing multiple employer (CSME) plan governed by the state, and two agent multiple employer (AME) plans for public safety and fire officials, the Public Safety Personnel Retirement System (PSPRS). Using Fitch's more conservative 7% rate of return, versus the plan's assumed 8.5% rate, funded ratios for the AME plans were 65% and 59%, respectively, as of June 30, 2009. The city funds OPEB on a pay-go basis. The city's carrying costs, including debt service, pension and OPEB contributions, represent a moderate 19.5% of fiscal 2011 general fund expenditures and transfers out.
Kingman consistently funds 100% of the pension actuarial required contribution (ARC) for the three plans in which it participates but funding levels are below average. The city projects its share of ASRS retirement and OPEB contributions to increase from 9.9% of fiscal 2011 compensation to 12% by fiscal 2015. PSPRS contribution rates are projected to increase from 19.2% and 18.4% of fiscal 2011 covered payroll to 23.8% and 21.5% of fiscal 2013 covered payroll respectively for police and fire employees.
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, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, National Association of Realtors, and the Municipal Advisory Council of Texas.
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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
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