SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has downgraded to 'BB+' from 'BBB' the following North Las Vegas, NV (the city) obligations:
--$1.475 million limited tax general obligation (LTGO) bond series 2002B;
--$136.57 million LTGO bonds (additionally secured by consolidated tax pledged revenues);
--$298.6 million LTGO water and wastewater improvement bonds (additionally secured by water and wastewater system pledged revenues).
The Rating Outlook is Negative.
SECURITY
The bonds are secured by the full faith and credit of the city, subject to Nevada's constitutional and statutory limitations on the aggregate amount of ad valorem property taxes. Additional security is provided to $136.57 million of the bonds by an irrevocable pledge of and lien on certain consolidated tax revenues (15% of these revenues) and to $298.6 million of the bonds by pledged water/wastewater system net revenues.
KEY RATING DRIVERS
BUDGET BALANCE REQUIRES EMERGENCY RESOLUTION: The downgrade and Negative Outlook reflect the city's continued fiscal distress, as evidenced by the second consecutive year with a resolution declaring a state of emergency. The state statue permitting the declaration does not include a fiscal emergency. However, the city contends that in the wake of failed concessions, offsetting layoffs would have created a public safety emergency.
PENDING LAWSUITS: The city is facing lawsuits and grievances related to the fiscal 2013 resolution, and one of the city's four unions declared its intent to file another lawsuit in response to the fiscal 2014 resolution. According to management, the city is in settlement negotiations with three of the four unions.
CONTINUED REVENUE DECLINES: The city's fiscal distress is driven by a steep drop in general fund revenues coupled with costly long-term labor contracts. Reserve levels previously viewed as a cushion against revenue fluctuations have been used to balance the budget and are narrow and illiquid. A recent attempt to refinance a small amount of LTGO bonds to boost liquidity was unsuccessful.
RELIANCE ON UTILITY TRANSFERS TO CONTINUE: The general fund is reliant upon large water/wastewater fund transfers for a quarter of general fund resources. A state law that mandated their reduction was recently overridden by adopted legislation. This practice provides near-term relief but has reduced the financial position of the utility funds, calling into question the longer-term feasibility.
PRESSURED AND NARROW ECONOMY: The city and region's economy were among the hardest hit by the collapse of the housing market, resulting in a combined TAV decline of 52% over the last four years. The regional economy is dominated by tourism and gaming which experienced significant revenue and employment declines but appear to be stabilizing.
GROWING LONG-TERM LIABILITIES: Debt levels are moderate to high with limited additional debt expected. Amortization is extremely slow and debt service is inclining. Carrying costs, including debt and retiree liabilities, are moderately high and expected to increase with rising pension payments.
NO ENHANCEMENT FOR ADDITIONAL PLEDGES: Fitch's rating reflects the city's LTGO pledge although the city intends to pay a portion of debt service from other pledged revenues. The additional pledges do not enhance the rating because consolidated tax revenues support a high proportion of general fund operations and water/wastewater revenues have historically provided only at or below about 1.0x debt service coverage after transfers to the general fund.
RATING SENSITIVITIES
UNFAVORABLE LEGAL RULING: Failure to gain relief from contractual compensation increases via favorable rulings or settlements with bargaining units may require the city to provide back wages for fiscals 2013 and 2014. This would result in a significant unbudgeted cost on the already highly stressed budget.
FURTHER ECONOMIC DECLINE: Given continued revenue declines, any additional weakening of the city's economic indicators from currently anticipated trends would likely result in negative rating pressure.
INABILITY TO UTILIZE UTILITY TRANSFERS: If the city is unable to obtain approval from the Committee on Local Government Finance (CLGF) as required by legislation for the additional transfers needed to balance the budget, it may face rating pressure given limited expenditure flexibility. However, Fitch views approval as likely.
CREDIT PROFILE
North Las Vegas encompasses approximately 100 square miles in Clark County with a population of 227,585. The city is approximately 43% built out with a large quantity of undeveloped land. The city has nearly doubled in population since 2000 but growth has more recently slowed with the housing and economic downturn.
EMERGENCY RESOLUTION ADOPTED FOR SECOND CONSECUTIVE YEAR
The downgrade reflects the city's ongoing fiscal distress resulting in the city adopting a resolution declaring a state of emergency for the second consecutive year on June 19. Facing an $18.8 million total deficit, of which the general fund accounts for $14.6 million (about 12% of general fund spending), the city had been unable to come to agreement with its four unions on concessions including suspension of salary increases, holiday sell backs, merit pay, and uniform allowances. Combined, these concessions total $11.7 million for fiscal 2014.
In addition, the city expects to receive only a net $500,000 (less than 1% of general fund revenues) increase in C-tax revenues in fiscal 2014 as a result of legislative action on the state-wide distribution formula versus its requested $23 million. Improved receipts bring total collections to $41.5 million, which is $2 million, or 4.6%, higher, than fiscal 2013. The city estimates an increase of less than 1% in property tax revenue for fiscal 2014.
STEEP REVENUE DECLINES AND RISING COSTS
General fund revenues declined to an estimated $87.6 million for fiscal 2012 not including utility transfers, a drop of 46.7% since peaking in fiscal 2008. Property taxes continue to decline and now make up only 9.7% of revenues compared to 18% in fiscal 2010.
The city has closed several years of budget gaps by eliminating about 1,000 full-time equivalent positions (45% since the peak in 2009) through attrition and voluntary separation and layoffs. In addition, the city negotiated temporary memoranda of understanding (MOUs) with various unions providing concessions but precluding layoffs through fiscal 2012.
The fiscal 2013 budget had an initial $33 million imbalance. Following unsuccessful negotiations with bargaining units to extend concessions under the temporary MOUs related to multi-year labor contracts expiring in fiscal 2014 and 2015, city council approved a large number of public safety layoffs, among other ongoing and one-time solutions. The layoffs would have generated savings of $17 million from public safety and $3.9 million from general government.
In lieu of following through with the layoffs, city council approved a resolution permitting the city to declare an emergency under Nevada Revised Statue (NRS) 288.15 which permits the one year suspension of labor contracts in 'situations of emergency such as a riot, military action, natural disaster or civil disorder.' The resolution stated that the 'mass layoffs of public safety personnel that would otherwise be required to balance the budget would result in a public safety emergency.' Pursuant to NRS 288.15, the city would not be required to pay back suspended wages. The emergency declaration resulted in about $9.9 million in fiscal 2013 savings primarily from suspension of the labor contracts through the end of fiscal 2013.
PENDING LITIGATION
The police supervisors' union filed a breach of contract lawsuit and the fire fighters and police officer's unions filed formal grievances following the fiscal 2013 emergency resolution. The police supervisors' union indicated its intent to file again given the fiscal 2014 resolution. The city continues to operate as if the labor contract suspensions hold and estimates resolution could take as long as two years. Management has indicated the city is in negotiations to settle the lawsuits with three of the four unions. Fitch believes the city faces significant financial risks if these issues are not resolved in the city's favor.
LIMITED FINANCIAL CUSHION
The city's financial position has weakened as a result of many years of large net deficits. Fiscal 2012 ended with a slightly improved unrestricted general fund balance of $8.9 million equal to 7.3% of spending. Results were modestly below expectations Management expects to end fiscal 2013 with similar results and meet the city's target of 8%, which is well under the original board policy of 18% which was revised downward during fiscal 2011.
General fund liquidity declined significantly from an average of $15.5 million from 2006 to 2009 to just $1.28 million at the end of fiscal 2011. It has since increased to $3.97 million in fiscal-year end 2012, equal to just 0.5x liabilities. Management expects to increase liquidity moderately to $6 million for fiscal 2013. An attempt to refinance $6.855 million in general obligation bonds in April to provide liquidity was unsuccessful. Fitch views this as both an indication of, and a contributor to, the city's financial stress.
The city retains 20% flexibility under the tax rate cap. However, Fitch believes the city council's decision not to increase the rate despite declaring emergency supports management's assertion that an increase is politically infeasible.
TRANSFERS FROM WATER/WASTEWATER SYSTEM PRESSURED
The general fund is highly dependent on transfers, including payments in lieu of taxes (PILT), from the water and wastewater systems representing 26% of general fund revenues in fiscal 2012. City council passed a resolution in 2012 to reduce the $32 million annual transfer by $500,000 annually to comply with state law limiting transfers to $17 million by 2021. However, recently adopted state legislation allows the transfers to continue at their higher levels. In addition, the city is permitted to transfer above the cap for certain purposes subject to the approval of the state's CLGF. Management estimates a total of $11.4 million above the current $32 million limit available for transfer from the utility funds through 2017.
Water and wastewater system unrestricted cash reserves continue a declining trend. Fitch believes increased transfers could accelerate this decline, creating uncertainty regarding availability of cash for future transfers. Days cash on hand fell from $179 million, or 1,367 days cash on hand in fiscal 2009, to $48.7 million, or 499 days in fiscal 2012.
Combined water/wastewater debt service coverage (DSC) equaled 2.6x in fiscal 2012. Coverage incorporating transfers out was 1.2x, an improvement after two years of less than 1.0x. Projections from October 2012 assuming 3% annual increases in water and wastewater rates and transfers of $32 million annually show coverage declining to 0.6x in 2013 net of transfers before increasing to just over 1.0x by 2017.Coverage may in fact be lower due to the increased level of transfers.
Given the general fund's reliance on the utility transfers and the strain they are putting on the utility system, Fitch does not believe the water and wastewater revenues provide additional credit enhancement for such LTGO bonds additionally secured by these revenues. Furthermore, sustained draws on reserves could further pressure the general fund's credit quality.
POTENTIAL INCREASED STATE INVOLVEMENT
State law authorizes the Department of Taxation (Taxation) to take over the management of a local government if the entity is not able to successfully deal with budget shortfalls. Taxation has broad financial powers, including approving all expenditures, negotiating with creditors, negotiating contracts and collective bargaining agreements, and increasing the ad valorem tax rate available to pay local government obligations from $3.64 to $4.50 per $100 of AV.
According to city management, thus far Taxation has requested monthly updates on financial status and has not indicated any intention of significant additional steps, including taking control of the city's financial management.
ELEVATED DEBT LEVELS
Overall debt levels are moderate to high at $2,747 per capita and 5.6% of market value not including water/wastewater debt. Amortization is low with a 10-year principal pay out of only 33% through fiscal 2024 and an ascending debt service schedule in the intermediate term. The city's five-year capital improvement plan through fiscal year 2018 includes about $244 million in projects, down from $300 million the prior year. The majority of projects have identified outside funding sources.
Carrying costs, net of GO debt paid by the water and wastewater funds, are currently in the moderate range at 22% of noncapital governmental spending. Fitch believes this ratio will increase as both debt service and post-retirement benefit costs rise. Pension payments make up the majority of those costs at 15%. Contributions rates to the Nevada Public Employees' Retirement System are statutorily determined and were 23.75% for regular employees and a high 39.75% of public safety salaries in fiscal 2012. The plan's funded ratio is somewhat weak at a Fitch-estimated 63.9% using a 7% rate of return, making future rate increases likely. The city's other post-employment benefits liability as of year-end fiscal 2012 was a relatively modest $29.4 million.
STRESSED ECONOMY
The city's tax base grew rapidly through fiscal 2008 before declining precipitously by 53% between 2009 and 2012. It has ticked up 3% in fiscal 2013 and 2% in 2014. The city's housing market continues to experience high foreclosure rates. North Las Vegas housing prices are still down more than 50% from their peak in April 2006; however, there are some positive signs with an increase of 32.1% as of May 2013 year over year to $126,300. State-wide figures are similar with prices up 23.2% year over year to $152,900. Given the small share of revenue that property taxes now contribute, Fitch believes sizable TAV increases would be needed to have a meaningful impact on the budget.
The city's economy is reliant upon gaming; most major employers and taxpayers are hotel/casinos. The top 10 taxpayers, of which three are hotel/casinos, make up 7% of TAV. Unemployment of 11.4% as of April 2013 is down from 13.7% year over year based on 2.2% employment growth. The city's rate is well above the county (9.6%), state (9.5%), and nation (7.1%). Median household income is 6% above the state's and 14% above the nation's, but per capita income is 20% below both state and national average.
Tourism is beginning to recover with the Las Vegas Convention and Visitors Authority reporting an increase in visitors of 0.5% as of April 2013 year over year. Average daily room rates are up 6.9% over the same time period.
Additional information is available at 'www.fitchratings.com'.
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.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
--'Revenue-Supported Rating Criteria (June 3, 2013);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (Aug 3, 2012);
--'2013 Water and Sewer Medians' (Dec. 4, 2012);
--'2013 Water and Sewer Sector Outlook' (Dec. 4, 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
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684901
2013 Water and Sewer Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695756
2013 Outlook: Water and Sewer Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695755
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=795205
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