NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA' rating to the following city of Kansas City, Missouri obligation:
--$55.3 million general obligation (GO) improvement & refunding bonds, series 2011A bonds.
The bonds are scheduled for negotiated sale March 15. Proceeds will be used to refund series 2002 A&B bonds, and to fund capital improvements.
In addition Fitch downgrades the following ratings:
--GO bonds to 'AA' from 'AA+';
--Kansas City Industrial Development
Authority (KCIDA) to 'A+' from 'AA-';
--Kansas City Municipal
Assistance Corp. (KCMAC) to 'A+' from 'AA-';
--Special obligation
bonds to 'A+' from 'AA-'.
Fitch places all debt ratings on Rating Watch Negative.
RATING RATIONALE:
--The downgrade reflects the greater inherent risks to the city's
financial performance and overall vitality created by the new initiative
requiring voter approval of the continuation of the city's principal
revenue source every five years.
--The Negative Watch reflects the
risks associated with the first such voter referendum, which could have
a materially adverse impact on the city's already thinly balanced
finances absent draconian expenditure reductions over the long term.
--The
Negative Watch further reflects potentially negative implications due to
an unfavorable referendum outcome on the city's ability to renew or
replace expiring letters of credit (LOC).
--The city has a deep and
diverse economic base that serves as the economic engine for the
surrounding region.
--Socioeconomic indicators are mixed with an
expanding population, average wealth levels and high unemployment rates.
--The
city's debt burden is elevated, and a portion, albeit a declining ratio,
is variable rate and/or synthetically fixed rate debt with associated
negative mark-to-market swap positions.
--The city has not made its
full actuarially required contribution (ARC) to its pension plan for
nine of the past ten years.
WHAT COULD TRIGGER A DOWNGRADE?
The outcome of the April 2011 referendum results in the phase-out of the city's principal revenue source.
SECURITY:
--The GO bonds are secured by the city's full faith and credit and its
ad valorem tax, without limitation as to rate or amount.
--KCMAC,
KCIDA and special obligation bonds are ultimately payable from any
legally available funds of the city, subject to annual appropriation.
Certain transactions additionally have cash funded debt service reserves
or sureties, leasehold interests in the non-essential pledged assets
and/or dedicated revenues.
CREDIT SUMMARY:
Kansas City has a deep and diverse economic base that serves as the economic engine for western Missouri and eastern Kansas. The economy is anchored by a stable employment mix of government, utilities, and health care, but also by the more economically-sensitive telecommunications and auto manufacturing sectors. As of November 2010, the city's unemployment rate of 11.5% was well above both the state (9.2%) and national (9.1%) averages, and furthermore experienced a 1.7 percentage point increase from the year prior compared to declines at both the state and national levels during the same time period. Population has been increasing without a commensurate increase in jobs, which has contributed to the high unemployment. City residents are less affluent than the U.S. average but a lower cost of living equalizes this credit factor.
The city's general fund operations are primarily supported by an earnings tax, which accounted for 41% of total general fund revenues in fiscal 2010 (April 30). The earnings tax is a 1% income tax on all workers employed within the city and 1% tax on net business profits generated within the city. City residents will vote on April 5, 2011 and every five years thereafter to maintain or repeal the earnings tax. If not renewed, the tax will be phased out in 10% increments over ten years, and the city is prohibited from instituting a new earnings tax. However, since roughly 50% of the earnings tax is paid by non-city residents, who cannot vote, city residents may be inclined to preserve this revenue source and the services it funds. If voters do repeal the earnings tax, either in April or in the future, the decision could have a catastrophic effect on the city's service levels, and would likely lead to a comprehensive deterioration on the quality of life within the city.
As a result of the pending initiative, management has prudently drafted two budgets for fiscal 2012 addressing both potential outcomes. If the earnings tax is repealed, management believes the city can increase its property and utility taxes and institute various fees and charges for municipal services that would, in the aggregate, counter the earnings tax declines for the first two years. Thereafter, the city has identified potential draconian expenditure reductions, including a 33% reduction in police personnel, 64% reduction in fire personnel, and wholesale cuts in municipal services. Even if residents vote to maintain the earnings tax in April, the city's primary revenue source will be subject to voter approval every five years thereafter.
After generating a $25.8 million (4.8% of expenditures and transfers out) general fund operating deficit in fiscal 2009, the city generated an $18.8 million (3.8%) general fund operating surplus in fiscal 2010, which augmented the unreserved balance to 5.4% from a nominal 2.2% balance the year prior. The positive results were achieved despite a 2% decline in earnings tax revenues and assisted by a 3% reduction in expenditures including wage and benefit concessions, staff reductions, and underfunding pension contributions. Results would have been closer to break-even if the pension ARC had been fully funded.
The fiscal 2011 budget was balanced without use of fund balance or non-recurring revenues. As of December 2010, revenue performance is mixed with earnings tax down marginally from the same period a year prior, utility taxes up 12%, sales tax up 4%, and convention & tourism tax up 6%.
As a result of aggressive infrastructure and economic development expansion, the city's debt load increased substantially over the past decade, and is a continuing credit concern. The aggregate debt burden totals $4,976 per capita and 8% of market value.
Historically, the city's debt profile included a notable portion of unhedged variable rate and/or synthetically fixed rate obligations, which at one point totaled 45% of debt outstanding; however, the percentage will equal 22% as of April 2011. Four synthetically-fixed swap transactions, with a negative mark-to-market of $21 million as of February 2011, and seven LOCs, of which four will expire by August 2011, are tied to $323 million in variable rate debt outstanding. If a favorable resolution for the expiring LOCs is not found (which may prove more difficult if the referendum fails), certain obligations would be accelerated over a three year period; an unpalatable result for the city. On a positive note, the city is actively pursuing a fixed rate refunding of $176 million of variable rate debt in May or June 2011, of which $131 million is synthetically fixed and has associated LOCs expiring in July 2011. The city would be required to pay roughly a $9 million swap termination payment but would no longer be subject to the ancillary risks associated with the original financing.
As of December 2009, the aggregate unfunded actuarial accrued liability (UAAL) associated with the city's four single-employer defined benefit pension plans totaled $706 million (72% funded), which equaled 2.4% of market value. The city paid 66% of its aggregate pension ARC in fiscal 2010, which even at the reduced level comprised 11% of general fund expenditures. The city provides an implicit rate subsidy for post-employment healthcare, which as of May 2008 had a UAAL of $209 million or 0.7% of market value. The city acknowledges the current funding of its pension benefits may not be sustainable, and thus has tentative plans to address funding levels and its benefit structure during the fiscal 2012 budget process.
Additional information is available at www.fitchratings.com.
In addition to the sources of information identified in the Tax-Supported Rating Criteria this action was additionally informed by information from Creditscope, LoanPerformance, Inc., University Financial Associates, and IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria,' dated Aug. 16, 2010.
--'U.S.
Local Government Tax-Supported Rating Criteria', dated Oct. 8, 2010.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Tax-Supported Rating
Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
U.S.
Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566
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