Colorado Tax: Fitch Rates Denver, CO's $353MM GOs 'AAA'; Outlook Stable
- $29.3 million tax-exempt general obligation (GO) Better Denver bonds, series 2010A;
- $324 million taxable GO Better Denver bonds (direct pay Build America Bonds), series 2010B.
The bonds are expected to sell competitively during the week of June 7, 2010.
In addition, Fitch affirms the following ratings:
- $616.2 million in outstanding Denver, CO unlimited tax bonds at 'AAA';
- $278.5 million in outstanding Denver, CO certificates of participation (COPs) at 'AA+'.
The Rating Outlook is Stable.
RATING RATIONALE
Denver's economy is fundamentally sound and diverse, serving as the hub of commerce for a large 10-county metropolitan area and as the seat of state government. While having experienced a strong recessionary impact in 2009, stabilized sales tax revenue trends and declining job losses in recent months suggest local economic conditions may be improving.
Financial performance in fiscal 2009 was a departure from previously strong results, with reserves used to partially offset a significant sales tax decline in 2009. As a result, reserves now fall below the city's 15% fund balance policy level but above its 10% floor. The city expects to rebuild its unreserved fund balance over the next several years.
The financial pressures in 2009 also substantially reduced liquidity levels; however, concerns over the city's cash position is partially offset by the frequency (monthly) of the receipt of its largest revenue source, sales and use taxes and the city's ability to operate without external cash flow borrowing.
Additional large budget cuts have been imposed in the current year budget (fiscal 2010) to achieve structural balance, and management is conservatively projecting a slow pace of recovery for sales tax revenues as it faces additional financial challenges in the development of the 2011 budget.
The city benefits from strong voter support for the city's large bond program and property tax levy increase for capital maintenance.
Denver's other post-employment benefits (OPEB) have been funded on an actuarial basis since 1992, reducing exposure to sizable cost increases in future years and providing a financial cushion in annual budgets.
Projected declines in non-residential reappraisals for fiscal 2012 will offset steady residential market trends, but property value losses can be mitigated within annual levy growth constraints imposed by the Taxpayer's Bill of Rights (TABOR.)
RATING DRIVERS
- Maintenance of adequate reserves is a key consideration for retaining current credit quality. Inability to avoid further thinning of its reserves in 2010 will lead to negative credit actions.
- Restoration of the city's cash position to close to prior years' levels.
- Successful execution of further expenditure reductions budgeted in fiscal 2010 and expected in fiscal 2011 following the reductions already achieved to date through operational and personnel savings.
SECURITY
General obligation bonds are secured by an unlimited annual property tax levy. COPs are secured by lease revenue payments from general revenues, subject to annual appropriation.
CREDIT SUMMARY
The breadth and scope of the recessionary effects on Denver's economy was greater than the city's management originally anticipated as evidenced by numerous downward revisions to the budget forecasts for city's largest revenue source, sales and use taxes. This revenue stream comprises 50% of general fund revenues. In response to a steep 10% decline in fiscal 2009 in sales and use tax revenues, the city reduced its budget by a large $76 million, equal to almost 9% of total spending. The remaining structural imbalance led to a $40 million drawdown of its reserves, net of a planned use of $17 million for capital projects. As a result, the unaudited fiscal 2009 unreserved fund balance declined to $91.7 million or 10.7% of spending, just above the city's 10% fund balance policy floor. The city's reserve required by TABOR, now set aside in a special revenue fund, provides another $20 million in reserves. Notably, the city's liquidity declined significantly to only 12 days of operating expenses at the end of fiscal 2009, which Fitch notes as a concern and expects improvement to occur by the end of fiscal 2010. The city made additional cuts, totaling $99 million to balance its 2010 budget, which is based on an assumed 3.5% gain in sales tax; initial receipts are on track with this forecast. In the event sale & use tax revenues underperform, management has expressed its commitment to impose further budget cuts to maintain financial reserves above the 10% fund balance floor. However, Fitch notes during the last recession the city's sales and use tax took four years to recover, a lengthy period, and suggests there is vulnerability to the current financial plan.
The current offerings represent the second installment of the $550 million bond program authorized by voters in November 2007 along with a 2.5-mill levy increase for capital maintenance. The bond program is projected to be mill levy neutral, assuming conservative assessed value growth assumptions. The current offerings include $92 million to refund interim commercial paper and $260 million in new money. The $120 million in remaining bond authorization will be issued over the next three to four years.
Despite frequent debt issuances, the city's direct debt burden remains moderate; overall debt levels, including lease obligations and excise tax debt, are moderately high at over $6,000 per capita and 4.7% of full value. Previously rapid, the principal payout rate for GO bonds is now only average. Notably, Denver is well ahead of most municipalities in funding OPEB liabilities. The city has funded its OPEB costs on an actuarial basis since 1992, posting a funded position of 69% for 2009.
Denver's economic diversity benefits from it being the hub of a large 10-county metropolitan area and the capital of Colorado. Nonetheless, job losses occurred in 2009 and year-to-date employment is down 2.2% thru March 2010, led by losses in the construction and manufacturing sectors. Similarly, the area's unemployment rate has trended up notably to 9.3% in March 2010. Although the city is experiencing a building downturn as a whole, ongoing redevelopment throughout the city and substantial public and private investment in the downtown area, including the massive Denver Union Station project, will benefit the city's short- and medium-term economic prospects.
Considerations for Taxable / Build America Bonds Investors
This sector credit profile is provided as background for investors new to the municipal market.
Local Government General Obligation Bonds
The unlimited taxing power of most local government general obligation pledges is the broadest security a U.S. local government can provide to the repayment of its long-term borrowing and, therefore, is the best indicator of its overall credit quality. The average local government general obligation rating is 'AA', with approximately 85% rated at or above 'AA-' and 1% rated 'BBB+' or below. The relatively high ratings reflect local governments' inherent strengths: the authority to levy property taxes, nonpayment of which can result in property foreclosures; additional taxing power that can include sales, utility, and income taxes; and essentiality of and lack of competition for services provided by local governments. Those with low investment-grade or below-investment-grade ratings generally have a combination of a limited or highly volatile economic base, high levels of long-term liabilities, including debt and post-employment benefits, and/or unusually limited financial flexibility. For additional information on these ratings, see "U.S. Local Government General Obligation Rating Guidelines," dated Dec. 21, 2009 and available on Fitch's Web site at 'www.fitchratings.com'.
Applicable criteria available on Fitch's web site include:
- 'Tax-Supported Rating Criteria,' dated Dec. 21, 2009.
- 'U.S. Local Government Tax-Supported Rating Criteria,' dated Dec. 21, 2009.
TAX NEWS - may 2010
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