Fitch Rates Santa Fe, NM Sr and Sub Lien GRT Rfdg Bonds 'AA+'/'AA'; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns initial ratings to the following city of Santa Fe, New Mexico's (the city) gross receipt tax (GRT) bonds:

--Approximately $15.5 million GRT refunding revenue bonds, series 2010A rated 'AA+';

--Approximately $26.6 million subordinate lien GRT refunding revenue bonds, series 2010B rated 'AA'.

Proceeds of the 2010A and 2010B bonds will refund a portion of the city's outstanding debt for interest savings. Debt structure is not materially changed as a result of the refunding. Both series of bonds are expected to sell via negotiation on or around Nov. 8.

In addition, Fitch affirms the following rating:

--Approximately $29 million in outstanding general obligation (GO) bonds at 'AA+.'.

The Rating Outlook is Stable

RATING RATIONALE:

--Given the heavy reliance on GRTs for operating support, the rating for the GRT bonds is inextricably tied to the city's financial performance as well as its GO bond rating.

--General fund reserve levels remain favorable, despite contraction in GRTs. Recent monthly GRT collections point to some stabilization.

--GRT bond legal provisions are strong.

--The city maintains additional financial flexibility through available property tax and GRT margins.

--Economic stability is anchored by the large government presence, and city unemployment rates remain below state and national averages, while wealth indices are above the state. Taxable value growth continues, albeit at a slower pace than in prior years.

--Tax supported debt ratios are above average, reflecting primarily GRT secured bonds and loans. GO debt levels, however, are very modest.

KEY RATING DRIVER:

Given the city's dependence on economically-sensitive GRTs for operating and debt service support, management's continued attention to expenditure controls and preserving reserve levels consistent with the high-grade rating remains an important credit consideration.

SECURITY

The bonds are secured by a first lien on the city's share of state GRTs (1.225% of the statewide 5% rate); 0.5% of the Municipal GRT; 0.0625% of the Infrastructure GRT; any portion of the above-mentioned GRTs that would have been remitted to the city but previously exempted by the state legislature; and any other GRTs received by the city pledged for payment of the bonds. Currently, the city levies a 0.0625% Environmental GRT, which is pledged for repayment for the 1997B bonds (subordinate lien); 2006B bonds (senior lien), and the 2006C bonds (subordinate lien). The higher rating for the series 2010A bonds reflects its superior position in the flow of pledged revenues for bond repayment.

CREDIT SUMMARY

Santa Fe serves as the county seat and state capital and is located in north central New Mexico. The local economy is anchored by the large state government presence; other important sectors include tourism and recreation, retail trade, healthcare, and some industry. In addition, the recent completion of the commuter rail line between Santa Fe and Albuquerque enhances employment and tourism opportunities for the region. Historically, Santa Fe unemployment rates have been below those of both the state and nation. However, the city has not been immune to the current economic downturn, as evidenced by rising unemployment rates; as of August 2010, the city's unemployment rate stood at 6.2%, still well below the rates of the state (8.4%) and nation (9.5%). Wealth indices for the city are above the statewide average. In addition, property wealth is evident in the city's high market value per capita ratio, which is nearly $150,000, despite the large amount of tax-exempt values. After years of healthy annual gains in taxable assessed valuation (TAV), growth slowed in fiscal 2010 to 1.6%, with preliminary information for fiscal 2011 indicating another modest increase. Independent housing information points to below-average mortgage delinquencies and foreclosures, and property tax collections continue to be solid.

Typical of municipalities in New Mexico, the city's general fund is heavily dependent on state and local GRTs for general fund support. In fiscal 2009, combined GRTs accounted for approximately 80% of revenues. Property taxes, on the other hand, represented less than 4% of operating support. GRT collections underperformed the budget in fiscal 2009, coming in at $52.5 million, or 9.6% lower than audited fiscal 2008 collections. In an effort to counter declining GRTs and other revenues, the city instituted various cost-cutting measures. Despite these measures, general fund reserves were reduced by nearly $6 million in fiscal 2009. Although down from prior year totals, general fund reserve levels remain favorable, with a total balance of approximately $21 million, or a sizable 26.9% of expenditures and transfers out. With the exception of a modest amount reserved for inventory, the majority of fund balance is designated for general fund purposes, including a state-mandated one month reserve.

In fiscal 2010, amidst the continued decline in GRT collections, the city imposed more severe spending reductions, including the imposition of furlough days. The city is still in the process of closing its books for fiscal 2010, but now estimates a 6.8% drop in general fund GRT collections from the previous year (up slightly from earlier projections). Officials believe that general fund drawdown will be no greater than the $2.7 million that was budgeted. The fiscal 2011 budget is balanced (a $60,000 operating surplus is budgeted) and does not include any furloughs, layoffs, or cost of living increases. General fund GRTs are budgeted for a 4.8% decline from the 2010 budgeted amount, although officials report that GRT receipts in four of the last six months have exceeded prior year collections during the same time period, indicating some stabilization.

Financial challenges for fiscal 2012 will likely remain, given recent drawdowns in reserve levels, the lack of additional one-time solutions (such as increasing transfers amounts to the general fund), as well as continued lackluster performance of GRT collections. The city's finance committee is in the process of developing a budget plan to match recurring revenues and expenditures for fiscal 2012, reviewing various revenue enhancement and expenditure reduction strategies. The city is fortunate in that it maintains some important revenue raising flexibility with the availability of an additional 1/4% on the municipal GRT rate as well as substantial property tax margin. Reportedly, the city maintains the second lowest property tax rate in the state, behind Albuquerque. However, given the current economic climate, raising the GRT or property tax rates may prove to be politically challenging. The continuance of solid reserves remains integral to maintaining the city's high-grade credit quality.

As expected given the importance of GRTs to operations, debt service coverage on senior and subordinate lien bonds and New Mexico Finance Authority loans is solid. Fiscal 2009 pledged revenues provide 4.1 times (x) coverage of senior lien maximum annual debt service (MADS) and 2.4x coverage on senior and subordinate lien MADS. Estimated fiscal 2010 collections of pledged revenues provide 4.0x and 2.3x coverage on senior and combined senior and subordinate lien MADS, respectively. Legal provisions are good, and include a multi-tiered additional bonds test that, among other provisions, calls for a 1x coverage requirement of senior lien MADS by Municipal and Infrastructure GRTS only (state shared GRTs represent the bulk of pledged revenues) and a subordinate lien bonds test of 2x combined senior and subordinate MADS. While included in some of the prior GRT debt issuances, there is no reserve fund established for the 2010A and 2010B bonds.

The majority of the city's outstanding tax-supported debt is secured by GRTs, elevating debt ratios to above-average levels. GO debt outstanding, however, is limited. Currently, given the tightening in GRT collections, there are no plans to issue additional GRTs or return to the voters for another GO bond authorization. However, if the city council decides to raise its property tax rate to generate additional operating income, the city may issue additional GRT bonds with the available margin.

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, University Financial Associates, LoanPerformance, Inc., and IHS Global Insight.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria', dated 16 Aug. 2010.

--'U.S. Local Government Tax-Supported Rating Criteria', dated 21 Dec. 2009.

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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