Fitch Rates Seattle (WA) $83.4MM LTGOs 'AA+'; Affs ULTGOs & LTGOs; Outlook Stable

SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA+' rating to the following city of Seattle, Washington general obligation (GO) bonds:

--$83,385,000 limited tax general obligation (LTGO) bonds, 2011.

The bonds are expected to sell competitively on March 1, 2010. Proceeds will be used to fund various programs in the city's capital improvement program.

In addition, Fitch affirms the following ratings:

--$120 million unlimited tax GO (ULTGO) bonds at 'AAA';

--$742.3 million LTGOs at 'AA+'.

The Rating Outlook is Stable.

RATING RATIONALE:

--Seattle is a regional economic center with a large and diverse but historically cyclical economy due to the presence of Boeing and Microsoft.

--Strong financial management, including economic forecasting, revenue monitoring and sound reserve policies, positioned the city to retain its strong financial position through the prolonged economic downturn.

--The city's finances are marked by diverse revenues and above-average, though fluctuating, total fund balance levels. Fluctuations reflect economic cycles and revenue limitations such as constrained property tax growth.

--The city's debt burden is low, primarily resulting from effective policies regarding pay-as-you-go capital financing and a real estate excise tax (REET) dedicated to capital.

--Despite diversification, the regional economy remains heavily influenced by Boeing and Microsoft and their related industries, both of which experience regular but uncorrelated economic cyclicality. Nonetheless, the recent economic downturn was broad and was not driven by technology or aerospace and is not expected to be followed by a strong recovery.

--The city's unfunded pension liability rose steeply due to investment losses. While the city is planning to increase annual contributions, such amounts will remain below the actuarially determined level (annual required contribution, or ARC) required to retire the liability. The city's OPEB obligation is relatively low, the result of an implicit subsidy provided to retirees.

KEY RATING DRIVERS:

--The city's strong reserve policies and practices are a key credit strength given the cyclicality of the regional economy; maintaining designated reserves at least at the current level with a view to rebuilding as economic recovery takes hold is key to retaining the highest credit quality.

--Fitch expects the city to take some action to address the pension liability during the biennium while maintaining general fiscal balance.

--The city will need to constrain spending during the slow economic recovery to ensure its ongoing expenses are aligned with ongoing revenues.

--The current high ratings assume the city's economy recovers along with the U.S. economy, as appears to be starting.

SECURITY:

Limited tax general obligation bonds are secured by the city's irrevocable pledge to budget and to levy taxes annually within the constitutional and statutory tax limitations provided by law on all taxable property in the city to pay debt service on the bonds. Unlimited tax bonds are secured by the city's irrevocable pledge to budget and levy taxes annually as needed to pay debt service, with no limit as to rate or amount.

CREDIT SUMMARY:

The Seattle area economy appears to be at the beginning of a very modest economic recovery. Although not yet adding jobs year over year, the rate of job loss slowed from October 2009 to October 2010 to 0.6% from 2.2% and the unemployment rate seems to have stabilized at a somewhat high 7.7%. However, this remains substantially below the state and national averages for October 2010 of 8.5% and 9.1%, respectively. Contributing to the recovery are the region's two large employers: Boeing reportedly added about 1,400 jobs in the fourth quarter of 2010 and Microsoft added about 770 in 2010 through September. Seattle's housing market decline started later and price declines have been less severe than nationally. Nonetheless, the area's housing market is stressed, as evidenced by an increase in the rate of foreclosure on non-agency loans in the Seattle metro area in the third quarter of 2010 to 7.9% from 6.9% a year prior.

As the economy contracted, Seattle's general fund revenues declined as well, led by a steep drop in the REET. However, the general fund benefits from a diverse revenue stream, led by property taxes (28%), utility taxes (20%), business & occupation (B&O) (18%), and sales taxes (16%). Utility and property taxes provided some stability as sales taxes, B&O taxes and real property transfer taxes declined more sharply. The actual decline in revenue for 2008 and 2009 was larger than the city originally had anticipated and, as a result, in addition to spending cuts, the city used fund balance in these years to close budget gaps. Another budget gap of about $40 million was identified for 2010 which the city addressed with ongoing cuts, the rainy day fund and other one-time sources. In addition, the city had to make $12 million in mid-year adjustments which it achieved without layoffs, suggesting some future budget flexibility.

For 2011, the city's budget includes layoffs (97 general fund and 200 citywide), a selective salary freeze, reduced or no COLAs and $18 million in increased revenue from a variety of use and penalty fees. Other revenue assumptions in the 2011 budget appear reasonable, including 1.1% growth in property taxes, 2% growth in sales tax and 4.6% growth in the B&O tax. These assumptions are supported by recent data, but as the recovery is still fragile, close monitoring and responsiveness to changes will be important to maintaining fiscal balance. The city currently expects fund balance in 2011 and 2012 to be fairly stable; use of fund balance would primarily result from capital spending from the REET fund which is limited to capital uses. Aside from revenue pressures, operating pressure results from a steep increase in the unfunded pension liability due to recent investment losses. From 2008 to 2010, the city's pension liability for general employees increased from $175 million to over $1 billion. Fully funding the ARC would require increasing the contribution rate to 25% from 16%. Since the city does not use smoothing in its pension fund, it is increasing the contribution rate to 20% in 2012. The city is currently reviewing its pension system, including the practice of not smoothing and expects to have another actuarial study this year. Fitch expects the city to take some action to address the pension liability while maintaining general fiscal balance.

Current fund balance levels are at the low end of the city's historical range so retaining fiscal balance is key to maintaining credit quality. Fitch does not expect the city to rebuild reserves to their previous high levels but does expect some increase to reserves in anticipation of future economic downturns. Going forward, the city will be challenged to increase reserves in a slower revenue growth environment than in previous recoveries. The city's fund balance peaked in 2007 when it ended the year with $197.7 million in unreserved fund balance, equal to a high 22.4% of expenditures. After drawing on its reserves in 2008-2010, the city expects to end 2010 with about $84 million unreserved fund balance, equal to a still solid 9% of expenditures. Importantly, the city does not plan to use fund balance for operations in 2011; a substantial decline in reserves would raise concerns for Fitch given the high city's high ratings.

Despite steep declines in taxable assessed valuation (TAV), property tax revenue has continued to grow due to Washington's property tax limitation which permits the tax levy to increase by 1% plus new construction. There is a $3.60 per $1,000 TAV limit to the rate, but the city is well below this limit. After increasing at double-digit rates for three years, TAV declined 10.3% in 2010 and 3.4% in 2011 but property taxes increased 3.1% and 2.2%, respectively. The city believes 2011 will be the last year of decline in TAV and forecasts a very small increase for 2012. Housing data for the regional economy is mixed, with median home prices down about 17% since 2006, and foreclosures of non-agency loans at a relatively low 7.2%, compared to 12.5% nationally. However, foreclosures have increased steeply from a year ago. Offsetting some concern about the sizable TAV decline is the city's ability to raise the tax rate to increase the overall levy.

Seattle's debt burden is low, largely the result of a significant pay-as-you-go capital program funded by the real estate excise tax and voter-approved levies. Debt service on unlimited tax debt is exempt from the levy growth and rate limits. Proceeds from this sale will fund various capital projects and refund existing debt. Amortization is above average with 62% of principal repaid in ten years.

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., IHS Global Insight, Underwriter, Bond Counsel, Underwriter Counsel, Trustee.

Applicable Criteria and Related Research:

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

'U.S. Local Government Tax-Supported Rating Criteria', dated 08 Oct 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

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.