Fitch Affirms Mountain Village Metro District, CO GO Bonds at 'A+'; Outlook Revised to Negative

NEW YORK--(BUSINESS WIRE)--In the course of routine surveillance, Fitch Ratings has taken the following action on Mountain Village Metropolitan District, Colorado's general obligation (GO) bonds:

--$28.1 million GO bonds outstanding affirmed at 'A+'.

The Rating Outlook has been revised to Negative from Stable.

RATING RATIONALE:

--The Outlook revision reflects the town's diminished financial position and prospects for further weakening due to its declining tax base and inflexible operating tax structure.

--The district was consolidated with the town of Mountain Village in 2007 and functions only to service previously issued debt under its auspices. Because the district is controlled by the town and its finances are reported in the town's audit, the town's credit is linked to the district's ability to pay debt service.

--Financial position has weakened as the town drew down on its once formidable general fund balance in fiscals 2008 and 2009 to fund large one-time expenditures. While reserve levels remain acceptable at 16% of general fund expenditures, Fitch expects balances to be drawn down further due to the town's inability to raise its operating tax rate to offset the projected tax base declines.

--The town's position as a popular tourist destination has generated extensive development, as indicated by a property market value of nearly $3.5 billion. Tax base growth has been robust, increasing by 50% over the past five years. However, with reassessment, 2011 taxable values are expected to experience a significant drop.

--Modest debt levels relative to the town's tax base with direct and total debt burden at 0.8% and 1.3%, respectively.

--The town's small size and resort-based economy leaves it susceptible to downturns in the tourist sector.

WHAT COULD TRIGGER A DOWNGRADE?

--Depletion of financial reserves. Management's inability to preserve the town's financial viability in response to these pressures will be a major factor in maintaining the district's 'A+' rating.

--Ongoing and substantial reductions of the district's tax base.

SECURITY:

The bonds are general obligations of the district for which all taxable property within the district is subject to the levy of an ad valorem tax to pay debt service on the bonds without limit as to rate or amount.

CREDIT SUMMARY:

In 2007, the district, which is coterminous with the town of Mountain Village, was dissolved as part of a voter-approved consolidation plan and its assets and functions were turned over to the town. However, the district remains in existence to pay debt service on its outstanding GO bonds while the town sets the district's property tax rate and performs all of the district's former municipal functions.

Mountain Village incorporates the main village area of Telluride Ski Resort. With a permanent population of 1,320, the town is reliant upon tourism and accompanying development around Telluride for its economic well-being. During the middle years of the past decade, Mountain Village experienced intensive development activity, issuing over $200 million of building permits in 2006, the peak year. Newly developed properties included hotels, condos and second homes. With the recession, permit activity dropped precipitously and only $27 million of permits were issued in 2010. Other economically-sensitive indicators such as sales taxes and development fees mirror this trend, although sales tax collections picked up in fiscal 2010.

Town financial operations weakened over the past three years and while its financial position remains satisfactory, projected operating deficits after this year raise concerns regarding the future adequacy of reserves. Operating results were either balanced or in surplus during this period; however, large transfers from the general fund in fiscals 2008 and 2009 resulted in a sizable drawdown of reserves. General fund transfers included a drawdown of $1 million of development-related revenues received in 2008 to pay debt service on the town's series 2006A general obligation bonds. Other transfers in that year included over $500,000 to support a conference center and $425,000 for capital outlays. In fiscal 2009 the town was required to utilize $1.1 million of reserves for emergency repair work at one of its affordable housing units. Due to these one-time transfers as well as ongoing town subsidies to enterprises such as daycare services and another affordable housing project, the town drew down upon its significant reserves. Between fiscals 2007 and 2010, unreserved general fund balance was trimmed from $4.4 million, over 40% of expenditures, to $1.6 million or 16% of general fund spending.

Growth in property and sales taxes combined with reduced transfers produced a small net general fund surplus in fiscal 2010. Town officials have had some success in reducing the amount of transfers; for example, private management was recently hired to operate the conference facilities lowering the level of subsidies. Fiscal 2011 general fund results are expected to show a small surplus.

The preliminary 11% reduction in the town's tax base, given the town's fixed operating tax rate of 13.11 mills, would reduce property tax revenues for fiscal 2012 by about approximately $540,000. Officials have set aside $450,000 of reserves to cover revenue shortfalls, although use of these funds would bring unreserved balance down to about 12% of general fund expenditures. Operating reserves at the current level are still adequate; however, the downward trend is a concern and financial flexibility has been diminished. The town remains susceptible to future unanticipated spending.

The district's tax base grew over the past decade, increasing by over 300% between fiscals 2000 and 2010; the average annual increase was 12.8%. This growth was fuelled by residential valuations, which represent over 86% of values and expanded at an average annual rate of 19% during this period. Growth has slowed in the last year as the recession has taken its toll on home values. Preliminary assessed valuation estimates from the appraiser for fiscal 2012 show an 11% drop in the tax base, although new construction might offset a portion of this drop. Furthermore, the top taxpayer, a hotel and condo development accounting for 3% of total valuations, is in receivership and will be sold in the near future. The hotel remains open for now and is current on its property tax payments.

Debt levels are quite high on a per capita basis but modest relative to the district's sizable tax base with a debt-to-full value ratio of 1.3%. Principal amortization is rapid with 72% retired within 10 years. Annual debt service requirements decline by over 75% after 2017, providing future operating flexibility. Town officials indicate that their capital needs are manageable with existing resources and have no plans to issue additional bonds in the foreseeable future.

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

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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