Fitch Rates Denver, Colorado GOs 'AAA'; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns the following ratings to Denver, Colorado debt:

--$16.5 million general obligation (GO) Better Denver Bonds, series 2011A 'AAA'.

The GOs are scheduled to sell competitively during the week of June 27.

In addition, Fitch affirms the following ratings:

--$966.2 million GO bonds at 'AAA';

--$442.7 million certificates of participation (COPs) at 'AA+';

--$13.0 million excise tax revenue bonds, series 2003, at 'AA+';

--$253.6 million excise tax revenue bonds, series 2005A, 2009A, 2009B, 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.

--Financial performance weakened due to the recession and management expects to continue to rely to some extent on non-recurring measures to keep reserves within prudent policy levels.

--The city benefits from strong voter support for the city's large bond program and property tax levy increases for capital maintenance.

--Taxing margin is available under the Taxpayer's Bill of Rights (TABOR), although large increases may not be politically feasible.

--The 2003 excise tax revenue bonds are characterized by very high debt service coverage and near-term maturity, offsetting credit concerns over recent pledged revenue declines.

--The 2005A and 2009A-B excise tax revenue bonds have a narrower revenue pledge than the series 2003 bonds but have benefited from solid debt service coverage.

For all Fitch-rated excise tax bonds, an absence of additional debt plans, level debt service, and rapid pay-out should facilitate continued solid coverage.

KEY RATING DRIVERS:

--Substantial progress in achieving structural balance is key to retaining the highest level of credit quality; failure to identify recurring solutions to budget gaps beyond 2012 will lead to negative rating pressure.

--Continued solid debt service coverage remains an important rating consideration for the city's two excise tax revenue bond securities.

SECURITY:

The GO bonds are secured by an unlimited annual property tax levy. The COPs are secured by lease revenue payments from general revenues, subject to annual appropriation. The series 2003A excise tax revenue bonds are secured by Denver's Facilities Development Admission Taxes (seat tax) and Employee and Business Occupational Privilege Taxes (head tax). The series 2005A, 2009A, and 2009B excise tax revenue bonds are secured by a parity senior lien on portions of the lodger's, prepared food & beverage, and auto rental taxes.

CREDIT SUMMARY:

Denver's economic diversity benefits from its role as the hub of a 10-county metropolitan area and the capital of Colorado. While job losses occurred in 2009-2010, employment losses for the 12 months ending March 2011 totaled a modest 0.3%. Similarly, the area's unemployment rate has trended up notably but appears to have stabilized at 9.3% as of March 2011. Although the city is experiencing a building downturn, 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 medium-term economic prospects.

The city's financial profile remains sound due to management's notable efforts to curb expenditures in the wake of recent recessionary pressures on the city's largest revenue source, sales and use taxes. This revenue stream comprises about 50% of general fund revenues. In response to 2009's steep 10% decline in sales and use tax revenues, the city reduced its budget by $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 2009 unreserved fund balance declined to $93 million or 10.7% of spending, just above the city's 10% fund balance policy floor, from 13.1% at the end of fiscal 2008. The city's reserve required by TABOR provides another $20 million in short-term flexibility, as any use of these funds would have to be replenished the following year.

The city made additional cuts totaling $100 million to balance its 2010 budget, resulting in a large $22.8 million surplus. In addition to greater than budgeted sales and use tax revenues, management decided not to make a $18 million payment to the fire pension plan. Along with budget cuts and revenue enhancement, the 2010 surplus will be used to help close another $100 million budget gap in the 2011 budget. This budget is based on an assumed 2.2% gain in sales tax revenues (over audited 2010 actuals). Year-to-date receipts are on track with this forecast, leading officials to project a year-end cushion of $94.1 million, equal to 10.5% of spending.

Preliminary estimates for 2012 point to another $100 million budget gap which management expects to close through revenue enhancements and budget cuts, along with improved revenue projections for existing revenues, in order to maintain its financial cushion at 10.5% of spending. Fitch notes that one-half of the budget cuts since 2009 are temporary and believes continued attention to creating long-term structural balance is important to maintaining the current rating. The city has set up a taskforce to address this issue, and Fitch will monitor its recommendations, due December 2011, and management's ability to implement them.

The current GO offering represents the fourth 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 was projected to be mill-rate neutral but preliminary estimates of a decline in assessed valuation in 2012 may result in a modest rate increase. The $60 million in remaining bond authorization will be issued over the next two to three years.

Despite frequent debt issuances, the city's direct debt burden remains moderate, but overall debt levels are moderately high at $6,920 per capita and 5% of full value. Previously rapid, the combined principal pay-out rate for GO bonds and COPs is now only average. The funded position of the city's pension for its non-fire and police personnel is satisfactory; similarly, the state's pension plans for fire and police personnel are adequately funded. The city's modest other post employment benefit (OPEB) liability is an implicit rate subsidy, funded on a pay-go basis.

The series 2003 excise tax revenue bonds continue to benefit from very high debt service coverage despite recent declines in pledged revenues. Such revenues are comprised of the broad-based head tax on all employees and employers within the city, and the narrower seat tax, both of which are rebounding after declining notably in 2009. Coverage of maximum annual debt service (MADS) by 2010 pledged revenues totals a very high 16.0 times (x). MADS coverage by 2010 head tax revenues alone, which Fitch views to be a more stable source of security, totals a still high 13.6x. Additionally, Fitch notes the bonds have a level debt service schedule and fully mature in 2015, plus there are no additional debt plans.

The series 2005A and 2009A-B excise tax revenue bonds also exhibited solid debt service coverage at 2x in 2010, but Fitch notes the narrow nature of these pledged excise taxes, making them more vulnerable to economic swings. The lodger's tax makes up 46% of pledged revenue, followed by the rental-car tax at 30% and the food and beverage tax at 23%. Total pledged revenues declined by nearly 14% in 2009 before rebounding by 11% in 2010. The bonds are structured with level debt service and rapid principal pay out of 80% in 10 years. The city reports no additional debt plans for this security.

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, 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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