Fitch Affirms Rio Rancho, NM's GOs at 'AA'; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)--As part of its routine surveillance efforts, Fitch Ratings has affirmed its 'AA' rating on the following Rio Rancho, NM's bonds:

--$29.6 million general obligation (GO) bonds.

The Rating Outlook is Stable.

RATING RATIONALE:

--The city's financial performance has weakened due to the substantial declines in its primary operating revenue source - gross receipts taxes (GRTs). Such declines were caused by the steep contraction in local home building which was the largest source of GRTs before the recent recession and the end of the housing boom.

--The city's GRT base has stabilized, and management is prudently allocating GRT revenue from major construction projects for one-time expenditures in order to mitigate the impact of this cyclical sector on its revenue base.

--The financial reserves of the city have thinned but remain adequate and are projected to improve due to renewed revenue growth and ongoing budget cuts.

--The city's economic base is intertwined with the Albuquerque MSA which is broadly based on government, healthcare, and manufacturing. City wealth levels are above average, aided by predominance of local high-tech employment.

--The city's debt profile is mixed, characterized by moderate debt levels, rapid amortization, and modest debt plans, balanced against voters' recent rejection of a bond election.

KEY RATING DRIVERS:

--Maintenance of solid financial reserves in light of the city's heavy reliance on economically sensitive GRT revenue.

SECURITY:

The bonds are secured by an unlimited property tax levy.

CREDIT SUMMARY:

The city of Rio Rancho, just north and west of Albuquerque, is relatively new, having begun as a development in the mid-1960s. The city, reportedly the fastest growing in the state, is now the third largest in New Mexico and among the fastest growing in the nation. The 2010 census count of almost 88,000 is up 69% since the 2000 census. The city's rapid population growth was fueled by an abundance of affordable housing and the subsequent relocation of high-tech companies to Rio Rancho, led by Intel, the city's largest employer with 4,600 permanent and contract employees, which added a $2.5 billion chip plant in 2002. With the expansion of its high-tech base, about one-third of Rio Rancho residents are employed in the manufacturing sector. The city's unemployment rate totaled 7.5% in March 2011, equal to the state average but well below the national average.

After peaking at 2,851 single family building permits in 2006, permits have fallen to pre-housing boom levels and are projected to remain at about 300-600 per year. However, non-residential construction remained steady due to several major higher education and healthcare projects. Within the last year, the University of New Mexico (UNM) and the Central New Mexico Community College each built new campuses. Also, UNM is building a teaching hospital on its Rio Rancho campus. Hewlett Packard built a $64 million customer service and technical support center and is ramping up its number of jobs to over 1,350 by the end of 2012. Finally, a new $80 million hospital is nearing completion, along with associated retail in its vicinity.

Like most New Mexico municipalities, GRT revenue comprises about one-half of the city's general fund revenues. After posting growth in excess of 20% in fiscal years 2005-2007, GRT revenue fell notably by 9%-16% in fiscal years 2008-2010 due to the steep contraction in home construction. Prior to the home building downturn, the construction sector accounted for 46% of the city's GRT revenue compared to 17% in fiscal 2010. To stabilize this revenue source, the city imposed an additional 1/4% GRT effective Jan. 1, 2011, generating an additional $625,000 for the remainder of fiscal 2011. Including natural growth of 11% and the new GRT increment, total year-to-date GRT growth for fiscal 2011 equals 13.5%.

After posting financial reserves as large as 50% of spending in recent years, the city's fund balance thinned in fiscal years 2007-2009 due to GRT declines plus planned capital outlays and surging public safety expenditures. Both trends were eliminated starting in fiscal 2009, leading to flat or declining spending through fiscal 2011, aided by a hiring freeze on 83 positions, deferment of pay hikes, and 1% salary reductions. In its most recent audit, the city posted a modest addition to the unreserved portion of its general fund balance, increasing it to $10.9 million or 22% of spending. As a result, the city's liquidity also improved, exceeding its policy of maintaining at least one-month's spending in unrestricted cash. Year to date results for the period ending June 30, 2011 point to positive operating results as the city expects its cash position to further improve by $1 million - $1.5 million. The 2012 budget represents another year of austerity for the city as it maintains a hiring freeze on 85 vacant positions and increases spending by only 1.3% over projected fiscal 2011 levels. The fiscal 2012 budget projects a nearly $1 million draw down in fund balance although recent GRT trends should allow the city to outperform its projections.

Direct debt levels are modest, benefiting from historically substantial pay-as-you-go financing as well as impact fee funding, and developer contributions. In fiscal years 2006-2008, over $24 million was transferred to capital projects from the general fund. Overall debt ratios are moderate, primarily reflecting issuance by the area school district. Payout is very rapid, with all general obligation bonds repaid within 10 years. After establishing a two-year GO bond election cycle in 2009, city voters rejected a $22 million authorization in March 2011. The city is contemplating a smaller $10 million bond proposition for March 2012, followed by similar sized propositions every two years, structured with a neutral tax rate impact. The city's five-year capital plan totals a large $813 million, although it's mostly funded by state and federal grants and water and sewer system revenues. The major capital needs of the city remain water (water and sewer revenue bonds rated 'AA-' with a Stable Outlook by Fitch) and streets and roads.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's 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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