NEW YORK--()--Fitch Ratings has affirmed the following Kansas City, Missouri (the city) bond ratings:
--$449.3 million in outstanding unlimited tax general obligation (ULTGO) bonds at 'AA';
--$317.9 million Kansas City Industrial Development Authority (KCIDA) at 'A+';
--$200.0 million Kansas City Municipal Assistance Corp. (KCMAC) at 'A+'; and
--$421.0 million special obligation bonds at 'A+'.
The Rating Outlook is revised to Stable from Negative.
The ULTGO bonds are secured by the city's full faith and credit and its ad valorem tax, without limitation as to rate or amount.
The special obligation bonds are payable from any legally available funds of the city, subject to annual appropriation.
The KCMAC and KCIDA bonds are ultimately payable from any legally available funds of the city, subject to annual appropriation. Certain transactions additionally have cash funded debt service reserves or sureties, leasehold interests in the pledged assets and/or dedicated revenues.
KEY RATING DRIVERS
IMPROVING LONG-TERM LIABILITY DRIVES OUTLOOK: The change to Stable Outlook reflects the city's revised capital plans, which are much more modest in scope than previously contemplated, as well as progress made towards improved pension funding.
STRONG ECONOMIC BASE: The city has a deep and diverse economic base that serves as the economic engine for the surrounding region.
AVERAGE SOCIOECONOMIC PROFILE: The city's population is expanding. Wealth levels and unemployment rates are roughly average.
STABLE FINANCIAL PERFORMANCE: The city has generated breakeven or positive general fund operating results for the past several years and reserve levels are adequate. However, the city's primary revenue source must be re-authorized by voters every five years.
PENSION UNDERFUNDING: Lack of full funding for the annual required contribution (ARC) has reduced pension funding ratios from previously strong to more moderate levels. Officials have made progress by negotiating agreements with employee groups participating in two of the city's four pension plans, although these are still subject to approval by the state legislature. These agreements include higher employee contributions and lower projected benefit costs and liabilities
APPROPRIATION RATING DIFFERENTIATION: The two-notch rating distinction between the city's ULTGO bonds and the KCIDA, KCMAC and special obligation bonds reflects the inherent appropriation risk and the less essential nature of the assets financed.
STALLED PROGRESS TOWARD FULL FUNDING OF PENSION ARC: The city's inability or unwillingness to initiate a plan to increase funding of its annual pension liability could place negative pressure on the rating.
REGIONAL ECONOMIC ENGINE
Kansas City has a deep and diverse economic base that serves as the economic engine for western Missouri and eastern Kansas. The economy is anchored by a stable employment mix of government, utilities, and health care, but also by the more economically sensitive telecommunications and auto manufacturing sectors.
AVERAGE SOCIOECONOMIC PROFILE
Wealth levels are on par with the state and slightly below the national average. The December 2012 unemployment rate of 7.5% represents an improvement over the 8.1% recorded a year prior, but this gain comes mainly as the result of a shrinking labor force. The rate is about the same as the national rate of 7.6% and above the state's rate of 6.5%.
Kansas City is a host city for Google Fiber, which is an ultra high-speed broadband network up to 100 times faster than current broadband. The network is already attracting a number of smaller internet and data companies to the city and has the potential to make a significant economic impact.
DIVERSE REVENUE STREAM VULNERABLE TO PERIODIC VOTER APPROVAL
The city's general fund operations are primarily supported by an earnings tax, which accounted for 30% of general and debt service fund revenues in fiscal 2012. The earnings tax is subject to voter approval every five years. Although city residents overwhelmingly approved its continuation on April 5, 2011, the city's primary revenue source is still at risk of a permanent phase-out if voter support wanes. However, since roughly 50% of the earnings tax is paid by non-city residents, who cannot vote, city residents may be inclined to preserve this revenue source and the services it funds. Other major sources of operating fund revenue include licenses and permits, which generate 19.6% and the property tax, which accounts for 9.4% of revenues.
STABLE OPERATING RESULTS
The city's general fund recorded essentially break-even results in fiscal 2012, with a net operating deficit after transfers equivalent to 0.5% of spending. Unrestricted general fund balance improved at 9.1%, versus the 7.1% unreserved balance recorded a year prior. Fitch notes that the financial results would have been less positive if the full pension ARC had been funded.
The fiscal 2013 budget includes significant cost containment measures, including a 105 position reduction in workforce and an early retirement incentive. Year to date results indicate positive trends in earnings tax collections and officials anticipate ending the year with a modest addition to general fund balance. While the budget includes an increase in annual pension payments, they remain significantly below the ARC. Officials project that significant increases in pension ARC funding will not occur prior to fiscal 2015.
ELEVATED LONG-TERM OBLIGATIONS
Debt levels are above average, measuring $5,071 per capita and 8.1% of market value. Debt service claims a large 20% of general and debt service fund spending. However, Fitch notes that much of the debt service payments are supported by identified revenue streams, reducing the pressure on operations.
Future capital plans have been scaled back from previously reported levels and now mainly center on combined sewer overflow solutions (expected to be funded from enterprise operations) and the downtown streetcar project. The city anticipates issuing $83 million of special obligation bonds to fund the starter route for the street car project; $15 million of federal grants is also expected. The bonds will be paid from the proceeds of voter approved sales tax and property assessments within the transportation development district. Overall, Fitch does not expect debt levels to materially rise given the more moderate borrowing plans and the average payout of existing debt.
Previously strong pension funding levels have dropped in recent years as the city has not fully funded the pension ARC. As recently as 2008, the combined funding level of the city's four plans was a strong 90%. By 2011, reduced contributions and investment losses reduced the combined funding ratio to 78.6%, or 75.6% when adjusted by Fitch to reflect a 7% discount rate. The city paid 70% of its annual pension cost (APC) in fiscal 2012. The entire required amount, if it had been paid, would have amounted to 11.8% of operating fund spending. The city provides an implicit rate subsidy for post-employment healthcare, which has a modest unfunded actuarial accrued liability of $52 million.
The city has been working towards a plan to address the pension funding levels and its benefit structure. Agreements have been reached with employees covering two of the plans, with the agreements including increases to employee contributions and a tiered benefit structure for new employees. These agreements must be approved by the state legislature before they can be implemented. Negotiations with employee groups covering the remaining two plans are ongoing. The city anticipates material progress toward full funding of the ARC in the fiscal 2015 budget year, assuming state approval of the plan.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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, S&P/Case-Shiller Home Price Index, IHS Global Insight, and National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria