SAN FRANCISCO--()--Fitch Ratings assigns an 'AA' to the following Matanuska-Susitna Borough, Alaska (the borough) bonds:
--$12.8 million general obligation (GO) school bonds, 2013 series A.
The bonds are scheduled to be sold via negotiation on March 5, 2013.
In addition, Fitch affirms the following ratings:
--$281.8 million outstanding GO bonds at 'AA'.
The Rating Outlook is Stable.
General obligations of the borough under a full faith and credit pledge. The borough is obligated to levy ad valorem taxes upon all taxable property for the payment of bond principal and interest, without limitation as to rate or amount.
KEY RATING DRIVERS
STRONG FINANCIAL MANAGEMENT: The borough's financial performance is strong, benefitting from sound fiscal policies and ample reserves.
DECLINING BUT AMPLE RESERVES: Fitch expects the borough's reserves to remain within its 25% policy despite systematic draws to for capital and operations over the last few years.
LIMITED POPULATION AND ECONOMY: The borough's economy is inherently constrained by a relatively small population base and the seasonality of some local economic activity. The economy has gradually expanded and diversified, reducing this concern, but it remains the key factor limiting the rating.
MILD RECESSION: Job creation, population growth, and assessed value (AV) gains continued throughout the recession, in marked contrast to most of the nation. Unemployment tends to run higher than the nation due to the seasonality of economic activity in the area, but income levels are solid.
STRONG DEBT PROFILE: The debt burden is low after netting out debt supported by the state of Alaska and amortizes rapidly.
EROSION OF GENERAL FUND BALANCE: Unrestricted fund balance draws below policy levels could trigger negative rating action, as robust financial cushion mitigates credit concerns surrounding the inherently constrained nature of the borough's economy.
The borough is located in south-central Alaska, approximately 40 miles northeast of the business district of Anchorage. The borough covers 25,265 square miles and has the fastest growing population in the state.
ONGOING ECONOMIC DIVERSIFICATION
The borough is now the third most populous Alaska municipality. While the borough is the largest agricultural producer in Alaska, the local economy began expanding in the early 1990s, diversifying into other types of commercial enterprises, including tourism, health care, and retail. Major economic and employment developments are underway related to the large Goose Creek Correctional Center, Port MacKenzie, and expansion of tourism infrastructure.
The borough experienced a relatively muted version of the national economic downturn similar to other Alaska communities. The unemployment rate averaged 8.3% in 2012, close to the national average of 8.1% for the year, but higher than the state's 7.1% rate. A significant number of local workers commute to part-time jobs in Alaska's northern oil fields, boosting the ongoing level of joblessness. The borough's socio-economic characteristics are relatively robust with median household income at 130% of the national level and per capita money income at 102% of the national average. The individual poverty rate of 9.9% is in line with the state rate (9.5%) and noticeably lower than the national rate (13.8%).
The tax base has been consistent over many years although slowed during/following the recession. Taxable AV increased 2.1% and 1.8% in fiscal years 2012 and 2013 respectively to $8.5 billion, an improvement from growth of less than 2% in 2010 and 2011. Tax base performance compares favorably with many other U.S. municipalities that experienced tax base erosion in recent years, but AV growth remains well below the double-digit percentage gains enjoyed in the middle of the last decade.
Ongoing new residential and commercial construction continues to gradually boost AV. Taxpayer concentration is not a concern with the top 10 payers representing only 4.4% of taxable AV and including a healthy variety of retail, health care, tourism, utility, and energy related concerns.
STRONG FINANCIAL RESULTS BUT DECLINING GENERAL FUND BALANCES
The borough's general fund balance grew annually between fiscal years 2006 and 2011. Fiscal 2011 ended with a high unrestricted general fund balance totaling $64.4 million (60.6% of spending), up 13.8% from an unreserved fund balance of $56.6 million the year prior.
Balances remain strong but the fiscal 2012 unrestricted general fund balance of $54 million (44.5% of spending) represents a significant decline. The drawdown reflects pay-as-you-go capital expenditures (for which reserves were specifically set aside) and short term maintenance of mill rates at their current levels.
The borough's fiscal 2013 budget includes further unrestricted general fund balance erosion to $43.6 million (33.6% of spending), but Fitch believes borough expectations for favorable budget variances are reasonable and consistent with historical performance. Fiscal 2013 general fund revenues are coming in stronger than expected particularly due to state funding over and above amounts already budgeted.
Fitch expects reserves to remain robust due to conservative budgeting and strong financial management policies. By borough assembly policy, the borough must maintain a general fund reserve of at least 25% of all budgeted operating expenditures (excluding the school district). Failure to maintain a strong financial cushion and adhere to reserve policies would place pressure on the borough's GO bond rating.
Fitch believes labor agreement constraints could affect the borough's future expenditure flexibility. The borough's labor agreements do not contain salary reopeners and do not allow the borough to unilaterally suspend or eliminate contracted salary and wage increases. These labor agreements also require future year wage increases, no lay-offs, and binding arbitration. More positively, they do not prohibit furloughs and do not require consideration of regional compensation in salary and wage adjustments.
MANAGEABLE DEBT BURDEN
The borough's debt burden is low after taking into account state support, largely for school district debt. Total net debt including overlapping jurisdictions is moderate at $3,220 per capita or 3.3% of market valuation without adjustments for state support. The borough is financially accountable for a legally separate school district which is reported separately within the borough's financial statements.
The overall net debt burden drops to a low $1,216 per capita or 1.3% of market valuation after taking state debt reimbursement for eligible bonds into account. Debt amortization is above average with approximately 61% of bonds repaid in 10 years and all bonds repaid in 20 years. Even after a planned $129.1 million in additional bond issuances in 2013 and 2014, Fitch projects that the per capita debt burden would remain low after state reimbursement.
Pension obligations and other post-employment benefits (OPEBs) are a significant but manageable expense. The borough routinely makes its full annually required contributions to the Alaska Public Employees Retirement System, the Supplemental Benefits System, and the Alaska Teachers Retirement System. The state is responsible for any shortfall if the annually required contribution rate needs to be in excess of 22% of payroll. Carrying costs for debt service, pension and OPEB are significant at 19.1% of governmental (less capital) fund spending, but the burden falls to a manageable 9% after adjusting for state debt service reimbursement.
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, National Association of Realtors, Bond Counsel, and the Financial Advisor.
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