Fitch Affirms Columbia, Missouri's Special Obligation Bonds at 'AA'; Outlook Stable

NEW YORK--()--Fitch Ratings affirms the ratings on the following City of Columbia, Missouri (the city) bonds:

--Approximately $172 million outstanding special obligation bonds (a detailed list appears at the end of this release) at 'AA';

--Implied unlimited tax general obligation (ULTGO) at 'AAA'.

The Rating Outlook is Stable.

SECURITY

All series are special obligations of the city, subject to annual appropriation. The bonds are not secured by a leasehold interest in or mortgage of the respective projects. The series 2012C and series 2012E bonds are not secured by a debt service reserve fund (DSRF); all other outstanding series are secured by a cash-funded DSRF.

In addition to the annual appropriation requirement, the series 2012D bonds are also secured by surplus electric utility net revenues after payment of any water and electric revenue bonds and other required deposits pursuant to ordinance.

KEY RATING DRIVERS

APPROPRIATION RISK: The 'AA' rating on the special obligation bonds reflects the city's 'AAA' implied ULTGO bond rating as well as the appropriation risk and lack of security interest in the projects.

SOLID FINANCIAL POSITION; DIVERSE REVENUES: The city's financial position benefits from diverse revenues, strong reserve levels and balanced operations.

STRONG MANAGEMENT PRACTICES: The city's strong management team has demonstrated a commendable record of proactive fiscal operations and conservative budgeting practices which have provided the city with ample financial flexibility.

FAVORABLE DEBT POSITION: The majority of the city's direct debt is supported from enterprise funds and is amortized rapidly, though overall debt is high.

DIVERSE ECONOMIC BASE: The implied ULTGO rating reflects a diverse and growing economic base anchored by a university community.

WEAK PENSION FUNDING: The city's pension plans are underfunded, with funding levels decreased from the previous review. Changes in plans for new employees and full funding of the annual required contribution (ARC) should help to improve the funding level.

RATING SENSITIVITIES

CHANGES TO CREDIT FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics including the strong financial performance and a stable local economy. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

The city of Columbia is located in Boone County in the central portion of the state along interstate 70. The population was 108,500 as of the 2010 census, an increase of 28% over the previous decade.

PAYMENTS SUBJECT TO APPROPRIATION BUT PAID FROM ENTERPRISE REVENUES

Fitch's rating on the bonds reflects the city's strong overall credit profile, appropriation risk, and the lack of security interest in the asset. City ordinance requires the city manager to include in each annual budget an appropriation of the amount necessary to pay debt service on its special obligation bonds in the next fiscal year and to take any further action that may be necessary to assure the availability of money appropriated to pay the debt service. The city has issued multiple series of special obligation bonds with payments subject to appropriation but which in fact are paid from enterprise net revenues.

The city's series 2012D bonds do include an additional security of surplus net revenues from the city's water and electric system after payment of any senior revenue bonds and any required reserve fund or renewal and replacement deposits. Pursuant to ordinance, the city has covenanted to charge electric utility rates sufficient to pay senior lien revenue bonds and debt service on the 2012D bonds by 110%. In fiscal 2013, water and electric revenues provided approximately 2.3 times coverage on combined senior lien and appropriation backed bonds. Fitch views the reliance on utility revenues for debt service as a credit neutral factor given the strength of the utility operations and the clear way in which utility rates are set to provide ample coverage and a fixed level of general fund support.

FAVORABLE ECONOMIC UNDERPINNINGS

The city benefits from a diverse economic base which includes a mix of government, education, health care, and financial services. The city is home to the main campus of the University of Missouri, Columbia College, and Stephens College. Approximately 48,000 students attend these institutions during the regular school year.

Unemployment in the city remains well below average at 3.5% as of November 2013 (preliminary) which was considerably lower than the state (5.5%) and national (7.0%) averages in the same month. Wealth levels have typically been below average with median household income at 90% of the state and 80% of the nation, which are depressed by a large student population.

STRONG GENERAL FUND FINANCIAL PERFORMANCE

The city's general fund financial position remains strong, with fiscal 2012 marking the third consecutive year of operating surpluses after transfers. The fiscal 2012 surplus was $1.9 million or 2.5% of spending after transfers, with the unrestricted general fund balance at $29.4 million or 39.2% of spending. The surplus was partially driven by a sales tax increase of 4.9% in fiscal 2012, which the city attributes to rising motor vehicle sales, home improvement activity, and increased student spending. Also, the surplus for fiscal 2012 (as well as prior years) was accomplished in part through active financial management, which helped to hold expenditures relatively flat over the past three fiscal years.

Results for fiscal 2013 are better than budgeted. The city ended fiscal 2013 with a small draw on general fund balance instead of using $1.7 million of reserves as expected. The projected ending general fund balance is $29.6 million, compared with $29.8 million in fiscal 2012, with $29.2 million being unrestricted. The favorable fiscal 2013 performance was again influenced by positive sales tax growth, which exceeded the 3% expectation. The fiscal 2014 budget is balanced with the exception that the city is expecting to use $1 million of fund balance towards reducing its pension liability, a significant budgetary concern for the city.

DIVERSE REVENUE BASE OFFSETS PROPERTY TAX LIMITATION

General fund revenue sources are diverse with sales tax accounting for 27% of total revenues, other local taxes at 16% and property taxes at 9% in 2012. Sales and other taxes have performed consistently over the past five years and sales tax was up notably in 2012 by 4.8%, with preliminary results indicating strong performance for 2013 as well.

Assessed values in the city have risen in each year since at least fiscal 2006. The current property tax rate of $0.41 is lower than the state-wide cap of $1.00. However, flexibility is limited as the rate cannot be raised without voter approval under the Hancock Amendment.

The city receives significant general fund support from payments in-lieu of taxes (PILOT) paid by the city-owned water and electric utility (the system). The PILOT was $14.2 million in fiscal 2012, which accounted for approximately 18% of combined general fund revenues and transfers in. The PILOT payment is based on the book value of the system at the city property tax rate plus an amount equal to 7% of annual gross energy receipts. Operations at the utility are sound and Fitch believes that support of the general fund will continue.

LOW DEBT BURDEN

The city's total overall net burden is low at approximately at 2.6% of market value or $1,630 per capita. Amortization is fast, with 77% maturing in the next ten years. The exposure to appropriation debt is partially mitigated by significant enterprise fund support for appropriation-backed debt.

PENSION CHANGES WILL HELP BELOW-AVERAGE PENSION FUNDING

The city's single employer pension plans for fire and police are significantly underfunded at an estimated 50% for both plans using Fitch's 7% discount rate assumption despite a history of 100% funding of the city's annual required contribution (ARC). The city additionally participates in the Missouri local government employee's retirement system (LAGERS) for all non-uniformed employees. LAGERS is funded adequately at an estimated 73% using a 7% rate of return assumption.

The city recently made changes to its pension and other post-employment benefit (OPEB) funding, including reducing benefits for employees hired after Sept. 2012, which will decrease its liability in the long term. The city also eliminated its healthcare subsidy for retirees as of Oct. 2013, which has significantly reduced the size of its OPEB liability. As of the most recent actuarial report (Oct. 2013), the plan was 103% funded. Fixed obligation carrying costs are moderate, with debt service, pension and OPEB expenses representing 22.7% of governmental spending.

The following outstanding special obligation bonds of the city are affirmed at 'AA':

--$38.5 million special obligation electric utility improvement bonds, series 2006C;
--$21.5 million special obligation electric utility improvement bonds, series 2008A;
--$23.4 million special obligation revenue improvement bonds (downtown government center project), series 2008B;
--$13 million taxable special obligation improvement bonds (Build America Bonds/direct subsidy - annual appropriation obligation) series 2009A;
--$1.3 million taxable special obligation improvement bonds (parking project), series 2012A-1;
--$7.3 million special obligation improvement bonds (parking project), series 2012A-2;
--$1.2 million special obligation refunding bonds (sewer system project - annual appropriation obligation), series 2012B;
--$2.1 million special obligation refunding bonds (solid waste system project - annual appropriation obligation), series 2012C;
--$23.7 million special obligation refunding bonds (electric utility project - annual appropriation obligation), series 2012D;
--$39.5 million special obligation electric utility refunding bonds (annual appropriation obligation), series 2012E.

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, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors, and 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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=821159
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Contacts

Fitch Ratings
Primary Analyst:
Sheena Gordon, +1-212-908-9115
Associate Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Eric Friedman, +1-212-908-9181
Director
or
Committee Chairperson:
Doug Scott, +1-512-215-3275
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst:
Sheena Gordon, +1-212-908-9115
Associate Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Eric Friedman, +1-212-908-9181
Director
or
Committee Chairperson:
Doug Scott, +1-512-215-3275
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com