Fitch Affirms North Las Vegas, NV LTGOs at 'B'; Outlook Negative

SAN FRANCISCO--()--Fitch Ratings has affirmed at 'B' the following North Las Vegas, NV (the city) obligations:

--$365,000 limited tax general obligation (LTGO) bond series 2002B;

--$131 million LTGO bonds (additionally secured by consolidated tax pledged revenues);

--$290.7 million LTGO water and wastewater improvement bonds (additionally secured by water and wastewater system pledged revenues).

The Rating Outlook is Negative.

SECURITY

The bonds are secured by the full faith and credit of the city, subject to Nevada's constitutional and statutory limitations on the aggregate amount of ad valorem property taxes. Additional security is provided to $131 million of the bonds by an irrevocable pledge of and lien on certain consolidated tax revenues (15% of these revenues) and to $290.7 million of the bonds by pledged water/wastewater system net revenues.

KEY RATING DRIVERS

TENTATIVE BUDGET DEFERS RECEIVERSHIP: The city has released a tentative budget for fiscal 2015 and appears likely to avoid a state takeover in the near-term. The budget utilizes a mix of expenditure reductions and deferrals in addition to further drawdowns of reserves, and will be considered by the city council in May.

SETTLEMENT REACHED WITH LABOR: Representatives from four bargaining units have tentatively agreed to a settlement with the city that would significantly reduce its obligation to restore wages frozen in prior years.

SEVERE FINANCIAL CHALLENGES CONTINUE: The city continues to face a sizeable and increasing budgetary imbalance with no significant prospects for revenue recovery, constrained expenditure flexibility following steep cuts in prior years, and ongoing cost pressures. It must also address a mandated reduction in subsidies from its utility funds.

LEGISLATIVE OPTIONS CONSIDERED: Recent press accounts have noted discussions among state officials of the need for additional options to address municipal distress. While no proposals have yet been released, officials are reportedly examining ways to bring bondholders to the table and negotiate concessions.

WEAK AND CONCENTRATED ECONOMY: The city and region's economy were among the hardest hit in the U.S. by the collapse of the housing market, resulting in a combined taxable assessed valuation (TAV) decline in the city of 52% over the last four years. The regional economy is dominated by tourism and gaming which experienced significant revenue and employment declines but appear to be stabilizing.

GROWING LONG-TERM LIABILITIES: Debt is high relative to the tax base, amortization is slow and debt service is inclining in the intermediate term. Carrying costs, including debt and retiree liabilities, are moderate but expected to increase with rising pension payments.

NO ENHANCEMENT FOR ADDITIONAL PLEDGES: Fitch does not believe the additional pledges of consolidated tax and water/wastewater revenues provide sufficient additional strength to warrant higher ratings than the level of the LTGO.

RATING SENSITIVITIES

APPROVALS PENDING: Rejection of the tentative agreements by the city council or labor would jeopardize the city's ability to adopt a budget for fiscal 2015 and would increase near-term uncertainty.

INABILITY TO ACHIEVE BUDGETED SAVINGS: The fiscal 2015 budget relies on management's ability to implement a hiring freeze and achieve departmental savings. Failure to achieve such savings would strain the city's finances further and increase downwards rating pressure.

POTENTIAL FOR BONDHOLDER IMPAIRMENT: Adoption of state legislation permitting the impairment of bondholders would add to downwards rating pressures on the city's bonds. Fitch notes that no such legislative proposals have yet been released and the timeframe for their consideration remains uncertain.

CREDIT PROFILE

North Las Vegas encompasses approximately 100 square miles in Clark County with a population of 227,585. The city is approximately 43% built out with a large quantity of undeveloped land. The city has nearly doubled in population since 2000 but growth has more recently slowed with the housing and economic downturn.

TENTATIVE 2015 BUDGET AND LAWSUIT SETTLEMENT

North Las Vegas has reached tentative agreements with all four of its unions related to a $25 million Jan. 21 court judgment as well as fiscal 2015 concessions allowing for a balanced budget. The tentative agreements must be voted on and approved by union members and City Council. If approved, the possibility of imminent additional state intervention, such as receivership, would be reduced. The council is scheduled to consider the settlement on May 7 and vote on the budget May 20. A final city budget must be submitted to the state June 2.

The $7.7 million lawsuit settlement relates to a judgment rejecting the city's fiscal year 2013 and 2014 resolutions declaring a state of emergency and suspending negotiated compensation increases. Payment consists of $5.6 million generated by a reduction in the city's general fund balance to 6% from 8% and $2.1 million from a public safety sales tax fund.

The city's unions have also tentatively agreed to defer drawing on compensated absences in fiscal 2015, shifting approximately $10 million in expenses to future years. Additional budget savings is anticipated from $4.8 million in previously planned hiring that will be delayed and $2.6 million in departmental budget cuts.

LIKELIHOOD OF IMMINENT STATE INVOLVEMENT LESSENED

Given the tentative fiscal 2015 balanced budget, the likelihood of imminent state receivership is lessened. State law bars Nevada municipalities from filing for bankruptcy, but allows for the state to become the receiver. The Nevada Tax Commission could also eventually ask voters to approve disincorporation. Current statute requires that taxes for bond repayment continue to be levied under disincorporation. However, under state receivership, the statute directs the state to formulate a debt liquidation program.

In place of receivership, sentiment at the state level appears to have shifted towards legislative solutions to encourage voluntary concessions by bondholders or other creditors. No formal proposals for such legislation have been released, but state officials have been quoted in recent press accounts regarding the need for tools to encourage creditors to voluntarily enter into negotiations with the city to restructure debt.

STRUCTURAL IMBALANCE; DEPENDENCE ON UTILITY TRANSFERS REMAIN

The city's seven-year forecast released in January indicates a large and growing structural deficit with negative general fund balances increasing to $142 million by fiscal 2021 (87.8% of that year's forecasted spending) assuming only small revenue increases as well as annual $32 million transfers from the utility fund. Such transfers have had a negative impact on the utility funds, whose cash balances, which stood at $83.5 million at fiscal-year end 2012, are projected to decrease to $3.5 million by fiscal 2018.

The city's financial position has weakened as a result of many years of large net deficits. Fiscal 2013 ended about as expected with an unrestricted general fund balance of $8.9 million equal to 7.5% of spending.

General fund fiscal 2013 year-end cash was just $2.3 million, or 0.4x liabilities and has declined significantly from an average of $15.5 million from 2006 to 2009. An attempt to refinance $6.9 million in general obligation bonds in April 2013 to provide liquidity was unsuccessful. Fitch views this as both an indication of, and a contributor to, the city's financial stress.

STEEP REVENUE DECLINES; NO REMAINING EXPENDITURE FLEXIBILITY

General fund revenues declined for the fifth consecutive year in fiscal 2013 to $86.95 million not including utility transfers, a drop of 47.2% since peaking in fiscal 2008. Property taxes continue to decline and now make up only 8.7% of revenues compared to 18% in fiscal 2010. The city retains about 30 cents in flexibility under the statutory tax rate cap of $3.64 per $100 of assessed value. However, management has indicated this would raise only an estimated $1 million due to abatement and Fitch believes the city council's decision not to increase the rate despite adopting two state of emergency resolutions supports management's assertion that an increase is politically infeasible.

Given the level of cuts made prior to the emergency resolutions, including eliminating about 800 full-time equivalent positions (35% since the peak in 2009) through attrition and voluntary separation and layoffs, the city retains virtually no additional expenditure flexibility beyond layoffs.

ELEVATED LONG-TERM LIABILITIES

In part due to the steep decline in TAV, overall debt levels including the water and wastewater GO bonds are high at 7.4% of market value. In addition, amortization is slow with an ascending debt service schedule in the intermediate term.

Carrying costs are currently in the moderate range at 17% of governmental spending. However, Fitch expects this ratio will increase as both debt service and post-retirement benefit costs rise.

STRESSED ECONOMY

The city's tax base grew rapidly through fiscal 2008 before declining 58% between 2009 and 2013. It ticked up 1.4% in fiscal 2014. The city's housing market continues to experience high foreclosure rates as, despite recent increases, home prices are still 50% below their 2006 peak.

The city and regional economies are concentrated in gaming; most major employers and taxpayers are hotel/casinos. The city's unemployment rate of 10.2% as of December 2013 was well above the county (8.9%), state (8.7%), and nation (6.5%). Median household income is 6% above the state and 14% above the nation, but per capita income is 20% below both state and national average.

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.

Applicable Criteria and Related Research:

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

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Contacts

Fitch Ratings
Primary Analyst
Stephen Walsh
Director
+1-415-732-7573
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Karen Ribble
Senior Director
+1-415-732-5611
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Stephen Walsh
Director
+1-415-732-7573
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Karen Ribble
Senior Director
+1-415-732-5611
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com