Fitch Rates Denver, Colorado's 2014A GOs 'AAA'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings assigns the following rating to Denver, CO (the city):

--$12 million general obligation (GO) Better Denver bonds (Denver mini-bond program), series 2014A 'AAA'.

The bonds will be sold directly to local investors during the week of July 14. Proceeds will be used for various civic facility improvements.

Fitch also affirms the following ratings on the city's outstanding debt:

--$903.9 million general obligation unlimited tax (GOULT) bonds at 'AAA';

--$415.2 million certificates of participation (COPs) at 'AA+';

--$8.3 million excise tax revenue refunding bonds, series 2003 at 'AA+';

--$222.3 million excise tax revenue refunding bonds, series 2005A, 2009A, 2009B at 'AA-'.

The Rating Outlook is Stable.

SECURITY

GOULT bonds of the city are secured by an unlimited annual property tax levy. COPs are secured by lease revenue payments from general revenues, subject to annual appropriation. The essentiality of the leased assets provides additional security.

The series 2003A excise tax revenue bonds are secured by Denver's Facilities Development Admission Taxes (seat tax) and Employee and Business Occupational Privilege Taxes (head tax). The series 2005A, 2009A, and 2009B excise tax revenue bonds are secured by portions of the lodger's, prepared food & beverage, and auto rental taxes.

KEY RATING DRIVERS

LARGE ECONOMIC BASE: Denver's economy is fundamentally sound and diverse, serving as the hub of commerce for a large 10-county metropolitan area and as the seat of state government.

IMPROVED FINANCIAL POSITION: Prudent financial management enabled the city to expand its financial reserves amidst a recovering revenue environment. Fitch views positively the city's successful ballot measure to increase its annual revenue growth flexibility, which is part of the city's efforts to sustain long term structural balance.

COMMUNITY SUPPORT: The city benefits from strong voter support for the city's large bond program, property tax levy increases for capital maintenance, and the permanent waiver of property tax revenue limitations.

SOUND REPAYMENT SECURITY: The COPs legal provisions are sound and provide a strong incentive to annually appropriate base rental payments.

HIGH COVERAGE OF HEAD/SEAT TAX BONDS: The 2003 excise tax revenue bonds are characterized by very high debt service coverage (DSC) and broad-based dominant pledged revenues (head taxes) balanced against a weak additional bonds test (ABT).

NARROW REVENUE PLEDGE BUT SOLID COVERAGE: The 2005A and 2009A-B excise tax revenue bonds have a narrower revenue pledge than the series 2003 bonds but have benefited from solid DSC.

RATING SENSITIVITIES

SHIFT IN FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices. The city's history of reserve adequacy and sound financial management practices suggest continued rating stability.

CREDIT PROFILE

FAVORABLE LONG-TERM ECONOMIC PROSPECTS

The city's economic diversity benefits from its role as the hub of a 10-county metropolitan statistical area (MSA) and the capital of Colorado. After posting recessionary job losses in 2009-2010, employment gains have outpaced labor force increases annually. As a result, the MSA's unemployment rate trended down steadily and averaged 6.7% for 2013, which is in line with the state average but below the national average (7.4%).

Taxable values are stabilizing after declining by a moderate cumulative 10.4% over 2011-2013. The assessed value for 2014, which is a reassessment year, rose by 4.7%, attributed mostly to reappraisal gains. New construction activity has started to rebound and has been fueled by ongoing redevelopment throughout the city and substantial public and private investment in the downtown area. New construction projects include the massive Denver Union Station project, which Fitch expects will benefit the city's medium-term economic prospects.

PRUDENT RESPONSE TO RECESSIONARY IMPACT ON LARGEST REVENUE SOURCE

The city's financial profile remains sound due to management's notable efforts to curb expenditures in the wake of recessionary pressures on the city's largest revenue source - sales and use taxes. This revenue stream, which comprises about 50% of general fund revenues, declined by a steep 10% in 2009. This led to a multi-year effort to reduce spending by closing annual budget gaps averaging $108 million or 10% of expenditures and transfers out from 2009-2013. These budget reductions plus conservative revenue projections and non-recurring measures enabled the city to post annual net general fund surpluses in 2010-2012.

PERMANENT WAIVER OF PROPERTY TAX REVENUE LIMITATIONS

Fitch favorably views the city's successful November 2012 ballot measure to permanently waive property tax revenue limitations in order to facilitate long-term structural balance. The ballot measure was the principal recommendation of a city-appointed structural taskforce that was charged with developing recommendations to help the city minimize future budget gaps. The successful waiver generated, on an unaudited basis, an additional $29 million in property tax revenues in 2013.

Aided by the waiver, unaudited 2013 results point to a large $60 million net surplus (equal to 6.2% of spending), increasing its unrestricted fund balance to a strong $255.7 million or 26.3% of spending. Such results were also boosted by a notable 9% increase in sales and use taxes in 2013. Including $28.1 million in audit collections, the city's principal revenue sources rose by a high 15.4%.

The 2014 budget was adopted with an $18.9 million (1.8% of spending) use of reserves for one-time expenditures although year-end results are likely to be balanced or better. Sales and use taxes are up by a large 11% for the first two months, well above the projected increase of 4.2%.

GROWING BUT MANAGEABLE DEBT BURDEN

Overall debt levels are high at $8,117 per capita and 6.5 % of full market value. But the combined principal pay out rate for GO bonds, COPs, and excise tax revenue bonds is rapid at 67% in ten years. The current offering exhausts the city's large $550 million bond program approved by voters in November 2007. A GO bond election is being considered but no earlier than 2015.

COPs comprise a manageable 27% of the city's debt and are secured by sound legal provisions along with a strong incentive to annually appropriate base rental payments as the leased assets are considered essential. A moderate 15.8% of the city's general government debt is comprised of variable rate demand obligation COPs, all of which are hedged with swaps. Fitch considers the swaps' termination risk as manageable given the low rating threshold required of the city and its counterparties.

STRONG COVERAGE BY EXCISE TAXES

The series 2003 excise tax revenue bonds continue to benefit from very high debt service coverage despite recent declines in pledged revenues. Such revenues are comprised of the broad-based head tax on all employees and employers within the city, and the narrower seat tax, both of which have rebounded after declining notably in 2009. Coverage of maximum annual debt service (MADS) by 2013 pledged revenues totals a very high 17.4x.

MADS coverage by 2013 head tax revenues alone, which Fitch views to be a more stable source of security, totals a still high 14.6x. Additionally, Fitch notes the bonds have a level debt service schedule and fully mature in 2015. Management reports that an undetermined amount of additional leveraging may be considered as part of its annual capital improvement plan (CIP) update. Any additional debt would require voter approval.

The series 2005A and 2009A-B excise tax revenue bonds also exhibit solid debt service coverage at 2.1x in 2013. But Fitch notes the narrow nature of these pledged excise taxes, making them more vulnerable to economic swings. The lodger's tax makes up 51% of pledged revenue followed by the rental car tax at 32% and the food and beverage tax at 25%. Total pledged revenues declined by nearly 14% in 2009 before rebounding with annual gains through 2013. The bonds are structured with level debt service and all bonds mature within 10 years. The city also reports an undetermined amount of additional leveraging for this security may be considered in future CIP updates. Any additional debt would require voter approval.

ADEQUATELY FUNDED PENSIONS

The funded position of the city's pension for its non-fire and police personnel is satisfactory. Similarly, the state's pension plans for fire and police personnel are adequately funded. The city's modest other post-employment benefit (OPEB) liability is an implicit rate subsidy, funded on a pay-as-you-go basis. Total carrying costs for debt service, pension, and OPEB totaled a moderate 15.8 % of governmental spending in 2012.

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

In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was informed by information from CreditScope, University Financial Associates, S&P/Case Schiller Home Price Index, IHS Global Insight, Zillow.com, 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

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=831514

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Contacts

Fitch Ratings
Primary Analyst
Jose Acosta, +1 512-215-3726
Senior Director
Fitch Ratings, Inc., 111 Congress Avenue, Suite 2010, Austin, TX 78701
or
Secondary Analyst
Shane Sellstrom, +1 512-215-3727
Analyst
or
Committee Chairperson
Doug Scott, +1 512-215-3725
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Jose Acosta, +1 512-215-3726
Senior Director
Fitch Ratings, Inc., 111 Congress Avenue, Suite 2010, Austin, TX 78701
or
Secondary Analyst
Shane Sellstrom, +1 512-215-3727
Analyst
or
Committee Chairperson
Doug Scott, +1 512-215-3725
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com