Fitch Affirms Bullhead City, AZ's MPC Excise Tax Revenue Bonds at 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'A+' rating on the following Bullhead City Municipal Property Corp., Arizona obligations:

--$11.4 million excise tax revenue refunding bonds, series 2009;

--$7.5 million excise tax revenue bonds, series 2006.

The Rating Outlook is Stable.

SECURITY

Excise tax bonds are payable from rental payments from Bullhead City (the city) secured by a priority lien and pledge of the city's excise taxes. The city's obligation to make lease payments under the use agreement is absolute and unconditional and is not subject to appropriation or abatement.

KEY RATING DRIVERS

AMPLE COVERAGE: Coverage has historically been sound, even throughout the recession. An improving revenue environment, coupled with a recent refinancing, has generated improved coverage recently, with unaudited fiscal 2014 excise taxes covering maximum annual debt service (MADS) by nearly 6.0x. Sound coverage is expected to persist given that the pledged revenues comprise the majority of the city's general fund resources.

RATING CEILING: The rating on the excise tax bonds is limited by the city's general credit quality to reflect the potential for a disruption in pledged revenue in the unlikely event of the city's bankruptcy.

IMPROVING REVENUE ENVIRONMENT: The city experienced positive general fund revenue growth in fiscals 2013 and 2014 for the first time in at least seven fiscal periods. The improved revenue environment has allowed the city to restore some expenditures and bolstered the city's high reserve levels. Revenue control and flexibility is limited, given the city's inability to impose new or increased taxes or assessments without voter approval.

TOURISM-BASED ECONOMY: Healthy reserves represent an important credit strength mitigating general credit weakness associated with the city's reliance on tourism-related activity and the gaming industry in nearby Laughlin, Nevada. Unemployment and income levels are comparable for the region, but lag behind the national averages.

LOW DEBT; RISING PENSION COSTS: The city is an infrequent issuer with low debt levels and rapid amortization. No new debt issuance is anticipated in the near term. Growth in pension costs will likely continue for the foreseeable future given below average funding levels.

RATING SENSITIVITIES

REDUCED FINANCIAL FLEXIBILITY: Material declines in the gaming and resort industry in nearby Laughlin or significant reduction in the city's reserves could place pressure on the current rating.

CREDIT PROFILE

Bullhead City is located along the Colorado River in western Arizona near the Nevada border, roughly 100 miles from Las Vegas. The city's population in 2013 was 39,383.

STRONG COVERAGE BY PLEDGED REVENUES

Debt service coverage for unaudited fiscal 2014 was strong at 6.0x MADS. Coverage levels have posted material improvement over the past several years, given an improved revenue environment and recent refunding activity. An additional bonds test of 2.25x and requirements to fund a standard reserve in any year that excise taxes received by the city are less than 225% of MADS enhance the security. Excise tax revenue is sufficient to sustain several stress scenarios, requiring a very high 72% decline to trigger the springing reserve.

Management does not anticipate leveraging the excise tax revenue stream further in the near future. In Fitch's view, the city's reliance on surplus excise tax revenues to fund general government operations provides a practical limitation on future leveraging.

TOURISM BASED ECONOMY

The city's economy is largely driven by tourism and retail. In addition to its close proximity to Laughlin's 10 casino resorts, the city is a frequent host to a variety of tournaments and special events, the most notable of which is the annual River Regatta. Bullhead City is the population, retail, and service center for the region. Bullhead City provides the bulk of the labor force for the Laughlin casinos.

The largest employers in Bullhead City, in addition to those in the government and education sectors, are in healthcare and retail. The city's unemployment rate and income levels are average for the region, but compare unfavorably to state and national averages.

The tax base posted positive growth for fiscal 2015 following multiple years of declines. These declines have had a muted effect on the city, as property taxes play no role in the city's general fund budget. Improvement in the city's housing market has largely resembled the trend of slow recovery throughout the state. A 61% increase in permit valuations from fiscal 2013 to fiscal 2014 support management's claim that the city has experienced renewed development activity.

IMPROVING REVENUE ENVIRONMENT, FINANCIAL PROFILE

City operations are heavily reliant on economically sensitive excise taxes, which constitute the largest source of income for the city (approximately 90%). Excise tax revenues include the city sales tax, state shared sales and income tax revenues, charges for services, fines and forfeitures, and franchise taxes; the city sales tax and state shared revenues represent 44% and 32%, respectively, of total unaudited fiscal 2014 collections. The city is currently charging the maximum allowable sales tax rate. The rate can be increased with voter approval, although voter reception to a recent referendum to raise the rate by 1% was overwhelmingly negative.

Recessionary pressure exacerbated an existing mild trend of excise tax revenue declines, leading to an extended period of general fund revenue declines. The city responded to this negative trend by cutting general fund expenditures by more than 20%. General fund revenue resumed growth in fiscal 2013, although revenue remains over 25% below fiscal 2006 levels. The positive growth allowed the city to eliminate the use of furlough days in fiscal 2013 and restore some previous spending cuts, resulting in a $20,000 surplus that brought unrestricted reserve levels to $6.2 million, or a solid 27.4% of spending.

Revenue growth continued in fiscal 2014, which allowed the city to provide employees with a cost of living adjustment for the first time since fiscal 2010. City management estimates a general fund surplus of $1.4 million in fiscal 2014, which Fitch believes is reasonable given the improving revenue environment and some conservative revenue assumptions in the fiscal 2014 budget. If the surplus materializes as estimated, unrestricted reserve levels would increase to $7.6 million, a high 30.5% of budgeted fiscal 2014 spending. The city's fiscal 2015 budget is balanced under the assumption of 1% sales tax growth, which Fitch views as conservative given recent trends.

Fitch believes the city's stabilizing economy, conservative revenue assumptions, careful expenditure management, and recent trend of budget surpluses should support stable-to-growing reserves over the longer term.

LONG-TERM LIABILITIES MANAGEABLE

Total debt per capita at $1,544 is considered low, while debt as a percent of full market value is more moderate at 2.5%. Principal amortization is rapid with over 95% retired within 10 years. The city's capital improvement plans are minimal and the city does not anticipate issuing more debt over the near- to mid-term. Debt service costs are a somewhat significant portion of the city's annual budget, constituting almost 19% of total government spending in fiscal 2013.

The majority of the city's employees participate in a defined contribution plan with the exception of public safety employees, who participate in the Public Safety Personnel Retirement System (PSPRS). PSPRS is a state sponsored cost-sharing multiple employer defined benefit plan that is significantly underfunded. The city makes 100% of annual required contributions to the plan, although the city's contribution rate has been on an upward trajectory. The city's relatively low PSPRS unfunded actuarial accrued liability (UAAL) and low pension costs mitigate Fitch's concern regarding the contribution increases.

The city recognizes a UAAL associated with retirees' participation in the city's healthcare plan at the group rate. Total carrying costs, including debt service and costs related to retirement benefits, were moderate at 21.9% of fiscal 2013 governmental spending.

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 Zillow.

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=891834

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Contacts

Fitch Ratings
Primary Analyst
Brendan Scher, +1 212-908-0686
Analyst
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Steve Murray, +1 512-215-3729
Senior Director
or
Committee Chairperson
Laura Porter, +1 212-908-0575
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Brendan Scher, +1 212-908-0686
Analyst
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Steve Murray, +1 512-215-3729
Senior Director
or
Committee Chairperson
Laura Porter, +1 212-908-0575
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com