NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a rating of 'AA' to the following general obligation (GO) bonds to be issued by the city of Birmingham, AL (the city):
--$48.5 million GO refunding bonds, series 2014-A;
--$49 million GO refunding warrants, series 2014-B.
The bonds are scheduled for negotiated sale on or about October 22. Proceeds will refund GO refunding bonds, series 2007-A; and GO warrants, series 2006-C and 2007-B for debt service savings.
In addition, Fitch affirms the 'AA' rating on the following debt obligations:
--$271 million GO bonds;
--$147 million GO warrants;
--$70 million revenue bonds (civic center improvements project), series 2011-A and 2011-B (taxable) of the Commercial Development Authority of the City of Birmingham (the authority).
The bonds are GOs of the city, for the payment of which its full faith and credit is irrevocably pledged. The bonds are payable from all legally available revenues of the city; however, there is no specific legally available revenue pledged to bondholders. The city does levy certain limited ad valorem taxes which may only be used for the payment of debt service on the GO bonds.
The GO warrants and authority revenue bonds also constitute a full faith and credit obligation of the city payable from the city's legally available revenues, but are not secured by the levy of ad valorem taxes.
KEY RATING DRIVERS
HIGH RESERVES, REVENUE FLEXIBILITY: The city's satisfactory financial policy requires the maintenance of a reserve fund equal to at least 20% of revenues. Additional reserves outside the general fund provide further protection against risk associated with the volatile nature of several economically dependent revenue streams. The city's broad revenue-raising authority is a credit positive.
MAJOR ECONOMIC CENTER: Birmingham anchors a deep and diverse employment base built around the education and health service sectors that should serve to promote long-term stability despite recent sluggish job growth.
ANNUAL PENSION-FUNDING DEFICIT: The city's practice of underfunding the annual required pension contribution was offset by strong fiscal 2014 asset performance, and funded levels remained stable. However, the large gap between the required and actual contribution is a concern and could result in a deterioration of funding absent near-term reform.
HIGH DEBT BURDEN: High debt metrics are partly due to the issuance of debt for recreation and economic development projects considered by Fitch to be outside the scope of traditional general government projects. Annual carrying costs remain affordable, however, and debt service requirements decline significantly in the near term.
FINANCES SUPPORT HIGH RATING: The city's 'AA' GO credit quality largely reflects its high financial reserves, balanced against a high debt burden, low income levels, and high unemployment. Rating pressure could stem from a meaningful change in the city's financial position or growth in the net pension liability.
Birmingham is located in north central Alabama, mainly within Jefferson County. The city has a population of 212,413 making it the most populous in the state.
STRONG FINANCIAL RESERVES
Satisfactory financial performance is reflected in the maintenance of an unrestricted general fund balance of $78 million or 19% of spending (operating expenses plus transfers out) in fiscal 2014. Over $93 million of funds or an additional 25% of spending is separately held in the Birmingham Fund; an account that is set aside for unanticipated budgetary shortfalls or emergency situations. The fund was originally funded from proceeds of the sale of the city's Industrial Water Board assets several years ago.
General fund operations have essentially been balanced over the fiscal period 2007-2013. In fiscal 2014 the general fund incurred a $13.9 million operating deficit (3.5% of spending) due to non-recurring expenditures. These expenditures were not part of the city's original budget, and include the purchase of fire trucks, neighborhood revitalization expenditures, and an $8.8 million transfer to the internal service fund (ISF) for the city's self-insured health plan. The ISF was created in fiscal 2014; previously the expenditures were reported in the general fund. The ISF closed the year with a year-end net deficit of $11.8 million. The city instituted 30% premium increases on Oct. 1, 2015 to improve the ISF balance and expects operations in fiscal 2015 to enable at least a $2.4 million reduction in the fund deficit. The city is reviewing reforms to benefits to achieve a positive net position in the ISF.
The city's fiscal 2015 adopted budget is balanced without the use of operating reserves. Total general fund revenues before transfers are budgeted at $386.2 million, a moderate 2.5% increase, and the budget includes $2.5 million for merit salary increases. The city's record of prudent budgeting helps support stable financial operations given the city's high dependence on economically sensitive revenues. In fiscal 2014 general fund taxes came in on budget.
General fund operations are funded by a combination of sales and use taxes (38% of fiscal 2014 revenue), occupational taxes (21%), and various business licenses and permits (23%). The city has fairly broad revenue-raising authority with the exception of ad valorem taxes which are constitutionally limited but account for only 15% of revenue.
FAVORABLE DEBT SERVICE TRAJECTORY TEMPERS HIGH BURDEN
Overall debt ratios are above-average at 5.8% of market value and about $4,280 per capita. Approximately $129 million in bonds, or 23% of the city's direct debt, are related to the funding of a hotel and baseball stadium, projects Fitch considers outside the city's core governmental purpose. Although presently affordable, these projects can potentially divert critical general fund resources in periods of fiscal distress.
The city has $75 million of authorized but unissued GO bonds which it expects to issue in the winter of 2016, possibly in installments. Annual debt service on the city's GO bonds is currently expected to decline by $19.6 million through fiscal 2020, thus the additional debt is not expected to increase debt metrics from the current level. Debt service on the city's GO warrants, which are not paid from the dedicated tax, are expected to be lower by almost $9 million over two years.
Debt and other long-term liabilities related to pension and other post-employment benefits (OPEB) consumes 20.6% of governmental fund spending, a midrange burden. The city's two primary pension plans are funded at about 70% on an aggregate basis but this is down from 93% in 2007 due to market performance and underfunding of the required annual contribution. In fiscal 2014 the city funded only 50% of the required contribution; continuation of this practice leaves the city vulnerable to mounting pension liabilities. At present the unfunded liability of $469 million represents 3.0% of the market value of the city's tax base.
Management is looking to implement pension reform effective with the fiscal 2016 budget. Minimally, an increase in the contribution rate (to 14% payroll from the current 1 3%) and establishment of a new tier for new hires is expected. The city has the authority to increase the contribution rate up to 14% without state legislation, although establishing a new benefit tier requires legislation. City officials indicate there is wide recognition of the need for reform and does not anticipate difficulty in securing the necessary legislative authority. Additional reform measures would require the consensus of stakeholders. Fitch believes that failure to implement pension reforms would exert additional pressure on credit health.
CRITICAL EMPLOYMENT AND ECONOMIC CENTER
Birmingham anchors the seven-county Birmingham-Hoover metropolitan statistical area (MSA) which has a population of more than 1.1 million people and accounts for approximately one-quarter of Alabama's total non-farm employment and gross domestic product.
Numerous higher education and health care institutions, including the University of Alabama at Birmingham, St. Vincent's Health System, Baptist Health and Trinity Medical Center serve as stable employment anchors for the city and stimulate significant investment in capital and research and development. Regions Bank ranks among the city's largest employers and solidifies the city's role as the banking center of the state, and the proximity to Honda, Mercedes-Benz, and Hyundai assembly plants fuels a growing parts supply business and provides employment opportunities for the region.
Despite its strong economic presence, the city has experienced employment erosion of 0.5% over the past year. Statewide employment losses were more pronounced. The July 2014 unemployment rate of 8.8% remains elevated relative to the state (7.7%) and nation (6.5%). Within the Birmingham-Hoover Statistical Area (SA), retail trade and the government sector have been the employment loss leaders. Income levels in the MSA measure comfortably above state averages and slightly below those of the U.S. City income levels remain considerably below average, but have experienced positive rates of growth.
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, 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
U.S. Local Government Tax-Supported Rating Criteria