SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed the following North Las Vegas, NV (the city) limited tax general obligations (LTGOs) at 'B':
--$129.7 million LTGO bonds (additionally secured by consolidated tax pledged revenues);
--$284.7 million LTGO water and wastewater improvement bonds (additionally secured by water and wastewater system pledged revenues).
The Rating Outlook is revised to Stable from Negative.
SECURITY
The bonds are backed 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. As noted above the bonds are additionally backed either by an irrevocable pledge of and lien on certain consolidated tax revenues (15% of these revenues) or by water/wastewater system net revenues.
KEY RATING DRIVERS
NEAR-TERM BUDGET BALANCE: The revision of the Outlook to Stable reflects successful negotiation of labor concessions needed to balance fiscal 2015 and 2016 budgets.
MEANINGFUL SOLUTIONS OUTSIDE CITY CONTROL: The 'B' rating continues to reflect Fitch's view that the city has virtually no remaining budget flexibility. Given tax caps and the scope of service cuts already made, Fitch believes any meaningful solutions are outside the city's control.
UTILITY PROVIDES CRUCIAL LIQUIDITY: Unrestricted balances in the utility fund serve as the city's only meaningful source of liquidity and are expected to be drawn down to just adequate levels to support governmental operations over the intermediate term.
WEAK AND CONCENTRATED ECONOMY; FUTURE UNCERTAIN: The city and region's economy were among the hardest hit in the U.S. by the collapse of the housing market with a combined loss of 56% of taxable assessed valuation (TAV). While TAV has rebounded some, Fitch is concerned that long-term growth prospects are limited.
GROWING LONG-TERM LIABILITIES: Debt is high relative to the tax base, amortization is slow and debt service is escalating in the intermediate term. Carrying costs, including debt and retiree liabilities, are expected to increase with rising debt and 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
DEFICIT REDUCTION: Positive rating action could result if the city is able to develop a realistic strategy towards near-term deficit reduction as well as a medium-term plan to address the required reduction in utility transfers by fiscal 2021.
POTENTIAL FOR BONDHOLDER IMPAIRMENT: It appears that public consideration of bondholder impairment has lessened in recent months. A shift back towards permitting the impairment of bondholders could result in a downgrade depending on Fitch's view of the likelihood of advancement.
ECONOMIC VULNERABILITY: Fitch believes the economy is fragile leaving the city ill-prepared to manage any further contractions. A down cycle in the economy from this point would likely result in further financial stress and a rating downgrade.
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 slowed with the housing and economic downturn. The regional economy is dominated by tourism and gaming which both experienced significant revenue and employment declines but appear to be stabilizing.
SHORT-TERM FIXES REDUCE LIKELIHOOD OF STATE INVOLVEMENT
The likelihood of state intervention is reduced due in part to agreements reached in spring 2014 with all four of the city's unions as well as concessions for fiscal 2015 and 2016.
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.
According to press reports and city management, sentiment at the state level regarding crafting a state-wide legislative solution to encourage voluntary concessions by bondholders or other creditors has diminished significantly since adoption of the fiscal 2015 budget.
STRUCTURAL IMBALANCE; HEALTHY UTILITY BALANCES SUPPORT LIQUIDITY
An updated seven-year forecast released in September 2014 is largely unchanged from the prior forecast in that it indicates a large and growing structural deficit even with heavy subsidies from the utility funds. The forecast assumes only small revenue increases as well as continued annual $32 million transfers from the utility fund through fiscal 2020, after which the transfer is required to be eliminated.
Such transfers have had a negative impact on the utility funds, resulting in Fitch-calculated all-in debt service coverage of less than 1x after transfers in two of the last five years. Unrestricted utility cash balances have remained approximately $50 million the three years ending fiscal 2014; however, they are projected to decrease annually through fiscal 2019.
NEAR-TERM BUDGET BALANCE
The city's financial position has weakened as a result of several years of large operating deficits averaging 7% through fiscal 2011. After two years of minor surpluses fiscal 2014 ended with a $1.26 million deficit (1% of spending) resulting in an unrestricted general fund balance of $7.8 million equal to the city's policy requirement of 6% of spending. City Council reduced the required level of reserves from 8% for just 2014 in order to use fund balance as part of a $7.7 million 2014 settlement with the unions. The settlement was related to a $25 million judgment rejecting the city's fiscal 2013 and 2014 resolutions declaring a state of emergency which suspended negotiated compensation increases. The deficit was primarily due to payments related to a Nevada Supreme Court ruling that the city owed $6.3 million to land developers from wrongful pre-condemnation.
General fund fiscal 2014 year-end cash was less than half of liabilities (less deferred revenue) for the fifth consecutive year. Nominal cash increased about $2 million to $4.6 million; however, liabilities increased due to the legal settlement. The city was unable to refinance LTGO bonds in 2013 to provide liquidity; however, the city has access to approximately $50 million in utility funds (as of fiscal year-end 2014).
The adopted fiscal 2015 budget includes an additional drawdown of $1.77 million, which would bring the general fund balance to about 5%; however, management anticipates ending at approximately 8%. The city was able to pass the budget due to temporary budgetary relief resulting from the union's agreement to defer drawing on compensated absences in fiscal 2015 as well as $4.8 million in previously planned hiring that will be delayed and $2.6 million in departmental budget cuts.
VERY LIMITED REVENUE & EXPENDITURE FLEXIBILITY
Fitch believes the city retains virtually no additional expenditure flexibility, having eliminated about 800 full-time equivalent positions (35% since the peak in 2009) through attrition and voluntary separation and layoffs. Management reports that the city's current staffing level is unsustainable.
Meaningful revenue solutions are outside the city's control given the estimated $1 million that could be generated by a property tax increase, leaving the city dependent on economic growth to increase its revenue base.
General fund revenues increased for the first time in fiscal 2014 after five consecutive years of declines. The revenue increase of 15.8% to $100.7 million not including utility transfers was primarily due to improved consolidated tax revenues as well as licenses and permits.
Revenues bottomed out in fiscal 2013 at $86.95 million, a drop of 47.2% since their fiscal 2008 peak, and remain just 61% of the peak level. Property taxes continue to decline and are off 70% from their peak, comprising only 7.4% of revenues compared to 17% in fiscal 2009.
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 6% of the tax base. In addition, amortization is slow with only 33% of principal retired within 10 years and an ascending debt service schedule in the intermediate term.
Fitch estimates that carrying costs currently consume 20.7% of governmental spending. The burden approximates full funding of the actuarially required contribution to the state plan, which the state does not currently require. Fitch expects the burden to increase as both debt service and retirement benefit costs rise.
STRESSED ECONOMY
The city's tax base grew rapidly through fiscal 2009 before declining 56% through fiscal 2013. It has since rebounded a significant 38%, but remains about 60% of the 2009 peak. The city's housing market continues to experience high foreclosure rates relative to state and national averages as, despite recent increases, home prices are still more than 40% below their 2006 peak. Fitch expects only gradual improvement at best and believes economic contraction from this point would stress revenues and the bond rating even further.
The city and regional economies are concentrated in gaming; most major employers and taxpayers are hotel/casinos. Employment in the city experienced a steep decline in 2010 but has since more than recovered the jobs lost. Nonetheless, the city's unemployment rate of 8% as of December 2014 was well above the county (6.9%), state (6.7%), and nation (5.4%). Median household income is 6% above the state and 14% above the nation, but per capita income is 20% below both state and national averages.
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:
--'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=983113
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