Fitch Rates Vestavia Hills, AL's GO Warrants 'AA+'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'AA+' rating to the following Vestavia Hills, AL (the city) general obligation (GO) warrants:

--$8.7 million GO warrants, series 2015.

The bonds are expected to sell the week of Aug. 17 via negotiation. Bond proceeds will be used to advance refund outstanding debt for debt service savings.

In addition, Fitch affirms the following ratings:

--$50.83 million GO warrants, series 2008, 2009A, 2009B, 2012, 2013-A, 2014 at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The full faith and credit of the city are irrevocably pledged for the payment of all general obligations. The GO warrants are non-voted, payable from all general fund revenues, with no dedicated ad valorem millage.

KEY RATING DRIVERS

STRONG FINANCIAL OPERATIONS: The city's financial position remains very strong, characterized by ample reserves and liquidity with a history of positive operating results over the prior decade.

LIMITED REVENUE CONTROL; DIVERSE SOURCES: The city has limited ability to raise property taxes but some flexibility in sales tax and other locally generated revenues such as licenses and fees.

ABOVE-AVERAGE ECONOMIC INDICATORS: The city exhibits above-average economic and demographic factors including high wealth and education levels and low unemployment, benefiting from the employment base of nearby Birmingham.

SATISFACTORY LIABILITY PROFILE: The city's debt burden is moderate with average amortization and limited future debt needs. Steady declines in funding for the city's share of the state pension plan have shown signs of slowed decline.

RATING SENSITIVITIES

RESERVE POSITION: Fitch expects the city to retain its high reserve position to counterbalance concerns over its limited revenue raising flexibility.

CREDIT PROFILE

Vestavia Hills is an affluent residential community with a population of 34,049, located approximately three miles south of Birmingham. The majority of the city is in Jefferson County with parts reaching into Shelby County.

ABOVE-AVERAGE ECONOMIC INDICATORS

City residents benefit from Birmingham's deep, diverse and stable employment base built around the education and health service sectors. Income levels are high, with median household income almost twice that of the state and 53% more than the national median. The city's workforce is highly educated. The city experienced unemployment of 4.0% in May 2015, well below both the state and national rates of 6.1% and 5.5%, respectively.

The city's tax base is diverse and full value per capita is a sizable $148,000. Taxable assessed values (TAV) declined throughout the recession until it hit bottom in fiscal 2013. Since then, the tax base has risen in fiscal 2014 and fiscal 2015, 1.3% and 1.9% respectively. The city's fiscal 2014 total residential and commercial building permits came in above pre-recession peaks for the first time with fiscal 2015 year-to-date new commercial construction the most in a decade. Fitch agrees with city officials' belief that future increases in TAV are likely, due to increases in both residential and commercial construction.

STRONG RESERVES OFFSET LIMITED REVENUE CONTROL

City operations are predominantly funded through a nearly equal mix of property and sales taxes which combine for 75% of general fund revenues; other taxes and license and permit fees help to round out general fund resources. The city is limited in its ability to increase property taxes to the 100 mill constitutional limit (the city is currently at 92.60 mills), which would require a majority vote of the public and subsequent approval from the legislature. A vote of city council could raise the sales tax rate above the current rate of 9% (including the county and state rates). General fund performance has historically been strong, characterized by modest surpluses and growing reserves. Fiscal year 2014 ended with a slight use of reserves which was less than 1% of general fund spending. Fiscal 2014 unrestricted general fund balance was $12.3 million or a strong 36.2% of expenditures and transfers, well above the city's policy level of 25%.

Fiscal 2015 projections show strong year-to-date performance with an expected surplus at year end driven by sales tax revenue increases and expenditures coming in under budget. Proactive budget monitoring, conservative budget assumptions and a policy to maintain emergency reserves support the city's strong fiscal performance.

The city budgeted a 2.9% increase in expenditures for fiscal year 2016 reflecting its expectation of strong sales and property tax receipts. The budget is balanced with no use of reserves.

MODERATE DEBT BURDEN AND MANAGEABLE PENSION OBLIGATIONS

The city's overall debt burden is moderate at $3,841 per capita and 2.6% of market value. Principal amortization is just below average with 44% of total outstanding debt retired within ten years. The city does not prepare a formal multi-year capital plan but reports no major infrastructure needs or debt issuance plans.

City employees participate in the Alabama Employees' Retirement System (ERS), an agent multiple employer plan. The Fitch adjusted (using a 7% discount rate) unfunded actuarial accrued liability (UAAL) is $26.5 million or a low 0.5% of market value. Fitch believes that ERS' use of a 30-year rolling amortization schedule may prolong its weak funding position of a Fitch adjusted 59%. Actuarially required payments are routinely paid in full by the city and are currently manageable at approximately 4.8% of government spending.

Fiscal 2014 total carrying costs of debt service, pension required contributions and OPEB contributions are relatively affordable at 16.3% of 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.

Applicable Criteria

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

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

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=989614

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=989614

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Parker Montgomery
Analyst
+1-212-908-0356
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Larry Levitz
Director
+1-212-908-0500
or
Committee Chairperson
Jessalynn Moro
Managing Director
+1-212-908-0608
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Parker Montgomery
Analyst
+1-212-908-0356
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Larry Levitz
Director
+1-212-908-0500
or
Committee Chairperson
Jessalynn Moro
Managing Director
+1-212-908-0608
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com