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):
--$38,050,144 GO convertible capital appreciation bonds, series 2015-A1;
--$23,215,000 GO current interest bonds, series 2015-A2;
--$15,340,000 GO bonds (federally taxable), series 2015-B.
The bonds are scheduled for negotiated sale on or about Nov. 9. Proceeds will be used to fund various capital projects in the city, including but not limited to solid waste landfills or disposal facilities, recreation facilities, road, bridge, and street improvements, transportation facilities, water, sewer, and storm water improvements, and public facilities and equipment.
In addition, Fitch affirms the 'AA' on the following debt obligations (a detailed list of bond series included follows at the end of this release):
--$270.1 million GO bonds;
--$136.2 million GO warrants;
--$68.6 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 Rating Outlook is Stable.
SECURITY
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 backed by the levy of ad valorem taxes.
KEY RATING DRIVERS
HIGH RESERVES: 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 unanticipated budgetary shortfalls or emergencies.
BROAD REVENUE FLEXIBILITY: Operations are largely funded from a variety of economically driven taxes and fees which the city has unilateral authority to modify. Strict limitations are imposed on property taxes, which only account for a low proportion of spending.
MAJOR ECONOMIC CENTER: Birmingham is anchored by a deep and diverse employment base built around the education and health service sectors that should serve to promote long-term stability and 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.
MODERATELY HIGH LONG-TERM LIABILITIES: Debt and unfunded pension liabilities are moderately high relative to the city's tax base, however, annual debt service requirements decline in the near-term enhancing overall budgetary and debt management flexibility and reported capital needs are manageable.
RATING SENSITIVITIES
CHANGE IN FINANCIAL POSITION: The rating is sensitive to changes in the city's strong financial position, which tempers risk associated with a moderately high liability burden and weaker economic and demographic metrics.
PENSION FUNDING DEFICITS: The city's poor pension funding practices continue to elevate its longer-term risk profile; the inability to address the annual funding gap may exert pressure on the GO rating.
CREDIT PROFILE
Birmingham is located in north central Alabama, mainly within Jefferson County. Birmingham has an estimated population of 212,234 in 2014 making it the most populous city in the state.
STRONG FINANCIAL RESERVES AND LIQUIDITY
The city's overall reserve and liquidity position remain very sound. Unaudited financial statements for fiscal 2015 show an unrestricted general fund balance of $91 million or 23.4% of spending (operating expenses plus transfers out). An operating surplus after transfers totaling $13.1 million (3.4% of spending) was achieved, reflecting an improvement in the economy and business related taxes and careful expenditure management. An additional $92 million in reserves was separately held in the Birmingham Fund at the end of fiscal 2015. The Birmingham Fund was originally funded from proceeds of the sale of the city's Industrial Water Board assets several years ago - an amount up to 5% of its rolling five-year average market value can be used for general spending, otherwise the balance held therein is set aside for unanticipated budgetary shortfalls or emergency situations. Liquidity across the primary government is sound with nearly $310 million in unrestricted cash and investments or roughly 6 months of spending.
PENSION FUNDING GAPS
The city's pension funding history is poor and negatively skews the city's overall financial profile. The city has not paid the full actuarial contribution to its two primary pension plans (the Retirement & Relief System and Firemen's & Policemen's Supplemental Pension System) since fiscal 2006. The annual funding gap has increased from $1.4 million in fiscal 2006 to $17.8 million in fiscal 2015 (3.5% of governmental fund spending), and the aggregate funding shortfall during this period totals $72.6 million. The funding deficits have contributed to a reduction in the aggregate funded position of the city's pension plans from 93.5% in fiscal 2006 to 72.3% in fiscal 2015.
Pension contributions were increased from 13% of payroll to the statutory maximum of 14% (split evenly between the city and employees) effective July 1, 2015. The actuary's recommended contribution rate is 23% of payroll. Assuming no change in funding or benefits, the unfunded pension liability will continue to rise as will the recommended amortization payment. This may ultimately lead to negative rating action on the city's GO bond rating.
The city is reviewing certain reform benefits and establishment of a new tier for new hires that would allow it to meet the actuarial determined pension contribution from a payment equal to 14% of payroll by fiscal 2018. Increases in pension contributions above 14% of payroll or changes in employee benefits require the adoption of state legislation. Additional reform measures would require the consensus of stakeholders; however, city officials indicate there is wide recognition of the need for reform and does not anticipate difficulty in securing the necessary legislative authority.
MODERATELY HIGH LONG-TERM LIABILITIES
The current unfunded liability of the city's pension plans is $381 million or 2.3% of market value which, when combined with an overall debt burden of 5.8% contribute to a somewhat high long-term liability burden. 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 somewhat outside the city's core governmental purpose. The fiscal 2016 budget includes $50.5 million of debt service costs or approximately 10% of governmental fund spending. The actuarial determined pension payment, if fully paid, would consume an additional 7% and the pay-go cost for other post-employment benefits (OPEB) about 2%. In aggregate these fixed costs are viewed as moderately high. Debt service on outstanding GO warrants declines by $10 million in fiscal 2019 providing opportunity to enhance budgetary flexibility or to fund its five-year capital program totaling a manageable $114.7 million.
GENERALLY STABLE OPERATING PERFORMANCE
Notwithstanding the aforementioned pension funding concerns the city's management of its operating budget is generally viewed favorably. Revenues and expenditures tend to exceed forecast and operating deficits are typically associated with non-recurring capital investments. The adopted fiscal 2016 budget increases spending a moderate 2.4% from the prior year. Growth in spending reflects an increase in pension contributions and 3% cost-of-living raises. For the second consecutive year the budget is balanced including a transfer from the Birmingham Fund for general operations ($4.2 million following a transfer of $4.0 million in fiscal 2015). The budget also appropriates $7.8 million of general fund reserves to fund a neighborhood restoration program to remediate areas of blight.
Approximately 80% of the general fund budget is funded by a combination of sales and use taxes, occupational taxes, and various business licenses and permits. These taxes generally respond to changes in economic conditions more quickly than property taxes, a risk that is tempered by the city's fiscal management history and high reserves. 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. After several years of flat to nominal change in revenue unaudited fiscal 2015 general fund revenue increased 5.5% on the year due to improved non-property tax collections.
REGIONAL 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.
Per capita retail sales activity in the city is strong relative to the Alabama and U.S. metric largely drawing on the strength of the regional economy. The city's economic and demographic profile is comparatively weaker than that of the MSA. Median household income registers a low 63.9% of the MSA and 30.2% of persons are considered in poverty compared to 17.5%. Since 2010 total resident employment has increased at a modest pace of 0.5% annually compared to the 0.8% growth rate for the MSA. Employment growth appears to have accelerated some in 2015, however, unemployment remains elevated at 7.6% in August 2015. City unemployment levels have consistently remained higher than those of the MSA, the state, and the U.S. since 2007.
The following is a list of all bonds and warrants included in this release:
--GO refunding warrants, series 2002;
--GO capital improvement & refunding bonds, series 2002B;
--GO refunding bonds, series 2005A;
--GO refunding bonds, series 2006-A;
--GO capital improvement & refunding bonds, series 2007-A;
--GO warrants, series 2007-B;
--GO refunding warrants, series 2009-A;
--GO refunding warrants, series 2010A;
--GO warrants (Taxable Recovery Zone Economic Development Warrants), series 2010B;
--GO refunding warrants (taxable), series 2013-A;
--GO convertible capital appreciation bonds, series 2013-A and series 2013-B;
--GO refunding bonds (taxable), series 2013-C;
--GO refunding bonds, series 2014-A;
--GO refunding warrants, series 2014-B.
Additional information is available at 'www.fitchratings.com'.
Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope and IHS Global Insight.
Applicable Criteria
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=993144
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=993144
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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