NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the following ratings for Westminster, Colorado's (the city) outstanding revenue bonds:
--$16.2 million sales and use tax bonds, series 2001, 2007A, 2007C and
2010 at 'AA+';
--The city's Issuer Default Rating (IDR) at 'AA+'.
Fitch has also upgraded the rating on $23.6 million special purpose parks, open space and trails (POST) sales and use tax bonds, series 2007B and 2007D to 'AA' from 'AA-'. The upgrade reflects application of Fitch's revised criteria for U.S., state, and local government credits, which was released on April 18, 2016. The revised criteria include more focused consideration of historical revenue performance and overall revenue sensitivity relative to maximum annual debt service (MADS) and the additional bonds test (ABT) for dedicated tax bonds.
The Rating Outlook for all of the above ratings is Stable.
SECURITY
The sales and use tax bonds are payable from a first lien
on the 3% sales and use tax levied within the city. The POST sales and
use tax bonds are payable from a first lien on the 0.25% POST sales and
use tax levied within the city. The sales and use tax is levied on all
sales of tangible personal property and taxable services within the city.
KEY RATING DRIVERS
The upgrade to 'AA' for the POST sales and use
tax bonds reflects solid debt service coverage levels relative to MADS,
which partially offset moderate historical pledged revenue volatility
relative to the weak ABT of 1.5x.
The 'AA+' sales and use tax rating reflects expectations for an exceptionally strong coverage cushion during periods of economic decline relative to both MADS and the ABT of 2.0x.
The city's 'AA+' Long-Term IDR reflects solid revenue growth prospects result from historically sound revenue performance and the city's continued development within the growing economy around Denver, CO. Ample expenditure flexibility partially offsets limited revenue-raising capacity, and the city's low long-term liability burden and rising reserve levels throughout the recovery support the 'AA+' overall rating assessment.
Economic Resource Base
The city's economy is sound and diverse,
centrally located in close proximity to the city of Denver, which has
experienced rapid assessed value (AV) and general economic growth in
recent years. Increasing economic demand has led to aggressive
redevelopment efforts, fueling the expansion of the city's commercial
and retail sectors.
Revenue Framework: 'a' factor assessment
Fitch expects solid
revenue performance going forward due to ongoing population expansion,
bolstered by positive local economic development. That said, the city
has only a moderate level of revenue-raising ability, as almost all
revenue streams require voter approval.
Expenditure Framework: 'aa' factor assessment
The natural pace of
spending growth should remain comparable to or slightly above revenue
trends given the city's spending profile. Management retains ample
flexibility in main spending areas, with low carrying costs, minimal
labor pressure, and flexible discretionary transfers out for capital.
Long-Term Liability Burden: 'aaa' factor assessment
The combined
long-term liability burden represents a very low share of the city's
resource base at 5.8% of personal income. Given low debt levels and
minimal liabilities related to retiree benefits, Fitch expects total
liabilities to remain modest relative to personal income.
Operating Performance: 'aaa' factor assessment
Fitch expects that
management would use its ample spending flexibility and strong
gap-closing capacity to preserve its financial position throughout the
economic cycle at a level consistent with the current rating level. The
city has demonstrated its ability to respond effectively through
economic downturns, buoying fund balance levels throughout the recovery
while prudently managing long-term commitments.
RATING SENSITIVITIES
SOUND FINANCIAL PERFORMANCE: The city's rating
is sensitive to shifts in fundamental credit characteristics, including
the city's historically sound financial operations and resultant ample
reserve levels. The Stable Outlook reflects Fitch's expectation that
such changes are unlikely.
Debt Service Coverage Cushion: The sales and use tax and POST sales and use tax revenue bond ratings are additionally sensitive to shifts in debt service coverage, with significant coverage declines (not expected) potentially resulting in negative rating pressure. The ratings on the sales and use tax and POST sales and use tax bonds are capped at the city's IDR.
CREDIT PROFILE
The city's economy is sound and diverse, located approximately 11 miles from the city of Denver, with a 2015 Census population of approximately 113,000 residents, representing 6% growth since 2007. Resident wealth and employment characteristics trend favorably to both the state and nation.
Revenue Framework
Total revenues have averaged solid growth of 3.2%
per year over the last decade, beating inflation while still below GDP,
and ongoing population and regional economic growth support expectations
for solid revenue growth going forward. Combined taxes accounted for 78%
of 2014 general fund revenues, comprising a modest 3.5% from property
taxes and nearly all other tax revenues generated by sales and use
taxes. The city's legal ability to raise revenues is moderate, as all
tax rate increases require voter approval, though expectations of solid
revenue growth going forward somewhat offset this constraint.
Total revenue growth is expected to remain consistent with historical performance due to ongoing population and regional economic growth within the greater Denver metropolitan area in which the city is centrally located. Growth in the years since the recession has been especially strong with city revenues declining moderately in 2009 and recovering to pre-recession levels the following year.
The city's legal ability to raise revenue is extremely limited. In total, tax revenues constituted 78% of general fund revenue in 2014 and all tax rate increases require voter approval. The city retains control over fines, forfeitures, and fees for services, though these represent a comparatively modest share of total revenues, providing limited overall revenue flexibility.
Expenditure Framework
Expenditures are expected to grow apace with
revenues based on historical performance and the growth in demand. The
city retrains considerable spending control with low carrying costs and
ample flexibility in labor costs. Public safety spending represents a
moderate 33% of 2014 general fund spending and the city's expenditure
profile is further bolstered by discretionary transfers for capital
improvements.
The natural pace of spending growth is expected to remain in line with revenues, as labor costs are naturally stable due to attrition levels and the city is not expected to face major operating cost increases related to population growth.
The city retains ample flexibility in main spending areas with carrying costs - the combination of debt service, the actuarially calculated annual pension funding amount, and the annual actual spending for other post-employment benefits (OPEB) - equaling 11.9% of 2014 governmental spending. Nearly all carrying costs are for debt service, which is driven by rapid principal amortization of 74% in 10 years. Personnel spending flexibility is ample, given the absence of collective bargaining agreements.
Long-Term Liability Burden
The combined long-term liability burden
represents a very low share of the city's resource base at 5.8% of
personal income. The existing burden is driven entirely by debt, as
there are no unfunded liabilities related to pensions. The city manages
a defined contribution pension plan for general employees and
participates in the Colorado State Fire and Police Pension Plan, a
cost-sharing multiple-employer defined benefit pension plan administered
by the Colorado Fire and Police Pension Association. The ratio of assets
to liabilities was 130.4% in 2014, based on Fitch's assumed 7%
investment rate of return. Given low debt levels and minimal liabilities
related to retiree benefits, Fitch expects total liabilities to remain
modest relative to personal income even in the event of future debt
issuance.
Operating Performance
The city's solid reserve cushion could be
slightly pressured by an unaddressed, moderate economic decline, but
Fitch expects management would continue to use its strong gap-closing
capacity to preserve its financial position through the economic cycle.
The combination of expenditure and, to a lesser extent, revenue
flexibility is expected to afford the city considerable capacity to
close budget gaps without material decreases in available fund balance.
The city demonstrated its ability to respond effectively through
economic downturns while maintaining prudent reserves, reducing spending
in 2009 by curtailing transfers out for capital (which represent the
bulk of transfer activity) and carefully managing attrition in response
to recessionary revenue declines.
The city has demonstrated its ability to bolster financial flexibility in economic recovery while maintaining a high level of services and meeting long-term commitments. Following the 2008 recession, the city experienced one modest net deficit after transfers in 2010. Fund balance levels have risen consistently throughout the recovery while management has prudently funded long-term commitments and transfers for capital spending. Available reserves equaled a solid 27% of 2014 spending and unaudited results for 2015 indicate similar results.
The 3% sales and use tax and the .25% POST sales and use tax are both levied on all sales within the city. Both revenue streams are expected to exhibit solid growth in future years as revenues are tied to levels of consumption and local economic activity, which are expected to continue in line with historical performance. Sales and use tax revenues constitute the lion's share of general fund revenues, garnering the same assessment for future growth prospects.
To evaluate the sensitivity of the dedicated revenue stream to cyclical decline, Fitch considers both revenue sensitivity results (using the same 1% decline in national GDP scenario that supports assessments in the IDR framework) and the largest decline in revenues over the period covered by the revenue sensitivity analysis.
Based on the city's sales and use tax revenue history, Fitch's analytical sensitivity tool (FAST) generates a 6% scenario decline in pledged revenues. The largest actual cumulative decline in historical revenues is a steep 11% decline in 2002. FAST generates a 6% scenario decline in pledged revenues for the city's POST sales and use tax and the largest cumulative decline was slightly greater at 11.3%, also in 2002.
Based on current debt service coverage levels for the sales and use tax bonds the structure could tolerate a drop in revenues 15.4x greater than the scenario results and 8.4x the largest actual revenue decline in the review period. Both of these tests demonstrate an 'aaa' level of cushion. Similarly, when the same scenarios are measured assuming leverage to the sales and use tax bonds' 2.0x ABT, the level of coverage margin remains at the 'aaa' level under the 1% GDP decline scenario and when considering the largest historical decrease.
Current debt service coverage levels are somewhat thinner for the POST sales and use tax bonds, and the structure could tolerate a decline 8.1x greater than the scenario results and 4.3x the largest actual revenue decline in the review period. Both of these tests demonstrate an 'aaa' level of cushion. However, when the same scenarios are measured assuming leverage to the 1.5x ABT, the level of coverage margin declines to the 'a' level under the 1% GDP decline scenario and to the 'aa' level when considering the largest historical decrease.
The city has indicated that it has no plans for additional issuance of either the sales and use tax or the POST sales and use tax bonds at this time. The current ratings reflect Fitch's assumption that actual coverage will remain well above what the ABT would allow because the city uses excess sales and use tax revenues after debt service to fund general operations.
Fitch does not believe that the sales and use tax and POST sales and use tax bond securities would be insulated from the general operations of the city in the event of bankruptcy. As such, the rating on both the sales and use tax and the POST sales and use tax bonds are capped at the city's IDR.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.
Applicable Criteria
U.S. Tax-Supported Rating Criteria (pub. 18 Apr
2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478
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Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1005718
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005718
Endorsement
Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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