Fitch Upgrades Tacoma, WA's GOs to 'AA'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has upgraded the following Tacoma, WA (the city) ratings:

--Issuer Default Rating (IDR) to 'AA' from 'A+';

--$142.8 million limited tax general obligation (LTGO) bonds to 'AA' from 'A+';

--$16.1 million unlimited tax general obligation (ULTGO) bonds to 'AA' from 'A+'.

In addition, Fitch has affirmed the following rating:

--$4.6 million convention center and parking revenue bonds series 2010 at 'A+.'

The Rating Outlook is revised to Stable from Positive.

SECURITY

The ULTGO bonds are supported by an unlimited pledge of ad valorem taxes and the full faith, credit, and resources of the city. The LTGO bonds are a general obligation for which the city covenants to levy an ad valorem property tax within limits permitted to cities without a vote, along with other legally available money. The revenue bonds are secured by a senior lien on a public facilities district (PFD) contribution and net revenues of the city's parking enterprise. PFD revenues consist of a 0.033% sales and use tax collected within PFD boundaries, as well as an admissions and parking tax on PFD-owned, operated, or financed facilities. PFD revenues are remitted to Tacoma via an interlocal agreement that cannot be rescinded until all bonds are repaid.

KEY RATING DRIVERS

The upgrade of the city's IDR to 'AA' reflects a combination of positive credit trends and application of Fitch's revised criteria for U.S. state and local governments, released on April 18, 2016. The 'AA' IDR is supported by positive revenue trends, well-managed expenditure growth, low long-term liabilities and solid operating performance.

Economic Resource Base

Tacoma is located on Puget Sound, about 35 miles south of Seattle, and has a population of 208,000. The city's economy was historically concentrated in heavy industry but has diversified substantially over the last several decades. Employment and income performance has lagged behind regional and national averages in recent years despite notable improvement following the last recession.

Revenue Framework: 'aa' factor assessment

Revenue growth over the past 10 years has been strong, outpacing both overall U.S. economic performance and inflation. The city's independent legal ability to increase revenues is satisfactory based on statutory limits on tax increases offset by flexibility to raise other revenues.

Expenditure Framework: 'aa' factor assessment

The city has a solid ability to manage expenditures and Fitch expects expenditure growth will be in line with anticipated revenue growth. Carrying costs for retiree benefits and debt service are moderate and appear likely to remain so.

Long-Term Liability Burden: 'aa' factor assessment

Long-term liabilities are low relative to personal income and appear likely to remain affordable based on the city's limited plans for new debt issuance and well-funded pension plan.

Operating Performance: 'aaa' factor assessment

Reserve levels are strong relative to inherent budget flexibility and expected revenue volatility in a moderate economic recession. Budget management has remained conservative during the current economic expansion.

Adequate Revenue Bond Coverage:

Revenues pledged in support of the parking and convention center provide coverage that is expected to remain adequate in the event of a moderate recession.

RATING SENSITIVITIES

Maintained Operating Balance: The rating is sensitive to the city's ability to maintain operating balance, particularly in periods of economic stress, and incorporates Fitch's expectation that the city will maintain a strong reserve safety margin.

CREDIT PROFILE

Revenue Framework

Sales taxes, property taxes, and gross earning taxes on business provide the majority of general fund resources, including taxes collected from the city-owned public utility.

Revenue growth has exceeded U.S. GDP and inflation over the past 10 years due in part to a voter-approved increase in taxes paid by a city-owned utility and other revenue raising measures implemented following the last recession. Fitch expects future revenue growth to be above the level of inflation and near overall U.S. economic performance.

Property tax growth is limited in most circumstances to 101% of the prior year's levy on existing properties, plus taxes on new construction. The city has limited independent legal ability to raise revenues as other tax increases are subject to voter approval.

Expenditure Framework

Public safety accounts for approximately 60% of general fund expenditures, with the balance attributable to a variety of municipal functions.

Expenditure growth has matched the pace of revenue growth in recent years and this trend appears likely to persist based on the city's demonstrated commitment to maintaining operating balance.

The city's ability to adjust expenditures is solid. Management implemented substantial cost reductions during the last recession, including public safety staffing cuts, and retains the ability to renew such efforts if required. The city has also increased pay-go spending for capital in recent years, which could be reduced if needed to maintain operating balance.

Long-Term Liability Burden

Long-term liabilities, including tax-supported overall debt and direct pension liabilities, are low at approximately 10% of personal income levels. The city participates in several local and state-sponsored pension plans with strong aggregate asset levels relative to liabilities.

Other post-employment benefits are funded on a pay-go basis, resulting in a growing liability that was equivalent to a high 1.1% of market value as of fiscal 2015.

Operating Performance

The city retains substantial gap-closing ability as a result of strong reserves relative to historic revenue volatility. General fund reserves are enhanced by approximately $12 million of excess reserves in the city's health care trust fund and parking fund as of fiscal 2015. Unrestricted general fund balance increased to a strong 33% of general fund spending in 2015, with further additions likely in 2016 based on year to date performance.

The city has improved financial flexibility since the last recession by increasing reserves and improving budget management to insure operating balance. In addition, the city has begun to address deferred maintenance and other capital needs through increased pay-go spending.

Adequate Revenue Bond Coverage

Pledged revenues supporting the city's convention center and parking revenue bonds have performed strongly over the past 10 years but remain vulnerable to economic declines. The city's demonstrated ability to increase parking rates and revenues provides a key offset to such risks. This rate setting capacity is supplemented by a covenant to increase rates as necessary to maintain pledged revenues at 1.5 times (x) annual debt service after accounting for PFD contributions. The 'A+' rating on the bonds reflects the combination of these credit strengths and weaknesses. The potential exposure of pledged revenues to the city's operations caps the rating on the bonds to no higher than the city's IDR.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's 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/site/re/879478

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1011205

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011205

Endorsement Policy

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Contacts

Fitch Ratings
Primary Analyst
Stephen Walsh, +1-415-732-7573
Director
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Alan Gibson, +1-415-732-7577
Director
or
Committee Chairperson
Karen Ribble, +1-415-732-5611
Senior Director
or
Media Relations
Hannah James, New York, +1-646-582-4947
hannah.james@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Stephen Walsh, +1-415-732-7573
Director
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Alan Gibson, +1-415-732-7577
Director
or
Committee Chairperson
Karen Ribble, +1-415-732-5611
Senior Director
or
Media Relations
Hannah James, New York, +1-646-582-4947
hannah.james@fitchratings.com