Fitch Upgrades Bullhead City, AZ's MPC Excise Tax Revs to 'AA-'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has upgraded the Issuer Default Rating (IDR) of Bullhead City, AZ (the city) to 'AA-' from 'A+'. In addition, Fitch has upgraded the following Bullhead City Municipal Property Corporation, AZ bonds to 'AA-' from 'A+':

--$5.7 million excise tax revenue bonds, series 2006;
--$10.1 million excise tax revenue refunding bonds, series 2009.

The Rating Outlook is Stable.

SECURITY
The bonds are payable from rental payments from the city secured by a priority lien and pledge of the city's excise taxes. The city's obligation to make lease payments under the use agreement is absolute and unconditional and is not subject to appropriation or abatement.

KEY RATING DRIVERS

The upgrade of the IDR to 'AA-' results primarily from positive credit trends, such as Bullhead City's prudent budget management that has rebuilt financial flexibility in recent years, and reflects application of Fitch's revised criteria for U.S. state and local governments, released on April 18, 2016. Operating reserves and demonstrated spending flexibility are key mitigating factors for the city's high revenue volatility and limited revenue raising ability. The upgrade of the excise tax bond rating to 'AA-' reflects application of the new criteria. The dedicated tax bond rating is capped at the IDR and incorporates the healthy debt service coverage afforded by the pledged revenue stream, which provides resilience against slow revenue growth prospects and high revenue volatility.

Economic Resource Base
Bullhead City is located along the Colorado River in western Arizona, roughly 100 miles southeast of Las Vegas. The population is just over 39,000, and the local economy is largely driven by tourism and retail.

Revenue Framework: 'bbb' factor assessment
Revenue growth prospects are slow, although operating revenues have improved notably over the past three fiscal years. The city has limited ability to independently raise operating revenues.

Expenditure Framework: 'aa' factor assessment
Fitch expects the current pace of expenditure growth to trend in line with to slightly above expected revenues given the city's flat population trend. Bullhead City has demonstrated its ability to curtail spending during a revenue downturn, and carrying costs are moderate.

Long-Term Liability Burden: 'aaa' factor assessment
The liability burden for debt and pensions is low. Fitch expects the burden to remain in this range based on limited capital needs and debt amortization.

Operating Performance: 'aa' factor assessment
The city's operating reserves and expenditure flexibility provide very strong gap-closing capacity through the economic cycle. Strong financial management and conservative budget practices support rapid rebuilding of flexibility during periods of economic recovery.

RATING SENSITIVITIES
Financial Management Practices: A sustained reversal of the city's solid financial operations and prudent fiscal practices would pressure the rating.

Dedicated Tax Bond Coverage: The sales and use tax bond rating is sensitive to changes in the level of pledged revenues over time compared to maximum annual debt service (MADS) as well as to changes in the city's IDR.

CREDIT PROFILE

Bullhead City serves as the population, retail, and service center for the region, and is a frequent host to a variety of tournaments and special events. The city is adjacent to Laughlin, NV, which features 10 casino resorts for which Bullhead City provides the bulk of the labor force. Improvement in the local housing market since 2012 has largely followed the trend of slow but steady recovery throughout the state. The unemployment rate is above average and wealth metrics trail the state and U.S. averages. However, management anticipates employment growth from recent investments in the mining and distribution sectors near Bullhead City.

Revenue Framework
City operations are heavily reliant on economically sensitive excise taxes, which constitute the largest source of general fund revenue (over 90%). Excise tax revenues include the city sales tax, state shared sales and income tax revenues, charges for services, fines and forfeitures, and franchise taxes; city sales taxes and state-shared revenues make up 45% and 33% of unaudited fiscal 2016 collections, respectively.

Compounded annual growth in general fund revenues was stagnant for the 10 years ended in fiscal 2014, with severe recessionary declines offset by steady improvement since fiscal 2012. The current trend of modest economic expansion supports Fitch's longer-term expectation of slow revenue growth in line with inflation.

The city has limited independent ability to raise revenues, as any increase in the sales tax rate would require voter approval. Revenue flexibility is limited to locally controlled franchise taxes, charges, and fees. The city does not levy a property tax, and to do so would also require voter approval.

Expenditure Framework
General fund spending was led by public safety and general government at about 60% and 30% of expenditures, respectively, in recent years.

Fitch expects that the natural pace of expenditure growth will trend in line with or slightly above projected slow revenue growth, given the mature city's stable population trend.

Bullhead City's fixed cost burden is moderate, with carrying costs for debt service, pension actuarially determined contributions, and other postemployment benefits equal to 18% of governmental fund spending in fiscal 2015. The city has demonstrated an ability to curtail operational spending in response to extended revenue declines in order to achieve operational balance. Management retains strong control over key elements of workforce spending; about one-third of city employees are under a flexible one-year collective bargaining contract that enforces binding arbitration in the event of conflict, while the remaining workforce is nonunionized.

Long-Term Liability Burden
The city's direct debt includes excise tax bonds and special assessment debt; a portion of the excise tax bonds is repaid from net revenues of the wastewater utility and is therefore considered self-supporting by Fitch. The long-term liability burden, which includes overall debt and pension liabilities, is low at 4.4% of personal income. Fitch expects that the metric will remain low given the city's maturity and the region's limited capital needs.

Bullhead City contributes to a state-sponsored pension plan for uniformed employees and maintains a defined contribution plan for non-uniformed employees. Recent legislative changes to the state plan are projected to address sizable pension liabilities over the long term but will provide no intermediate-term relief to contribution rates. The city's portion of the plan's net pension liability is manageable at 2% of personal income.

Operating Performance
The city's revenue recovery over the past four years bolstered operating reserves following recessionary drawdowns. Unrestricted general fund balance was $8.5 million at the end of fiscal 2015 (36% of spending) and unaudited fiscal 2016 results point to another surplus of about $1 million. The city's healthy reserves and expenditure flexibility provide important financial flexibility to manage through a moderate economic downturn given the high volatility of operating revenues.

Bullhead City made extensive cuts to operating costs in fiscals 2009-2012 as local economic softening resulted in a modest decline in excise taxes that was exacerbated by the national recession. Measures to achieve balanced operations included personnel reductions and use of furlough days. Officials report that recent enhancements in operational efficiency have maintained service levels and allowed for modest pay raises. The city has demonstrated a commitment to rebuilding reserves in support of flexibility with no material deferral of required spending. The 2017 budget is balanced.

Excise Tax Revenue Bonds
Fitch believes that slow but steady growth prospects for pledged revenues are comparable to those for the city's operating revenues, as excise taxes make up nearly all general fund revenues.

To evaluate the sensitivity of the dedicated revenue stream to cyclical decline, Fitch considers both the revenue sensitivity results (using the same 1% decline in 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 pledged revenue history, Fitch's analytical sensitivity tool (FAST) generates a 5.2% scenario decline in pledged revenues. The largest actual cumulative decline in historical revenues is 30.1% in fiscals 2007-2012.

The revenue stream performs well when subjected to Fitch's stress analysis. Assuming issuance to the additional bonds test (ABT) that requires 2.25 times (x) coverage of MADS, well below actual current coverage, the stream could tolerate a 56% drop in pledged revenues, or nearly 11x the scenario results and 1.9x the largest actual revenue decline in the review period.

In addition to the 2.25x ABT, additional issuance is more effectively restricted by the city's need of pledged revenues in excess of debt service to fund general operations.

The rating on the excise tax revenue bonds is capped at the city's IDR. Fitch does not view the pledged revenues as special revenues under section 902(2)(B) of the bankruptcy code, which defines 'special excise taxes imposed on particular activities or transactions' as special revenues.

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

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Contacts

Fitch Ratings
Primary Analyst
Shane Sellstrom
Associate Director
+1-512-215-3727
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Steve Murray
Senior Director
+1-512-215-3729
or
Committee Chairperson
Marcy Block
Senior Director
+1-212-908-0239
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Shane Sellstrom
Associate Director
+1-512-215-3727
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Steve Murray
Senior Director
+1-512-215-3729
or
Committee Chairperson
Marcy Block
Senior Director
+1-212-908-0239
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com