Fitch Rates Olathe (KS) GOs 'AA+'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'AA+' rating with a Stable Outlook to the following Olathe (KS) bonds:

--$6.2 million general obligation (GO) improvement bonds, series 229.

The Rating Outlook on the bonds is Stable.

The series 229 bonds are being issued to finance the cost of purchasing streetlights from Kansas City Power & Light. The bonds are scheduled to sell competitively on Nov. 15.

SECURITY

The bonds and notes carry the city's unlimited tax general obligation pledge.

KEY RATING DRIVERS

The 'AA+' rating reflects the city's superior flexibility to control both revenues and expenditures and a low long-term liability burden. Despite relatively high revenue volatility, Fitch expects that the city will maintain solid reserves in an economic downturn. The 'F1+' rating is based on the long-term credit quality of the city.

Economic Resource Base

Olathe is a suburban community located approximately 20 miles southwest of Kansas City, KS and is the seat of Johnson County. The city's population has doubled since 1990, and it presently stands at approximately 132,000.

Revenue Framework: 'aaa' factor assessment

Fitch expects that the city's revenue growth absent policy actions will continue above the level of inflation and in line with national GDP. The city maintains strong independent legal ability to raise operating revenues.

Expenditure Framework: 'aa' factor assessment

The natural pace of expenditure growth is in line with revenue growth and the city has solid control over its main expenditure items despite high carrying costs.

Long-Term Liability Burden: 'aaa' factor assessment

Long term liabilities are low at less than 10% of personal income.

Operating Performance: 'aa' factor assessment

Fitch expects that the city will continue to maintain reserves at a level needed for an 'aa' financial resilience assessment during an economic downturn. The city has demonstrated consistent efforts to build reserves throughout the recent economic recovery, although pension payments are based on a statutory basis that consistently falls short of the actuarially-determined contribution.

RATING SENSITIVITIES

Maintenance of Financial Flexibility: The rating is dependent on the maintenance of financial flexibility and conservative budgeting practices.

CREDIT PROFILE

The city benefits from its proximity to the Kansas City MSA in addition to its own vibrant and expanding commercial/industrial sector, anchored by several national companies. Economic indices are favorable and unemployment is low.

Olathe residents enjoy access to employment opportunities in the larger Kansas City area and benefit from growing employment within the city. Large employers include Garmin and Farmers Insurance.

Revenue Framework

The city's revenue growth is expected to continue to be strong given the vibrant tax base and diverse revenue stream. While the implementation of a statewide tax lid in 2018 will limit the city's ability to adjust the property tax rate, Fitch believes exemptions in the law will enable the city to continue to increase revenues as necessary. The city's sales tax comprised 54% of fiscal year (FY) 2015 general fund revenue while property tax revenue made up a lower 17%.

Fitch expects revenue growth to remain in line with historical norms and national GDP growth. Diverse revenue streams leverage the strong and growing tax base. The city is projecting FY 2016 sales tax to be 5% higher than in FY 2015.

The city should continue to have a high level of control over revenue increases even after the implementation of the tax lid, which will limit the ability to increase property taxes to CPI growth. Exemptions to the lid include public safety as well as debt service expenditures, which will enable the city to increase property tax revenue if necessary. The city also maintains some ability to adjust other locally controlled revenues.

Expenditure Framework

Fitch expects that the natural growth rate of expenditures will be marginally above the strong natural growth rate of revenue. The city's main expenditure items include public safety and public works (53% and 17% of general fund expenditures, respectively, in fiscal 2015).

The city has a solid degree of flexibility with its main expenditure items. The city has no labor contracts, so there is flexibility to control headcount. Carrying costs are sizable at 25% of governmental expenditures in FY 2015. Fitch expects the level of carrying costs to decline even after the current issuance given the city's rapidly declining direct debt (86% of debt matures within 10 years) and limited plans to issue additional debt. 75% of the carrying costs are for debt service, which is more stable and predictable than payments for pension and other post-employment benefit (OPEB) obligations.

Long-Term Liability Burden

Olathe's long-term liabilities are low, with the combined unfunded pension liability and overall debt as a percentage of personal income projected to be less than 9% in 2016 post-issuance. The city participates in two cost-sharing, multiple-employer defined benefit pension plans - the Kansas Public Employees Retirement System and the Kansas Police and Firemen's Retirement System - and makes contractually-required contributions that consistently fall short of the actuarially-determined levels. Fitch calculates the city's share of the net pension liability to equate to a 59% ratio of assets to liabilities, assuming a 7% discount rate. Fitch views as a credit concern the statutory basis for required contributions to the multiple-employer pension plans, which falls short of the actuarially-determined rate even during economic recovery. Fitch believes the shortfall will likely cause net pension liabilities, and future pension contributions, to grow.

Operating Performance

The city had strong available general fund reserve levels in 2015 (31% of general fund expenditures). Fitch expects that the city will continue to exhibit exceptionally strong gap-closing capacity throughout an economic cycle given its high degree of inherent budget flexibility and demonstrated commitment to maintaining sound reserves.

The city has made consistent efforts to maintain a high level of available reserves during the recent economic recovery. Current available reserve levels are above both the city's formal policy of maintaining at least 15% of revenues in the general fund and its target of 30% of revenues. Management expects FY 2016 operations to be balanced with the possibility of an increase in reserves.

Date of Relevant Rating Committee: Jun. 10, 2016

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

Rating U.S. Public Finance Short-Term Debt (pub. 17 Nov 2015)

https://www.fitchratings.com/site/re/873508

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/site/re/879478

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014164

Endorsement Policy

https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst
Matthew Wong
Director
+1-212-908-0548
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Arlene Bohner
Senior Director
+1-212-908-0554
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Matthew Wong
Director
+1-212-908-0548
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Arlene Bohner
Senior Director
+1-212-908-0554
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com