NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a rating of 'AAA' to the following Three Rivers Park District (MN) general obligation (GO) bonds:
--$8.6 million GO bonds, series 2016A;
--$875,000 GO capital equipment notes, series 2016B.
In addition, Fitch has affirmed the park district's 'AAA' Issuer Default Rating (IDR) and GO bond ratings on $61 million of debt outstanding.
The Rating Outlook is Stable.
The series 2016 bonds and notes are being sold via a competitive sale on Nov. 17, 2016. The bonds will finance the acquisition and betterment of park facilities and properties.
SECURITY
The bonds and notes are backed by the district's full faith and credit pledge and unlimited ad valorem taxing power.
KEY RATING DRIVERS
Fitch's affirmation of its 'AAA' IDR and GO ratings for the Three Rivers Park District reflects the district's strong revenue growth history, broad independent ability to raise revenues, and exceptional gap-closing capacity. Debt and retiree benefit liabilities are low relative to the district's economic resource base, located in Hennepin County, MN. A track record of surplus operations further supports the district's ratings at the 'AAA' level.
Economic Resource Base
Three Rivers Park District is a special purpose government entity created in 1957 by an act of the Minnesota Legislature to acquire, develop and maintain public parks, wildlife sanctuaries and forest reservations in the Twin Cities region. Its jurisdiction includes all parks in Hennepin County located outside the city of Minneapolis, parks owned by Scott County but administered by the district and parks owned by the district in four counties adjacent to Hennepin: Dakota, Wright, Carver and Ramsey. The district's taxing borders encompass only Hennepin County, excluding Minneapolis. The district serves affluent communities that benefit from a deep and diverse regional economy.
Revenue Framework: 'aaa' factor assessment
The district's historical revenue growth has been very strong and Fitch expects revenues will continue to grow at or above the pace of U.S. GDP in the future given Hennepin County's broad and wealthy tax base coupled with the vibrant economy of the Twin Cities region. The district's legal ability to raise recurring revenue is high, as its independently-elected board has broad control over the property tax rate within modest statutory limits.
Expenditure Framework: 'aa' factor assessment
The district maintains solid spending flexibility as a single-purpose entity with limited operations and a highly seasonal workforce. Management can control costs by reducing facility hours and restricting visitors to fewer days of the week or month. Fixed costs are moderately high at about 19% of expenditures, which is not unusual for a special-purpose entity.
Long-Term Liability Burden: 'aaa' factor assessment
The long-term liability burden is low as a percentage of the taxing jurisdiction's resident personal income at approximately 5%. This low liability metric reflects high resident income levels, a minimal amount of direct debt outstanding, and modest employee pension liabilities.
Operating Performance: 'aaa' factor assessment
The district's solid revenue-raising power and considerable ability to reduce costs, supplemented by health reserves, underpin what Fitch believes to be its exceptionally strong financial resilience. In a mild U.S. economic downturn, Fitch expects the district's superior gap-closing capacity would enable it to close budget gaps with minimal draws on fiscal reserves.
RATING SENSITIVITIES
FIXED CARRYING COSTS: The rating is sensitive to the district's level of fixed carrying costs for debt service, pension contributions and retiree healthcare benefits. Material increases to fixed costs that result in narrowed spending flexibility could negatively impact the rating.
REVENUE GROWTH PROSPECTS: The rating assumes the continuation of strong revenue growth for the district. A substantial slowdown in the pace of revenue expansion could pressure the rating.
CREDIT PROFILE
The district's recreational resources include public parks and forest preserves spread across five Minnesota counties totaling over 27,000 acres. District facilities hosted over 10.5 million visitors in 2015, more than double the number of visitors a decade prior in 2005. The local economy is deep and diverse, anchored in the Twin Cities metro region, which benefits from above-average wealth and education levels compared to U.S. averages. The per capita income of Hennepin County as measured by the U.S. Bureau of Economic Analysis was $63,901 in 2015 compared to $48,112 for the nation, or about 132% of the U.S. average. Unemployment and poverty levels have trended well below the U.S. average in the Twin Cities region.
Revenue Framework
Property taxes have historically accounted for more than three-quarters of general fund revenues, although the proportion of revenues derived from property taxes has been gradually declining as service charges are assuming a greater role in funding the district. Property taxes made up 77% of general fund revenues in 2015. Service charges made up 19% of revenues, while intergovernmental revenues accounted for 4%. In addition to general fund revenue sources, which totaled $36 million in 2015, the district receives roughly $2 million annually from Scott County under the terms of an inter-governmental agreement. The district's seven-member board of commissioners retains broad independent powers to increase revenues.
Fitch estimates a 10-year compound annual growth rate (CAGR) for general fund revenues at 5.8% for the period from 2004 through 2014 -- well above the natural rate of U.S. GDP growth during the same interval of time (3.5%). The metric includes the effects of policy actions such as raising service fees paid by visitors and both raising and cutting the tax rate in response to fluctuations in assessed values (AV). In Fitch's opinion, the district's 10-year revenue CAGR is more closely aligned with natural growth in visitor levels and Hennepin County's tax base than it is linked to policy actions by the district board. Fitch believes the revenue growth rate is likely to remain in line with, or above, U.S. GDP given the Twin Cities region's vibrant economy, low unemployment, and healthy population growth.
The district has ample legal revenue-raising authority. The district's seven-member board of commissioners, five of whom are independently elected and two of whom are appointed by Hennepin County, has control over the tax rate within limits imposed by state statute. Under state law, the district is subject to a tax cap that limits its annual levy for operations to 0.03224% of the estimated market value of taxable property within its boundaries. There is no similar cap in place for the debt service levy, however, leaving the board free to raise that portion of the levy without limit.
While excess operating levy capacity has been somewhat narrow in recent years, the district retains significant capacity under the cap. Healthy market value growth in 2014 and 2015 grew the levy capacity to nearly $4.4 million in fiscal 2016, or about 11% of budgeted operating expenditures. The board also has the ability to raise visitor fees without limit to help fund operations. Altogether, management's independent legal revenue-raising ability is more than sufficient to offset any normal revenue decline.
Expenditure Framework
The bulk of general fund spending is directed at activities that directly impact park visitors. The major spending items are park and trail operations (33% of 2015 spending); recreation, education and natural resources (38%); and planning, design and technology (10%). Spending on general government activities such as parks administration accounted for 17% of expenditures in 2015.
Fitch expects the district's spending demands to grow at a pace closely aligned with the natural rate of revenue growth, reflecting continued modest increases in the areas of statutorily-determined pension contributions, employee health insurance and contractual adjustments to salaries and benefits.
Fitch considers control over expenditures to be solid, given the board's ability to cut or eliminate programs for visitors, close facilities and/or reduce hours of operation, and adjust staffing levels in response to either revenue pressures or visitor demand. The majority of the district's budget ultimately goes to pay both full and part-time workers who staff district facilities. Therefore, revenue reductions tend to translate into reduced service levels, which require fewer staff. The district employs approximately 2,000 staff in any given year, roughly 1,600 of whom are seasonal and 400 of whom are permanent full-time and part-time employees. The large seasonal component to staffing affords management a fair amount of spending flexibility, as it can easily trim seasonal staff for cost savings.
The majority of full-time employees are not members of collective bargaining units; only 120 full-time staff members are union members. Management reports that relationships with its bargaining units are constructive. In order to reduce costs during the downturn, employees agreed to forgo annual cost of living adjustments between 2009 and 2013. Salaries were raised 1% in fiscals 2014 and 2015, followed by a 3% increase in 2016. Non-unionized employees tend to receive salary and benefit terms similar to those bargained for with unionized employees.
Fixed carrying costs for the district were moderately high at approximately 19% in 2015, which was in line with recent history. Somewhat elevated carrying costs are not unusual for single-purpose government entities with narrowly-defined service missions.
Long-Term Liability Burden
The district's long-term liability burden is low at about 5% of resident personal income in the district's taxing jurisdiction (i.e. Hennepin County, not including the city of Minneapolis). Long-term liabilities are composed of direct debt, overlapping debt obligations, and unfunded pension liabilities. Of the three, debt issued by overlapping jurisdictions represents the largest share at $2.5 billion (96% of the total). Overlapping issuers include cities and school districts located in Hennepin County (excl. Minneapolis), the regional rail authority, the Metropolitan Council, and the county itself. The $2.5 billion number may undercount overlapping debt slightly, as it includes GO bonds issued by overlapping entities, but not revenue-supported or special assessment-backed debts, which are assumed to be self-supporting. The district's direct burden will be $70.5 million when the current issue closes, making up less than 4% of the overall debt burden. Unfunded pension liabilities are minimal at $28 million as calculated by Fitch.
The park district participates in two state-sponsored pension plans - the General Employees Retirement Fund (GERF) and Public Employees Police and Fire Fund (PEPFF). The district annually funds it full required statutory contribution, but statutory contributions have been below actuarially-determined levels in recent years for Minnesota's state-sponsored plans. Falling funded levels of the statewide plans have triggered an increase in municipalities' contribution rates. Higher contributions have been easily absorbed by the district, and Fitch believes higher payments will not diminish the district's expenditure flexibility in the near term. The aggregate assets-to-liabilities ratio for the district's share of GERF and PEPFF unfunded liabilities is approximately 79% using the plans' 7.9% discount rate. Using Fitch's more conservative 7% discount rate assumption, the assets-to-liabilities metric equals about 72%.
Operating Performance
Fitch believes the district is well-positioned to manage the challenges associated with a moderate economic downturn while maintaining a high degree of fundamental financial flexibility. The district's inherently strong gap-closing capacity, which is centered on its considerable revenue-raising ability coupled with a solid ability to reduce costs, should allow management to close any budget gaps associated with a mild contraction in U.S. GDP. Healthy general fund reserve levels that approximated 52% of spending in 2015 serve as an added source of financial resilience to the district.
Fitch considers the district's budget management track record during the present recovery to be strong. Management has achieved operating surpluses in five out of the last seven fiscal years. General fund reserves were $18.5 million at 2015 year-end. The district has achieved positive operations largely by means of cost controls, particularly through the cost-of-living freezes agreed to by most employee groups, but also by delaying equipment purchases and seeking other efficiencies. User fees and charges were increased to offset stagnation in the property tax levy between 2012 and 2014. Management expects 2016 to conclude with a small addition to fund balances in the range of $200,000 to $400,000.
The district board adheres to detailed financial and debt policies. These include a policy on the use of fund balance that has four components that include fully funding all compensated absences and retaining 22% of the subsequent year's operating budget on hand in the form of available reserves. The district is required to budget for 98% of property tax collections, though actual receipts usually come in above that level. Under Minnesota statute, the district is only required to fund its annual statutory pension contributions, even if these are below actuarial levels. Fitch does not believe underfunding of the full actuarial contributions will be a source of near-term pressure on the district.
The district's capital plan totals $25 million, including the current bond issue. Approximately $5 million of cash-on-hand will be used to fund a portion of the plan in order to limit new debt issuance and future increases in the debt service levy.
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/site/re/879478
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