Fitch Rates $43MM Albuquerque, New Mexico GO Bonds 'AA'

AUSTIN, Texas--(BUSINESS WIRE)--Fitch assigns an 'AA' rating to Albuquerque (the city), New Mexico's $39 million general obligation (GO) general purpose bonds, series 2008A, and $4 million GO storm sewer bonds, series 2008B, scheduled to sell competitively on May 19. Fitch also affirms its 'AA' rating on the city's following outstanding bonds:

--$170.4 million general purpose GO bonds

--$42.2 million storm sewer GO bonds

--$62.5 million state-shared gross receipts tax bonds

--$74.7 million state-shared gross receipts tax / lodgers' tax bonds

--$3.7 million municipal gross receipts tax bonds.

The 2008A and 2008B bonds are secured by the city's unlimited property tax levy on all taxable property within the city. Proceeds will be used for various public improvements and to pay issuance costs. The Rating Outlook for all bonds is Stable.

The 'AA' ratings reflect the city's broad and expanding economic base, positive debt profile, and manageable capital plans. City operations are heavily dependent on gross receipts taxes (GRTs) for support. Recent sluggish growth in this revenue source, due to substantial contraction in housing construction, plus management's decision to reduce the GRT rate, has pressured the city's financial position. The city is still in compliance with its fund balance policy of maintaining reserves equal to one month's recurring expenditures and transfers out, but total fund balances are projected to decline substantially in fiscal 2008. Notably, the city closed a $65 million budget gap in order to balance its proposed fiscal 2009 budget. Fitch expects the city to restore its financial flexibility to previous levels and, at a minimum, prevent further narrowing of its financial position to avoid any negative credit actions. In contrast to the residential market, commercial building has remained steady and numerous large pending commercial projects may help stabilize building activity in the city. The city's development as a high-technology hub continues to attract higher wage industries and overall unemployment rates are at near record lows.

GRTs, both state-shared and municipal, represent a significant 72% of the city's general fund budget. State-shared GRTs rebounded quickly after stagnating during the recession in fiscal 2002, growing by a compound annual average of 6.6% over the subsequent five year period. However, fiscal 2008 collections, which were initially budgeted to grow by 4.3%, were revised downward twice during the fiscal year, and are now projected to remain level to fiscal 2007 amounts. The proposed fiscal 2009 budget also assumes flat GRT growth, and also includes tax relief in the form of a 1/8th cent municipal GRT reduction, effective July 1, 2008, totaling nearly $18 million in revenues. Declines in construction GRTs have driven recent trends, more than offsetting modest gains in retail GRTs.

The city posted general fund surpluses in fiscal years 2003-2006, aided by strong GRT growth and a shift of 1 mill from debt service to operations in fiscal 2004. Audited fiscal 2007 results posted a modest drawdown but still maintained one month's reserve of $41.9 million and a $34.3 million undesignated fund balance, totaling a solid 16% of expenditures and transfers out. For fiscal 2008, the city is projected to maintain its one month reserve but draw down nearly all of its undesignated fund balance due to contraction in GRT revenues. Revenue challenges in the proposed fiscal 2009 budget are compounded by the 1/8th GRT reduction sought by the city's leadership, leading to a large $65.6 million budget gap which was closed by eliminating 225 positions, shifting one mill from debt service to operations, and reducing pay as you go capital outlays. Unlike previous budget cycles, the city is not likely to outperform its projections for the current year and fiscal 2009 period. Fitch will monitor the city's progress and look for continued attention to restoring its previous levels of flexibility.

The city's debt profile is characterized by a relatively modest debt load, rapid general obligation bond amortization rate, and manageable capital plan. As a matter of practice, the city retires all of its general obligation bonds within 10 years and requires level principal payments. The current offering is the first installment of a $160 million GO authorization approved by voters in November 2007 as part of the city's 10-year CIP. Notably, seven of the 10 approved propositions received voter approval of 65% or more.

Albuquerque is the largest city in the state, accounting for about one-quarter of the population. The city grew by over 16% in the 2000 census, fueling strong tax base growth that has increased by a compound annual average of nearly 7% over the last five fiscal years. Residential construction accounted for the majority of new tax base growth with building permit values exceeding $500 million in fiscal years 2002-2006. However, notable contraction in the city's residential real estate market is now evident. Single family home building permits declined by 29% and 38% in fiscal years 2006 and 2007. In contrast, commercial building activity has continued to grow due to numerous high value projects. Employment growth for the 12 months ending February 2008 for the Albuquerque metropolitan statistical area (MSA) totaled a modest 1,500 or 0.4%. After growing steadily for four years, the construction sector has posted declines over the last 14 months, including a 1,200 or 4% decline this 12 month period. The MSA's preliminary unemployment rate for February 2008 totaled 3.4%, below state and national averages, indicative of the generally stable economic base.

Kirtland Air Force Base, Sandia National Labs, and Intel are among the area's largest employers, helping transform it into a hub for electronics, aviation and aerospace, and defense-related research and development. However, Intel recently reduced its workforce by 1,000 due to the phase out of an older silicon wafer fabrication plant. The addition of several major high technology employers that are pending or are underway may absorb a portion of this highly skilled labor force, mitigating any material negative impact to the city.

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