Fitch Rates Denver, Colorado's $17.7MM COPs 'AA'; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA' rating to the City and County of Denver (the city), Colorado's $17.7 million certificates of participation (COPs), series 2008B (Denver Botanic Garden Parking Facility Project), scheduled to sell via negotiation the week of Sept. 29. The Rating Outlook is Stable.

Fitch has affirmed the following ratings on the city's outstanding debt:

--$658.5 million general obligation (GO) bonds at 'AA+';

--$410.3 million COPs at 'AA';

In addition, Fitch affirms its 'AA+' rating on the City and County of Denver Board of Water Commissioners $61.5 million GO bonds.

The ratings reflect Denver's broad and diverse economic base, strong financial position and enhanced fund balance policy, voter support for capital programs and exemptions from state-wide revenue limitations, and notable progress in funding other post employment benefits (OPEB), balanced by the city's reliance on economically sensitive sales tax receipts for about one-half of general operations. The impressive containment of structural imbalances in the city's finances during the last recession points to sound financial stewardship. However, the four-year period of recovery for its main revenue source, sales taxes, was notable for its length and poses vulnerability for future economic slowdowns. Continued conservative budgeting of this revenue source will remain key to the city's credit profile as it enters a period of slower economic growth.

'The 'AA' rating for the series 2008B COPs reflects the transaction's strong legal structure and offsets for the funded project's somewhat weaker essentiality. COP proceeds will fund construction of a parking structure at the Denver Botanic Gardens (DBG) as part of a much larger capital program at DBG; the remainder will be funded with non-bond resources. Per the city's COP guidelines, an incremental revenue stream is expected to offset most of the base rental payments, originating from increased DBG membership, admissions, parking, and other fees which will be deposited to a trustee-held account. This revenue stream will reimburse annual general fund appropriations for base rental payments. The DBG will also establish a supplemental reserve account to offset any revenue fluctuations. All documents for this financing are akin to other city COPs for more essential projects. The city's COP policy also requires that projects and their proposed payment sources be approved by a sizable group of both elected and appointed city leaders.

Denver's economic diversity benefits from it being the hub of a large 10-county metropolitan area and the capital of Colorado. Nonetheless, employment in the area declined for three consecutive years in the last recession. Employment gains returned in 2004 but are now moderating again due to the ongoing economic slowdown. The area's unemployment rate totaled a modest 4.3% in 2007 but increased in June 2008 to 5.9% (preliminary). The employment, property, and sale tax bases are benefiting from ongoing redevelopment throughout the city and substantial public and private investment in the downtown area, including hotel construction. However, as in many parts of the country, there is evidence of a building downturn after several very active years.

The city's largest revenue source, the sales and use tax, has demonstrated its vulnerability to past recessionary contractions, declining annually in 2001-2004. Upon its rebound in 2005, sales and use tax receipts grew steadily by 4%-5% per year through 2007, allowing the city to return its financial reserves to strong levels. For 2007, the city posted a $9.9 million operating surplus, increasing its undesignated reserves to over $154 million or almost 19% of spending. Projected 2008 results point to a modest increase in reserves. The 2008 budget assumes a 15% surge in lodger's tax receipts and 5% sales tax growth, both of which are partly based on the massive influx of visitors for the Democratic National Convention last month.

Notably, Denver is well ahead of most municipalities in regards to the implementation of GASB 45 which addresses the reporting of other post-employment benefits (OPEB) liabilities. In addition to reporting its liabilities, the city has funded its OPEB liabilities on an actuarial basis since 1992, posting a funded position of 73% for 2006.

Despite frequent debt issuances, the city's direct debt burden remains moderate; overall debt levels, including lease obligations and excise tax debt, are manageable but approaching high at over $4,900 per capita and 3.8% of full value. The principal pay out rate for COPs is slightly below average but the GO bond amortization rate remains rapid at 76% in 10 years.

In November, voters approved a $550 million bond program and a 2.5 mill levy increase for capital maintenance, estimated to generate about $27 million annually. The bond program is projected to be mill levy neutral, assuming conservative AV growth assumptions. The first installment of this authorization is scheduled for 2009 to refund interim commercial paper financing.

Fitch issued an exposure draft on July 31 proposing a recalibration of tax-supported and water/sewer revenue bond ratings which, if adopted, may result in an upward revision of this rating (see Fitch research 'Exposure Draft: Reassessment of the Municipal Ratings Framework').

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