NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned the following rating to the city of Annapolis, MD (the city):
--$38.1 million general obligation bonds (GO) public improvements and refunding bonds, 2011 series 'AA+'.
The refunding bonds will be issued for cash flow savings and to finance certain projects of the city. The bonds have a final maturity of Aug. 1, 2040 and will be sold via negotiation on March 10, 2011.
In addition, Fitch downgrades the following rating:
--$92.2 million outstanding city GOs to 'AA+' from 'AAA'.
The Rating Outlook is Stable.
RATING RATIONALE:
--The downgrade reflects the city's diminished financial flexibility, as evidenced by declining reserves, a constrained liquidity position, and the current debt restructuring to achieve cash flow savings.
--Internal governance proved inadequate to deter previous inappropriate cash management and financial oversight. The city has since implemented more stringent internal controls and reporting.
--The Stable Outlook reflects Fitch's belief that newly implemented internal controls and analytics will stem the financial decline.
--The city benefits from a stable employment base with a solid state, county, and federal government presence enhanced by tourism and maritime industries.
--The city's debt burden is moderate and should remain so given manageable capital needs and adherence to debt affordability policies.
KEY RATING DRIVER:
--Healthy financial flexibility and a sound cash position, in light of broader economic pressures;
--Adherence to fiscal controls;
--Debt restructuring and maturity extensions to attain cash flow savings.
SECURITY:
The full faith and credit of the city of Annapolis will be pledged to the payment of debt service.
CREDIT SUMMARY:
Over the last several years the city has experienced structural imbalances. The revenue softening associated with the recession highlighted the imbalance, resulting in utilization of reserves and a liquidity crisis. In fiscal year 2009, unanticipated expenses resulted in reserve levels falling to $4.4 million, equal to 8% of general fund revenues. Despite budget reductions in fiscal year 2010, reserves fell to 6.3% of revenues which is below the city's policy floor or 5.6% of spending, a measure utilized by Fitch. The city anticipates adding around $880,000 to $1 million to its general fund balance in fiscal year 2011. The proposed fiscal year 2012 budget will maintain a constant tax rate and will incorporate fee increases for the enterprise funds in an attempt to eliminate their reliance upon general fund subsidies. Newly adopted financial management policies include a goal of keeping the unreserved general fund balance at 15% of revenues, which the city intends to achieve by fiscal year 2014.
During fiscal year 2010 softening revenues contributed to a constrained liquidity position. To bolster available cash, the city utilized approximately $8 million of bond proceeds for operating subsidies; lax internal governance failed to prevent this unorthodox use. Simultaneously the city drew upon a $10 million line of credit. The city, led by a new management team, has since repaid the bond proceeds and anticipates concluding fiscal year 2011 with a line of credit draw of no more than $10 million. The city projects concluding fiscal year 2011 with less than $3 million in cash across all funds, exclusive of the line of credit, which Fitch characterizes as a relatively modest cash position.
Annapolis is one of the nation's smallest capital cities, with an estimated 2009 population of 36,879, and is also the county seat of Anne Arundel County (GO bonds rated 'AA+' with a Stable Outlook by Fitch). Approximately 25 miles from both Baltimore and Washington, D.C., the local economy is anchored by government employment, with added depth from the tourism and the maritime industries due to the city's location on the Chesapeake Bay. While the government centers and the United States Naval Academy (USNA) generate significant year-round visitation, the marinas and the historic district attract leisure travelers from around the region. The city's economic indicators remain solid, despite broader recessionary pressures, with above-average income levels and an unemployment rate below county, state, and national averages, although unemployment did increase slightly during fiscal year 2010 in comparison to the same time period last year.
The city's direct debt levels are moderately low on a per capita basis at roughly $2,501 and moderately low as a percentage of full market value at 1.4%. Amortization, including this issue, is below-average at 45.2% in 10 years. In an effort to address the liquidity concerns and build reserves, 2011 series bonds will achieve $17.8 million in debt service savings. The restructuring will eliminate fiscal year 2011 debt service payments and reduce debt service payment over the next seven years. Savings will facilitate the city's efforts to increase its liquidity in the near term and reserve levels in subsequent years. The issue will result in a $1.9 million net present value loss and extend maturities. The city's fiscal 2011-2016 capital improvement plan (CIP) totals approximately $185.3 million. The water and sewer system needs represent roughly 52.8% of the total CIP; however, debt associated with the system is not given self supporting credit due to general fund subsidies.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, LoanPerformance, Inc., and IHS Global Insight.
Applicable Criteria and Related Research:
'Tax-Supported Rating Criteria', dated Aug. 16, 2010;
'U.S. Local Government Tax-Supported Rating Criteria', dated Oct. 8, 2010.
For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566
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