Fitch Assigns 'AA-' to Aurora, CO COPs; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings assigns an 'AA-' to the following Aurora, CO certificates of participation (COPs):

--$21.2 million COPs, series 2015.

The COPs are expected to price during the week of May 11. Proceeds will be used to construct the city's public safety training facility.

In addition, Fitch assigns its 'AA' rating to the city's $2.1 million outstanding general obligation (GO) bonds.

The Rating Outlook is Stable.

SECURITY

The COPs are payable solely from lease revenue payments from general revenues, subject to annual appropriation. The leased asset provides additional security.

KEY RATING DRIVERS

HIGH SALES TAX RELIANCE: The city's general operations are highly reliant on economically sensitive sales and use tax revenues. Strong revenue trends have led to healthy financial margins and substantial pay-go funding. Fitch expects the city to maintain robust reserves to mitigate its considerable sales and use tax dependence.

HIGH DEBT; MODEST CARRYING COSTS: Overall debt per market value is high but direct carrying costs are modest, principal amortization is above average, and debt plans are manageable.

LACK OF VOTER SUPPORT: Three failed GO bond elections have forced the city to rely on COPs and current resources to finance its capital plan. The latter fund the majority of the city's capital needs.

STRONG GROWTH PROSPECTS: Surging development and strong population growth has been fueled by ample land, large (but concentrated) healthcare and military employment sectors, and its proximity to Denver International Airport. Service by two of the Regional Transportation District's (RTD) FasTracks rail lines (to be completed in 2016) may also boost transit-oriented development.

BELOW AVERAGE WEALTH: Wealth levels are moderately below the state and national averages and growing sluggishly.

IMPROVED PENSION FUNDING: Pension reforms have enabled the city to nearly restore full actuarially required contributions (ARCs) of the city's main pension plan, the General Employees Retirement Plan (GERP). Despite the ARC shortfalls, the funded position remained adequate.

RATING SENSITIVITIES

SHIFT IN FUNDAMENTALS: The rating is sensitive to material changes in fundamental credit characteristics, including the city's strong financial management practices.

LOWER DEBT; ECONOMIC GROWTH: A reduced debt burden, sustained economic expansion and diversification, and continued solid financial performance with full ARC funding may lead to future positive credit consideration.

CREDIT PROFILE

Aurora is located adjacent and directly east of Denver and with a population of over 345,000 is the third largest city in the state.

MAJOR MEDICAL/MILITARY PRESENCE

Buckley Air Force Base is the city's single-largest employer with 11,000 (6.3% of city employment) military and civilian personnel. As an Air Force Space Command base, its primary mission is to provide global surveillance of missile launches. Buckley is also home to the Colorado National Guard and numerous other tenants. Potential future reductions in military spending could impact base operations as well as the city's economic profile.

Aurora's emergence as a regional medical provider stemmed from the redevelopment of the former Fitzsimmons Army Medical into the expansive Anschutz Medical Campus which includes two hospitals, a medical school, and research facilities. A $1.7 billion Veteran's Administration hospital complex under construction will further boost the current employment of 22,000 (13% of the city's employment base) on the campus.

An $800 million Gaylord resort with 1,500 rooms is planned near the Denver International Airport. Upon the completion of Regional Transportation District's (RTD) two commuter rail lines within the city in 2016, management expects transit-oriented development to ramp up as well.

STRONG DEVELOPMENT TRENDS

The city's assessed value (AV) growth has remained sluggish after declining by a cumulative, moderate 6.6% recessionary loss from 2010 thru 2012. Due to an 18-month lag in the addition of new properties to the tax base, resurgent building activity should boost AV in 2016. The number of single family home permits rebounded to about 80% of pre-recession levels in 2013 and 2014. A significant 18% increase in median home values (to $214,500) over the prior year per Zillow will likely lead to greater reassessment gains compared to the city's budgeted rate of 3.5%. Notably, current home prices are now above pre-recession peak levels.

CITY HIGHLY RELIANT ON SALES TAX REVENUES

The exposure of general fund operations to economic swings is heightened as sales and use taxes account for a high 64% of the city's general fund revenues. These revenues declined by a cumulative 8.6% in 2008-2009 but have rebounded solidly with a compound annual average rate of 7.1% through 2014. Sales and use tax revenues increased by 9.8% in 2014 and first quarter receipts for 2015 are up by 10.5% over the same period in the prior year. Voter approval is required for any increase to the sales tax rate.

ADEQUATE RESERVES

The city recorded net operating surpluses consecutively since 2010 and unaudited 2014 results point to similar results. However, in certain years these results were made possible by not fully funding the city's annual required contribution (ARC) for its largest pension plan, which Fitch views negatively. In 2012 and 2013, operating surpluses exceeded the ARC shortfall or were achieved despite large hikes in capital projects transfers. Unaudited results for 2014 (during which 95% of the pension ARC was funded) point to an $8.8 million net surplus despite $30 million in capital projects transfers, increasing the unrestricted fund balance to nearly $79 million or 28% of spending. Although reserves typically exceed the city's formal 14%-16% fund balance policy, Fitch considers this policy floor low for the rating category given its high sales tax exposure.

The adopted 2015 operating budget is balanced but includes the use of $9.8 million of fund balance for one-time transfers to the capital projects fund. The 2015 budget appropriations represent an 8% increase over the prior year's budget due to the additional capital projects transfers, a 3.75% pay hike, and 18 additional public safety police, fire, and emergency medical service positions. The budget assumes a sales tax gain of 3.8% although first quarter results are 8% ahead of prior year receipts, leading management to project a year-end gain of 6.6% and a modest $900,000 net deficit. The city's five-year financial forecast projects balanced operations in 2016, followed by budget gaps starting in 2017, based on modest to moderate revenue growth, annual pay hikes, and growing pension contributions. The pension ARC is fully funded.

HIGH DEBT; RELIANCE ON COPS

Overall debt levels are high at 6% of full market value but moderate on a per capita basis at $3,937. The majority of overlapping debt is issued by the RTD for its $7.4 billion light-rail program. Nearly all of the city's general government debt is comprised of COPs due to a lack of voter support for the city's last three GO bond elections. The combined principal pay-out rate for GOs and COPs is above average at 63% in 10 years.

The city is relying on pay-go funding & COPs to fund its $255 million five year capital plan. COPs (including the current offering) are planned for funding 26% of capital plan. The planned sources of repayment for the series 2015A COPs are capital-related taxes that are transferred annually to the capital projects fund.

FULL ANNUAL PENSION FUNDING RESTORED

The city's various defined benefit pension plans are dominated by the single-employer General Employees Retirement Plan (GERP). Only 51%-69% of the ARC was funded over the last five years due to budgetary pressures. Despite the partial ARC funding, the GERP's funded position remained solid at 92% as of Jan. 1, 2013. The Fitch-adjusted estimate, based on a 7% rate of return assumption, is satisfactory at 83%. Pension reforms approved in 2011 will increase employee and employer contributions annually through 2017 and created a lower cost tier of benefits for employees hired after 2011.

Other post-employment benefits (OPEB) are limited to an implicit rate subsidy for health insurance premiums through Medicare age and are funded on a pay-go basis. Total carrying costs for debt service, pension ARC, and OPEB are moderate at 10% of 2013 governmental spending.

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, S&P/Case-Shiller Home Price Index, IHS Global Insight, and National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984036

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Contacts

Fitch Ratings
Primary Analyst
Jose Acosta
Senior Director
+1-512-215-3726
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Teri Wenck
Director
+1-512-215-3742
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
Jose Acosta
Senior Director
+1-512-215-3726
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Teri Wenck
Director
+1-512-215-3742
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com