Fitch Affirms Bloomfield, NM's Unlimited Tax GOs at 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'A+' rating on the following bonds for Bloomfield, New Mexico (the city).

--$625,000 outstanding unlimited tax general obligation (ULTGO) bonds series 2005.

The Rating Outlook is Stable.

SECURITY

The bonds are a general obligation of the city secured by an unlimited ad valorem tax pledge without limitation as to rate or amount.

KEY RATING DRIVERS

DEPENDENCE ON ECONOMICALLY VOLATILE REVENUES: After several years of declines, the city's primary revenue source, the gross receipts tax (GRT) has been positively impacted by recent gains in economic activity. The GRT has been a volatile revenue source and is often difficult to predict. Shifts in its performance have had a material impact on city financials.

LIMITED ECONOMY: The city's local economy is closely tied to a heavy regional crude oil and natural gas presence. Although the recent decline in oil prices has lowered natural gas and oil values, it has not yet had a material impact on the city's tax base. Fitch believes continued declines in these values should not impact the city as long as TAV in other property types remains stable.

MANAGEABLE LONG-TERM OBLIGATIONS: Fitch expects that limited debt issuance plans will allow the city to maintain a moderate debt burden. Pension and other post-employment benefit (OPEB) requirements are manageable.

RECENT ANNEXATION EXPANDS TAX BASE: In fiscal year (FY) 2014, the city was approved by the state to annex 6,775 acres of San Juan County land. The annexation doubled the size of the city and added $25 million in taxable assessed value (TAV) to the tax roll for FY 2016.

RATING SENSITIVITIES

STABLE OUTLOOK: Stable reserves and conservative budgeting practices are imperative given the city's limited economy and dependence on GRT that fluctuates with changes in the overall economy.

CREDIT PROFILE

Located in the four-corners region of New Mexico, the city of Bloomfield lies 14 miles east of Farmington and 165 miles northwest of Santa Fe. Population in the city as of 2014 was 7,638.

BELOW AVERAGE WEALTH AND LIMITED ECONOMY

The local economy is limited and focused largely on extraction industries, primarily natural gas but also oil and coal mining. Recent drops in natural gas prices have led to notable declines in oil and natural gas values. Declines in these values have not had a material impact on the city's property tax collections as oil and gas values comprise only 0.5% of total TAV.

Socio-economic metrics for the city are mostly below average. Wealth levels are low relative to the state and nation although they have increased as the overall economy continues to improve. Unemployment in San Juan County was 6.0% in March 2015, which remains comparable to the rest of the state and below the national average.

One of the area's major employers, the Four Corners Power Plant closed three of its units in FY 2013 due to environmental concerns. In July 2015, the U.S. Deputy Secretary of the Interior approved a "Record of Decision" that will allow operations to continue at the plant for another 25 years. This decision should have a positive impact on the city's local economy by safeguarding more than 800 current jobs and by encouraging new development (the plant's operators have agreed to spend up to $160 million on equipment to reduce harmful emissions).

IMPROVING FINANCIAL POSITION:

The city's modest scale of operations is extremely reliant on the economically sensitive GRT, which comprises 75% of general fund revenue. As is the case in most New Mexico municipalities, these revenues have historically fluctuated in tandem with changes in the economy. After several years of notable declines, GRT growth returned in the fiscal year ending June 30, 2013 with a growth of 8.1%. FY 2014 and 2015 similarly demonstrated growth trends of 3.5% and 6.0%, respectively.

In recent years, general fund operating performance has varied. FY 2011 ended with a significant deficit after a steep decline in the GRT. And although FY 2012 had a small surplus, FY 2013 ended with an operating deficit. The city's mixed financial results reflect the difficulty the city faces in predicting the GRT and budgeting expenditures accordingly.

FY 2014 ended with a $147,000 operating surplus, raising unrestricted fund balance to $1.9 million or 23% of spending. Based on preliminary unaudited figures, FY 2015 ended with a small surplus of $18,000 and an unrestricted fund balance estimated to be similar to the year prior at $1.9 million, or 22.5% of spending.

FY 2016 is budgeted to add a modest $42,000 to the unrestricted fund balance, increasing it to $2 million or 17% of spending. FY 2016's budgeted fund balance as a percent of spending is lower than years prior due to a significant increase in budgeted expenditures (over 28%). The increase is driven by capital spending that the city is hoping to fund through grant funding or state capital outlay allocations. The hike in appropriations is funded by additional property taxes and GRTs from the newly annexed area of the city.

Liquidity has improved to solid levels after declines a few years ago. Fiscal years 2011 and 2012 were characterized by significant cash declines due to declining revenue, over-budgeted projects and delayed reimbursements. As the city cut expenditures and the reimbursement situation was resolved, the city was able to build back its liquidity in FYs 2013 and 2014 (as evidenced by a 3.1x quick ratio in both years, up from 0.2x in FY 2012).

RECENT ANNEXATION EXPANDS TAX BASE:

Through the annexation of 6,775 acres of San Juan County land, Bloomfield more than doubled its previous size. As a result, the city's TAV is projected to increase by 24.7% in FY 2016. The city is also estimated to earn $700,000 in additional property taxes and GRTs, including those from the newly incorporated gas plants. The possible intended use of these additional revenues will be towards the planning costs for the purchase of an electric utility system from the city of the Farmington expected to be funded by the additional annexation revenues and possibly through a bond or loans from NMFA. The financial impact of this acquisition would likely not be realized until FY 2017.

In the near-term, the city plans to provide the newly annexed gas plants with a new water main at a cost of approximately $825,000 (to be financed from the Joint Utility Fund). Eventually, the city plans to convert the undeveloped portion of the annexed land into hiking trails and parks.

MODERATE DEBT PROFILE

For FY 2015, debt relative to market value and debt per capita are moderate at 4.7% and $2,748, respectively. Outstanding principal amortization is also moderate, with 57% retired within the next 10 years.

The city participates in the New Mexico Public Employees Retirement Association (PERA) and fully contributes 100% of the statutory required contribution each year. PERA contributions are statutory and have been below the actuarially required contribution (ARC) for several years. After investment losses decreased its funded position, PERA enacted a series of pension reforms in 2013. These reforms increased PERA's funded position to 75.8% as of June 30, 2014 (as compared to a funded position of 65% two years prior). Using Fitch's 7% rate of return, the 2014 estimated funded position is lower but adequate at 70%.

The city also makes the full required contribution to the state OPEB program. Carrying costs for debt service, pension ARC (adjusted for full funding), and OPEB actual contributions equaled a moderate 18% of governmental spending in FY 2014 and do not pressure the city's financial profile in Fitch's view.

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, National Association of Realtors.

Applicable Criteria

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

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

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

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=989172

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=989172

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Rupali Mahida
Analyst
+1-212-612-7839
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Jose Acosta
Senior Director
+1-512-215-3726
or
Committee Chairperson
Marcy Block
Senior Director
+1-212-908-0239
or
Media Relations:
Sandro Scenga, New York, +1 212-908-0278
Email: sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Rupali Mahida
Analyst
+1-212-612-7839
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Jose Acosta
Senior Director
+1-512-215-3726
or
Committee Chairperson
Marcy Block
Senior Director
+1-212-908-0239
or
Media Relations:
Sandro Scenga, New York, +1 212-908-0278
Email: sandro.scenga@fitchratings.com