AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has upgraded the Reno-Sparks Indian Colony, NV's (RSIC or the colony) long-term Issuer Default Rating (IDR) to 'BBB' from 'BB+'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
The upgrade to 'BBB' from 'BB+' reflects expansion and diversification of the colony's tax base over the past eight years which has contributed to a healthy financial cushion as reflected in fiscal 2014 reserves equal to 96% of spending. 'BBB' ratings indicate that capacity for payment of financial commitments is considered adequate but adverse business or economic conditions are more likely to impair this capacity. Despite strong recent conditions and near-term prospects, Fitch believes that the very concentrated nature of the revenue base leaves the RSIC susceptible to a sudden and unpredictable change in profile; this represents an additional risk factor that constrains the rating,
Economic Resource Base
The RSIC is a federally recognized tribe with a reservation consisting of noncontiguous trust land totaling over 2,000 acres in and around downtown Reno, Nevada, within Washoe County.
Revenue Framework: 'bbb' factor assessment
Revenue performance has been strong and the colony has ample independent revenue raising capability. However, the 'bbb' assessment reflects the tribe's highly concentrated revenue base.
Expenditure Framework: 'aaa' factor assessment
The colony has no notable spending pressure, strong spending flexibility and a conservative annual budgeting process. Carrying costs are low.
Long-Term Liability Burden: 'a' factor assessment
The long-term liability burden, estimated at about 30% in relation to personal income of residents, is elevated, but still moderate. The burden reflects the colony's long-term debt and relatively small population. The colony does not have defined benefit pension or other post-employment benefit obligations.
Operating Performance: 'aa' factor assessment
Fitch expects the colony to maintain sound financial flexibility during an economic downturn despite its exposure to highly concentrated and economically sensitive revenues based on strong expenditure flexibility and very high reserves levels. The colony's currently healthy financial cushion reflects rebuilding of reserves during the most recent economic upturn.
LARGE RESERVE CUSHION: The rating is sensitive to the colony's ongoing ability to maintain reserves at a high level to offset exposure to both cyclical declines and unexpected events.
The tribe has approximately 1,130 enrolled members and employs approximately 332 people, 44% of whom are tribal members. The tribe is governed by an eight-member tribal council and a tribal chairman, all elected to four-year staggered terms. Despite the significant diversity of RSIC operations over the past eight years, the colony's revenues remain economically sensitive and highly concentrated. Fiscal 2014 sales tax revenues were provided by smoke shops (27%) and non-smoker operations (73%). A single Walmart store is the top taxpayer, followed by several car dealerships, retail, and other area businesses. Although the Reno economy shows signs of improvement, it remains vulnerable to economic downturns due to its reliance on the leisure and tourism industries.
Although sales tax revenue growth has been strong in recent years and the colony has legally unlimited independent revenue raising capability, the key rating factor assessment is constrained by the extreme concentration of the revenue base.
Near-term growth prospects appear solid. Fitch anticipates Tesla Motors' $5 billion battery manufacturing factory under development east of Reno and other notable expansions and relocations to spur regional economic development in northern Nevada.
The colony's authority to levy and collect sales and excise taxes on businesses operating on tribal trust land is generated from an agreement with the state signed in 1991. The agreement stipulates that the colony must charge a rate at least equivalent to the state's sales and excise tax rate on retail sales activity on tribal trust land. Within this parameter, the colony retains the independent ability to adjust its tax rate, as well as other fees and charges, although this ability is practically limited by competitive pressures.
The 'bbb' assessment reflects a highly concentrated tax base. With the opening of Walmart in 2010, the colony's non-tobacco business contributes the majority of general fund revenues. Now the top taxpayer, Walmart contributed a significant portion of unaudited fiscal 2015 sales tax receipts. The majority of remaining non-tobacco sales taxes are generated from car dealerships including Mercedes, Acura, Infiniti and Carmax. RSIC is currently developing a six-acre commercial site adjacent to Walmart with operations expected to come on line within the next 24 months.
General fund spending is focused on tribal police, seniors, recreation, administration, public works and education.
Fitch does not anticipate the pace of government spending to exceed revenue growth, which results in a manageable spending profile.
The colony manages workforce costs through its annual budgeting process. There is no collective bargaining in place. Additional expenditure flexibility is reflected in low carrying costs, at 6% of fiscal 2014 governmental expenditures. Principal amortization is rapid (85% in 10 years) and Fitch anticipates carrying costs to remain low based on their trajectory.
Long-Term Liability Burden
RSIC's long-term liabilities are elevated, but moderate, at about 30% of estimated personal income. Outstanding debt of $19.4 million as of Dec. 31, 2014 includes $12.1 million of outstanding 2006 fixed-rated bonds supported by an LOC provided by U.S. Bank, National Association and a $7.3 million U.S. Bank term loan (not rated by Fitch).
The LOC supporting the series 2006 bonds has been auto-renewed annually and is scheduled to expire on June 27, 2016. If the LOC expires without substitution, a mandatory tender is triggered. At that point the bonds become bank bonds and the terms of the indenture specify that the RSIC must pay the bonds in full within 36 hours or pay a rate to the bank of 5% above prime until the bonds are paid in full. Ongoing payments required under a bank bond scenario would add some stress to the RSIC's financial profile, but in our view remain manageable.
Fitch expects the colony to maintain sound financial performance through an economic downturn based on its strong expenditure flexibility and very high reserve levels. The reserve cushion totaled 96% of spending at fiscal 2014 year-end. Favorable fiscal 2014 general fund performance reflected sales tax growth and increased indirect cost recoveries provided to the general fund from the colony's health care clinic, opened in the current facility in 2008. The colony's unaudited fiscal 2015 results indicate additional reserve growth.
The colony's budget management is conservative and contributes to consistent performance, cost savings and replenishment of reserves during economic expansionary cycles.
Given these factors, Fitch believes that the colony's operating risk stems more from its limited size and concentration rather than exposure to normal economic cyclicality.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
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