Fitch Rates Columbia, Missouri's Special Obligation Refunding Bonds 'AA'; Outlook Stable
Fitch Ratings assigns an 'AA' rating to the following city of Columbia, Missouri (the city) bonds:
--$45,270,000 special obligation electric utility refunding bonds (annual appropriation obligation), series 2012E.
The bonds are being issued to refund the city's outstanding series 2006C bonds and are scheduled to be sold via competition the week of Dec. 3.
In addition, Fitch affirms the following ratings:
--$74.9 million outstanding special obligation bonds at 'AA'.
--Implied unlimited tax general obligation (ULTGO) at 'AAA'.
The Rating Outlook is Stable.
A detailed list of ratings follows at the end of this release.
All series are special obligations of the city, subject to annual appropriation. The bonds are not secured by a leasehold interest in or mortgage on the respective projects. The current offering and series 2012C bonds are not secured by a debt service reserve fund (DSRF); all other outstanding series are secured by a cash funded DSRF.
In addition to the annual appropriation requirement, the series 2012D bonds are secured by surplus electric utility net revenues after payment of any water and electric revenue bonds and other required deposits pursuant to ordinance.
KEY RATING DRIVERS
APPROPRIATION RISK: The 'AA' rating on the special obligation bonds reflects the city's 'AAA' implied ULTGO bond rating as well as the appropriation risk and lack of security interest in the projects.
SOLID FINANCIAL POSITION; DIVERSE REVENUES: The city's financial position benefits from diverse revenues, strong reserve levels, and balanced operations.
STRONG MANAGEMENT PRACTICES: The city's strong management team has demonstrated a record of proactive fiscal operations and conservative budgeting practices which have provided the city with ample financial flexibility.
FAVORABLE DEBT POSITION: The majority of the city's direct debt is supported from enterprise funds and is amortized rapidly; overall debt is moderate.
DIVERSE ECONOMIC BASE: The ratings reflect a diverse and growing economic base anchored by a university community.
PAYMENTS SUBJECT TO APPROPRIATION BUT PAID FROM ENTERPRISE REVENUES
Fitch's rating on the bonds reflects the city's strong overall credit profile, appropriation risk, and the lack of security interest in the asset. City ordinance requires the city manager to include in each annual budget an appropriation of the amount necessary to pay debt service on its special obligation bonds in the next fiscal year and to take any further action that may be necessary to assure the availability of money appropriated to pay the debt service. The city has issued multiple series of special obligation bonds with payments subject to appropriation but which are paid from enterprise net revenues.
The city's series 2012D bonds are additionally secured by surplus net revenues from the city's water and electric system after payment of any senior revenue bonds and any required reserve fund or renewal and replacement deposits. Pursuant to ordinance, the city has covenanted to charge electric utility rates sufficient to pay senior lien revenue bonds and debt service on the 2012D bonds by 110%.
STABLE, DIVERSE ECONOMIC BASE
The city of Columbia is located in Boone County in the central portion of the state along interstate 70 and benefits from a diverse economic base which includes a mix of government, education, health care, and financial services. The city is home to the main campus of the University of Missouri, Columbia College, and Stephens College. Approximately 48,000 students attend these institutions during the regular school year. City management reports that increases in student enrollment have resulted in the construction of additional student housing facilities at the University of Missouri and has contributed to favorable sales tax revenue growth for the city.
Unemployment in the city remains low at 4.0% as of September 2012 which was considerably lower than the state (6.3%) and national (7.6%) averages in the same month. The city's population of 108,500 in 2010 is up significantly (+28%) since 2000. Wealth levels have typically been below average with median household income at 90% of the state and 80% of the nation, but are depressed by a large student population.
STRONG GENERAL FUND FINANCIAL PERFORMANCE
The city's general fund financial position remains strong, with $27.5 million in unrestricted general fund balance (36% of spending after transfers) at fiscal 2011 year end. Management projects that the city will end fiscal 2012 with a small surplus, beating its $1 million budgeted use of fund balance. Fitch believes that this estimate is reasonable given the city's strong sales tax growth, up 5% year-on-year.
The city's recently adopted 2013 budget includes a small use of fund balance to bolster pension funding and does not increase taxes. The budget increases real estate-related fees, increases electricity fees by 1.5%, and reduces expenditures by 2% in every department. Further, the city has raised its general fund balance policy to 20% of budget from 16%, which it handily meets. The county will seek approval from voters in April 2013 of a county-wide 9-1-1 sales tax which would allow the county to take over responsibility for emergency dispatch from the city. The city's budget prudently contains contingency plans if the sales tax fails.
DIVERSE REVENUE BASE OFFSETS PROPERTY TAX LIMITATION
General fund revenue sources are diverse with sales tax accounting for 36% of total revenues, other local taxes at 21% and property taxes at 13% in 2011. Sales and other taxes have performed consistently over the past five years and sales tax was up notably in 2011 by 5.8% and is estimated to have performed strongly in 2012.
Assessed values in the city have risen in each year since at least 2006; however the rate of growth has slowed. Current market value of $6.9 billion is up 12% since 2007. The current property tax rate of $0.41 is far lower than the state-wide cap of $1.00; however, flexibility is limited as the rate cannot be raised without voter approval under the Hancock Amendment.
The city receives significant general fund support from PILOT payments paid by the city-owned water and electric utility. The PILOT was $14.1 million in fiscal 2011 which accounted for approximately 18% of combined general fund revenues and transfers in. The PILOT payment to the city general fund is based on the book value of the system at the city property tax rate plus an amount equal to 7% of annual gross energy receipts. Operations at the utility are sound and Fitch believes that support of the general fund will continue.
LOW DEBT BURDEN
The city's total overall net debt burden is low at approximately $1,626 per capita and 2.7% of market value. All city debt is appropriation-backed. The city's carrying costs were an elevated 30% of general fund spending; however, this number is somewhat overstated due to debt service payments occurring outside of the general fund.
PENSION CHANGES WILL HELP BELOW-AVERAGE PENSION FUNDING
The city's single employer pension plans (fire and police) are significantly underfunded (53% for both plans using Fitch's 7% discount rate assumption) despite a history of 100% funding of the city's annual required contribution. The city recently made changes to its pension and OPEB funding that will increase the city's annual contributions and decrease its liability in the long term. The city has reduced benefits for certain classes of new hires and ceased its 401(a) plan match, formerly at 2%. Funds formerly used for the plan match will be dedicated to improving funding of the city's pensions.
The city additionally participates in the Missouri local government employee's retirement system (LAGERS) which is funded at 70% using a 7% rate of return assumption. The city's aggregate pension payments were $13.6 million or 19% of general fund spending in 2011.
The city is phasing out its healthcare subsidy for retirees over two fiscal years which will increase short-term budget flexibility (representing a $220,000 annual reduction in expenditures during both years) and decrease its OPEB unfunded actuarially accrued liability. According to the most recent actuarial report, unfunded liabilities for the city-operated police and fire plans totaled $82 million, assuming a 7% rate of return, equivalent to a moderate 1.2% of the city's market value.
The following outstanding special obligation bonds of the city are affirmed at 'AA':
--$24.5 million special obligation improvement bonds (Downtown Government Center Project), series 2008B;
--$13 million taxable special obligation improvement bonds (BABs) series 2009A;
--$7.3 million special obligation improvement bonds (Parking Project), series 2012A-2;
--$1.6 million taxable special obligation improvement bonds (Parking Project), series 2012A-1;
--$1.3 million special obligation refunding bonds (sewer system project), series 2012B;
--$2.7 million special obligation refunding bonds (solid waste system project), series 2012C;
--$24.5 special obligation refunding bonds (electric utility project), series 2012D.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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, Underwriter, and Bond Counsel.
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
U.S. Local Government Tax-Supported Rating Criteria
Stephen Friday, +1-212-908-0384
One State Street Plaza
New York, NY 10004
Eric Friedman, +1-212-908-9181
Karen Ribble, +1-415-732-5611
Elizabeth Fogerty, +1-212-908-0526
New York, Media Relations