Correction: Fitch Takes Rating Actions on Columbia, MO's Ratings
This is a correction to a press release originally published on June 10, 2016. It modifies the language in the key rating drivers to clarify Fitch's reason for the downgrade.
Fitch Ratings has taken the following rating actions on the city of Columbia, MO obligations:
-- Issuer Default Rating (IDR) downgraded to 'AA+' from 'AAA';
-- $110.7 million in various series of Fitch rated special obligation bonds outstanding as of June 10, 2016 affirmed at 'AA'.
The Rating Outlook is Stable.
Repayment of the special obligation is subject to annual appropriation of the city.
The city's series 2012D bonds include an additional security of 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.
KEY RATING DRIVERS
The downgrade of the IDR reflects implementation of Fitch's revised criteria for U.S. state and local governments, which was released on April 18, 2016. The revised criteria place increased focus on the demands that long-term liabilities place on an entity's budget. Although the absolute level of the city's liabilities is a low burden on resources as measured by personal income, the fixed carrying costs associated with annual funding of debt service and retiree benefits are sizable. As carrying costs are mostly attributable to pension funding demands, the annual costs are also subject to variability. The 'AA+' rating incorporates the city's strong economic base, solid revenue and expenditure framework, and reserves that are expected to remain well above the level Fitch believes provides an adequate cushion in economic downturns.
The now one-notch distinction between the IDR and the 'AA' rating on the special obligation bonds also reflects application of the revised criteria. While the bonds were formerly rated two notches below the city's general credit rating, the revised criteria include more focused consideration of project factors in ratings for appropriation-backed debt. The special obligation bonds do not carry any of the additional risk features that Fitch identifies for rating more than one notch below the IDR.
Economic Resource Base
The city benefits from a strong economic base, which is centered on higher education, but also includes a mix of government, healthcare, 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.
Revenue Framework: 'aa' factor assessment
Fitch expects the city's revenues to continue to grow at a rate above CPI, but below national GDP. The city maintains a moderate amount of control over revenues, including a sizable payment in lieu of taxes from the water and electric fund.
Expenditure Framework: 'aa' factor assessment
The city's natural pace of expenditure growth is expected to be in line with revenue growth and the city maintains solid control over expenditures despite moderately high carrying costs.
Long-Term Liability Burden: 'aaa' factor assessment
The city has a low burden of combined debt and unfunded pension liabilities at 6.2% of personal income.
Operating Performance: 'aaa' factor assessment
Fitch expects that the city will continue to maintain reserves well above the level needed to maintain an 'aaa' financial resilience assessment during an economic downturn. The city maintained financial flexibility throughout the recent recession, increased reserves in the recovery, and has not deferred required spending.
The rating is dependent on the maintenance of financial flexibility and conservative budgeting practices. The rating assumes the city will be able to accommodate potential increases to annual pension costs while continuing to provide adequate service levels and maintain a satisfactory reserve safety margin throughout economic cycles.
The city of Columbia is located in Boone County in the central portion of Missouri along Interstate 70. The population was 108,500 as of the 2010 census, an increase of 28% over the previous decade. Population growth combined with enrollment increases and construction of new student housing facilities at the University of Missouri has contributed to sales tax revenue growth for the city.
Unemployment in the city was 2.9% as of April 2016, which was considerably lower than the state (4.3%) and national (5.5%) averages in the same month. Wealth levels have typically been below average, but are depressed by a large student population.
The city has a diverse revenue stream, with 27.2% of general fund revenues and transfers in from sales tax receipts, 9.0% from property taxes, 14.7% from other local taxes, and 18.1% from a PILOT from the water and electric utility fund. The PILOT is derived from a 7% gross receipts tax on water and electric fund revenue and provides a large degree of stability to general fund resources. The diverse revenue stream allows the city to leverage its sound local economy. Revenue growth has historically risen at a rate higher than CPI and is expected to continue to do so.
The city's independent legal ability to raise revenues is limited due to a requirement that voters approve any increases in the property tax levy and any new sales tax levies. The city has various other fines and fees that can be increased without voter approval, which provides some flexibility.
This flexibility is increased by the water and electric fund PILOT, which is enabled in both city charter and ordinance at the 7% gross receipts tax rate on those revenues. While the city cannot increase the tax rate without voter approval, the city's high level of control over water and electric utility rates and charges enables it to increase the base of revenue on which the tax is charged. The city charter also authorizes the city to use excess water and electric revenue to fund public safety expenses. The city has never used that authority and does not plan to do so.
Public safety is the city's largest expenditure. There is no binding arbitration in Missouri, which gives the city ample legal ability to adjust labor force expenditures.
Fitch expects the city's natural pace of spending growth to be in line with revenue growth. A 10.4% increase in general fund expenditures in FY 2015 was due to a $5 million (6.0% of expenditures) supplemental payment into the city's Police and Firefighters' Retirement Funds pension plan. Net of this payment, expenditures increased a moderate $2.8 million (3.7%) over FY 2014 expenditures.
The city maintains an adequate degree of flexibility with its main expenditure items. However, Fitch has some concern regarding the relatively high actuarially-required pension contributions (15.1% of fiscal 2015 governmental spending). This percentage may be somewhat overstated because some of the pension payment are for employees and retirees of enterprise funds, but Fitch believes it would still sizable if those costs were netted out. Overall carrying costs (adding debt service and OPEB actual payments) consumed a moderately high 22.8% of FY 2015 government spending.
While many city employees belong to unions, none work under a contract. The city has legal control over headcount, wages, benefits, and work rules and can adjust staffing levels. The city also pays for a modest amount of capital needs on a pay-as-you-go basis and could cut or delay that spending if revenue fell.
Long-Term Liability Burden
The city has a low long term liability burden, with unfunded pension and overall debt at 6.2% of personal income. The city participates in two single-employer defined benefit pension plans - the Police Retirement Fund and the Firefighters' Retirement Fund - and one agent multiple employer plan - the Missouri Local Government Employees Retirement System (LAGERS). Both the Police and Firefighters' pension funds have relatively poor funding levels at 53% assets to liabilities ratio as of FY 2015 (assuming a 7% discount rate). The city made progress toward reducing the long-term growth in the liability in the two single-employer plans through a 2012 negotiated reform that reduced some benefits for future hires. The city funds LAGERS on a statutory basis that caps increases in contributions at 1% annually, which occasionally causes contributions to be lower than the Actuarially Determined Contribution. The total Net Pension Liability of the three plans, assuming Fitch's adjusted 7% discount rate, is $100.5 million. Fitch calculates the aggregate ratio of assets to liabilities of the three plans to be a healthy 78.9%.
Fitch expects that the city will continue to maintain solid reserve levels throughout economic cycles given its high degree of inherent budget flexibility and strong current reserve levels. Revenue volatility, incorporating the PILOT from the city's water and electric fund, is low.
Budgetary oversight and control are strong. The city demonstrated its ability to increase revenues and limit expenditures to maintain budget targets, resulting in balanced operations throughout the downtown. The city also has added to reserves during the economic recovery.
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)
Dodd-Frank Rating Information Disclosure Form
Fitch Ratings, Inc.
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New York, NY 10004
Elizabeth Fogerty, +1 212-908-0526