Fitch Rates Columbia, Missouri's Special Obligation Bonds 'AA'; Outlook Stable
Fitch Ratings assigns an 'AA' rating to the following City of Columbia, Missouri (the city) bonds:
--$7.56 million special obligation refunding bonds series 2015.
The bonds are scheduled for competitive sale on Nov. 16, 2015. Proceeds will be used to refund outstanding series 2006 bonds.
Additionally, Fitch affirms the following ratings:
--Approximately $109 million in outstanding special obligation bonds at 'AA';
--Implied unlimited tax general obligation (ULTGO) at 'AAA'.
The Rating Outlook is Stable.
All series are special obligations of the city, subject to annual appropriation. The bonds are not secured by a leasehold interest in or mortgage of the respective projects. The series 2012C, series 2012E and series 2015 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 also 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
SOLID FINANCIAL POSITION; DIVERSE REVENUES: The city's financial position benefits from diverse revenues, strong reserve levels and balanced operations.
STRONG MANAGEMENT PRACTICES: Management has demonstrated a commendable 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.
DIVERSE ECONOMIC BASE: The ratings reflect a diverse and growing economic base anchored by a university community.
WEAK PENSION FUNDING: The city's pension plans are underfunded. Changes in plans for new employees, full funding of the annual required contribution (ARC) and additional payments above the ARC should help to improve the funding level over the long term.
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.
CHANGES TO CREDIT FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics including the strong financial performance and a stable local economy. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
The city of Columbia is located in Boone County in the central portion of the state along interstate 70. The population was 108,500 as of the 2010 census, an increase of 28% over the previous decade.
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 in practice are paid from enterprise net revenues.
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. 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%. In fiscal 2014, water and electric revenues provided approximately 2.5x coverage on combined senior lien and appropriation backed bonds. Fitch excludes the debt for utilities from the city's tax-supported debt burden calculation given the strength of the utility operations and the clear way in which utility rates are set to provide ample coverage and a fixed level of general fund support.
FAVORABLE ECONOMIC UNDERPINNINGS
The city 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.
Unemployment in the city remains well below average at 4.1% as of July 2015 which was considerably lower than the state (5.9%) and national (5.6%) averages in the same month. Wealth levels have typically been below average with median household income at 91% of the state and 82% 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. The fiscal 2014 surplus was $4.2 million or 5.3% of spending after transfers, with the unrestricted general fund balance at $33.6 million or 42.7% of spending, well above the city's 20% policy level. The surplus was largely driven by expenditures coming in $3.6 million below budget.
The city recently completed fiscal 2015 and again expects revenues to outpace operating expenditures. Sales tax receipts were up 3.2%, slightly ahead of the budgeted 3%. Expenditures were again closely managed and likely came in below budget. The city contributed a total of $5 million above its ARC to the police and fire pension funds to improve funding levels, which will likely result in a small overall deficit in the general fund. The fiscal 2016 budget is balanced, with 3% growth in sales tax revenues assumed.
DIVERSE REVENUE BASE OFFSETS PROPERTY TAX LIMITATION
General fund revenue sources are diverse with sales tax accounting for 38% of total revenues, property taxes at 12%, and other local taxes at 22%. Taxes have performed consistently over the past five years, with the sales tax up 4.6% on average since 2010.
Assessed values in the city have risen in each year since at least fiscal 2006. The current property tax rate of $0.41 is 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 payments in-lieu of taxes (PILOT) paid by the city-owned water and electric utility (the system). The PILOT of $15 million in fiscal 2014 accounted for approximately 18% of combined general fund revenues and transfers in. The PILOT payment 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 burden is low at approximately at 2.5% of market value or $1,703 per capita. Amortization is fast, with 64% maturing in the next 10 years.
PENSION CHANGES WILL HELP BELOW-AVERAGE PENSION FUNDING
The city's single employer pension plans for fire and police are significantly underfunded at an estimated 54% for both plans using Fitch's 7% discount rate assumption despite a history of 100% funding of the city's ARC. The additional payments to these plans in fiscal 2015 should further gradually improve funding levels. The city additionally participates in the Missouri local government employee's retirement system (LAGERS) for all non-uniformed employees. LAGERS is funded at an estimated 78% using a 7% rate of return assumption.
The city recently made changes to its pension and other post-employment benefit (OPEB) funding, including reducing benefits for employees hired after September 2012, which will decrease its liability in the long term. The city also eliminated its healthcare subsidy for retirees as of October 2013, which has significantly reduced the size of its OPEB liability. As of the most recent actuarial report (October 2013), the plan was 103% funded. Fixed obligation carrying costs are sizable, with debt service, pension and OPEB expenses representing 22% of governmental spending.
Additional information is available at 'www.fitchratings.com'.
Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.
In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from CreditScope, IHS Global Insight, and Zillow Group.
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
Dodd-Frank Rating Information Disclosure Form
Fitch Ratings, Inc.
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