Fitch Rates Manhattan, KS GO Bonds 'AA+'; Outlook Stable on Astini News
NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns an 'AA+' rating to the following Manhattan, Kansas (the city) general obligation (GO) bonds:
--$10.5 million GO bonds, series 2011-A; and
--$2.9 million GO refunding bonds, series 2011-B.
The GO bonds are scheduled for competitive sale Nov. 15, 2011. Proceeds will be used for various capital improvements and to advance refund series 2002-B, 2003-A, and 2003-D bonds.
In addition, Fitch affirms the following ratings:
--$86.7 million outstanding GO bonds at 'AA+';
--$16.9 million sales tax special obligation revenue (STAR) bonds, series 2009-1 at 'AA-';
--$33.2 million taxable sales tax special obligation revenue (STAR) bonds, series 2009-2 at 'AA-';
--21.2 million senior lien special obligation revenue (TIF) bonds, series 2009A at 'AA-';
--$5.6 million transportation development district sales tax revenue bonds (TDD), series 2010 at 'AA-'.
The Rating Outlook is Stable.
SECURITY
The GO bonds are secured by the city's full faith and credit and its ad valorem taxing power, without limitation as to rate or amount.
The TDD, STAR, and TIF bonds are secured by the city's pledge of any legally available funds, subject to annual appropriation. Each has a cash funded debt service reserve funded to the IRS standard. The bonds are also secured by the following, which in each case are the intended sources of repayment.
The TDD bonds are special limited obligations secured by a pledge of, and lien upon, a 0.5% sales tax levied within the TDD (coterminous with a development known as the north project area).
The STAR bonds are special limited obligations secured by a pledge of the state sale tax (6.3%) collected within the north project area (coterminous with the TDD), and city (1%) and local (.306%) sales tax collected within another development known as the south area.
The TIF bonds are special limited obligations secured by a pledge of city (1%) and local (.306%) sales tax collected within the north project area, and incremental property tax collected within the north and south project areas. Local sale tax revenues from the south area are also available if the STAR bonds are fully repaid prior to final maturity.
KEY RATING DRIVERS
REGIONAL ECONOMIC ENGINE: The city serves as the economic and cultural center for the regional community, which includes Fort Riley and Kansas State University (KSU).
SIZABLE FINANCIAL RESERVES: The city's current general fund financial cushion is notable.
ELEVATED DEBT BURDEN: The city's direct debt burden is elevated and a meaningful portion of debt service relies upon a small number of retailers to support the general fund's contingent obligations.
CONTINGENT OBLIGATIONS ADD UNCERTAINTY: The city's financial position could be stressed if the contingent obligations are not self-supporting and, in turn, trigger the city's commitment to annually appropriate the necessary funds to subsidize the obligations.
MIXED SOCIOECONOMIC PROFILE: Socioeconomic indicators are mixed with low unemployment rates but high poverty and low per capita income levels, of which the latter two are skewed by the large student population.
CONTINGENT OBLIGATION RATING: The 'AA-' rating on the TDD, STAR and TIF reflects the city's commitment to appropriate annually for debt service and the lack of a security interest in and non-essentiality of the financed projects.
WHAT COULD TRIGGER A RATING ACTION
SALES TAX DEVIATION: A material deviation from projected sales tax revenues would strain the city's general fund operations both directly and indirectly, as subsidization of contingent obligations would be more likely.
CREDIT PROFILE
Manhattan is located in northeastern Kansas, roughly 55 miles west of Topeka. The city's population, which currently stands at 52,281 residents, has grown through real gains and limited annexations. The city's tax base continues to grow, albeit at a more measured pace, despite the national housing correction and economic recession. The city's stable economy is anchored by Fort Riley, with 18,500 military personnel located 10 miles west of the city limits, and KSU with roughly 25,000 students located within the city. Longer term, the city is anticipating additional ancillary economic growth associated with the construction of the U.S. National Bio and Agro-Defense Facility, which broke ground in 2010 and is slated to open in 2015.
MIXED SOCIOECONOMIC PROFILE
The sizable student population skews both the per capita income level and individual poverty rate, which are 73% and 258% of the state mean, respectively. However, these statistics likely do not accurately reflect the students' purchasing power garnered from external sources. The city's unemployment rate is extremely low at 4.8% in July 2011 despite a 28% increase in the labor force over the past nine years.
SIZABLE FINANCIAL RESERVES
The city continued its oscillating financial trend, ending 2010 with a 1.6% operating general fund surplus after transfers. Sales tax revenues accounted for roughly 40% of general fund revenues, followed by charges for service at 19%, other taxes 15%, and property tax 7%. The city ended the year with a healthy 24% ($5 million) unreserved general fund balance, and has maintained at least a 19% unreserved balance for the past five years.
Sales tax revenues are up 4% through September 2011 compared to the same period the year prior. Management estimates the city will end the year with a small operating surplus without use of fund balance or non-recurring revenues. The 2012 general fund budget, which by law must be adopted by Aug. 25, incorporates a 4.7% increase in total spending from the year prior. The budget is balanced without use of non-recurring revenues even with the addition of 12 new fire fighters to staff two new fire stations. Despite recent trends, the city typically budgets breakeven results and achieves moderate surpluses due to extensive budgetary management and reasonable budget assumptions.
ELEVATED DEBT BURDEN
The city's overall debt load is elevated at $6,082 per capita and 10.3% of true value. Principal amortization of outstanding long-term GO debt is rapid with 79% repaid within 10 years. Principal amortization is more prolonged but still reasonable with 48% retired within 10 years when including the contingent obligations. The city's direct debt burden includes $76 million of STAR, TIF and TDD bonds (together 35% of direct debt) issued by the city to develop the north and south downtown development project areas. The various development project debt is first paid from sales tax revenues and incremental property tax revenues (the latter primarily paid by one developer) generated in the north and south project areas. The city has also pledged any legally available funds, subject to annual appropriation, if the primary security pledge proves insufficient.
CONCENTRATED TAXPAYER BASE FOR CONTINGENT OBLIGATIONS
The north area encompasses 20 acres (.03 square mile) that presently consists of 15 retailers including HyVee Supermarket, Petco, Bed, Bath & Beyond, Dick's Sporting Goods, and Best Buy. The south area encompasses 10 acres (.015 square mile) with a 98-room Fairfield Inn, and a soon-to-be-opened privately-owned conference center and a 135-room Hilton Gardens hotel. Two of the 15 retailers located within the north area own their property, while the remainder rent their property via renewable 10-year leases.
The top retailer presently accounts for 32% of total sales tax revenues and the top 10 account for 94%. Sales tax concentration is projected to decline nominally by 2014 due to the anticipated addition of new retail establishments. Given both the point-of-sale and geographic concentration, incongruent lease terms to final debt maturity, and presence of local competitors, there is significant risk of future tax revenues declining materially and permanently, which would, in turn, stress the city's finances given the city's commitment to support these obligations.
Debt service on the contingent obligations is slightly ascending, with aggregate maximum annual debt service (MADS) occuring on the year of final maturity. Assuming the final maturies are partially subsidized by the cash funded debt service reserves and that the turbo prepayment feature on the STAR bonds continues to reduce outstanding principal, MADS totals roughly $8 million. The turbo feature, whereby all excess pledged revenues associated with the STAR bonds must retire outstanding related principal, has already prepaid $3.6 million in principal with an additional $1.2 million to be prepaid in December 2011. Despite the early repayment, all of the contingent obligations require sales and/or incremental tax growth to fully support the obligations through the life of the bonds. However, calculating the necessary annual growth rate is imprecise given the recent addition of a least one notable retailer and the imminent opening of several other properties.
The city's 2011-2016 capital improvement plan totals $237 million of which the city plans to bond out for $63 million. Additionally, the city has over $38 million in short-term notes due through 2015 issued for capital improvements that are expected to be refinanced into long-term GO debt when due. Manhattan's long-term liabilities related to employment benefits are modest. Most employees are in modestly-funded state-sponsored pension plans, and the city annually funds its full actuarially required contribution (ARC). The city allows retirees to participate in its healthcare plan at 102% of the stated premium. The combined pension ARC and other post employment benefit pay-as-you-go contribution equaled a nominal 2.9% of general fund expenditures.
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, and IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria,' dated Aug. 15, 2011;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 15, 2011.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://telecomadvisors.biz/www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
U.S. Local Government Tax-Supported Rating Criteria
http://telecomadvisors.biz/www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842
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