Fitch Ratings has assigned an 'AA+' rating to the following city of Manhattan, Kansas (the city) bonds:
--$1.5 million general obligation (ULTGO) bonds, series 2012-A.
The bonds are expected to be sold via competitive sale on May 15. Proceeds will be used to design two fire stations and for capital improvements.
In addition, Fitch affirms the following ratings:
--$102 million outstanding ULTGO bonds at 'AA+';
--$12.1 million sales tax special obligation revenue (STAR) bonds, series 2009-1 at 'AA-';
--$33.1 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.
The ULTGO 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.
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 expand, 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 was originally slated to open in 2015. However, recent decisions at the federal level have created uncertainty about the facility's future.
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 5% in February 2012 despite a 27% 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.
Management estimates the city ended 2011 with a roughly 2% ($386,000) general fund operating surplus after transfers. The 2012 budget incorporated a 4.7% increase in total spending from the year prior and is balanced without use of fund balance or non-recurring revenues. 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 $6,063 per capita and 9.8% of market value. Principal amortization of outstanding long-term GO debt is rapid with 70% repaid within 10 years. When including the STAR, TIF and TDD bonds, amortization slows to 48%. The city's direct debt burden includes $77 million in outstanding STAR, TIF and TDD bonds (together 34% 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 (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. To date, the bonds have been self-supporting; however, future coverage requires revenue growth.
The city's five-year capital improvement plan totals $237 million of which the city plans to bond out for $63 million. Additionally, the city has over $46 million in short-term notes (20% of total debt outstanding) due through 2015 issued for capital improvements that are expected to be refinanced into long-term debt when due.
CONCENTRATED TAXPAYER BASE FOR CONTINGENT OBLIGATIONS
The north area encompasses 20 acres (.03 square mile) that presently consists of 18 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 135-room Hilton Gardens hotel, a conference center, a city-owned discovery center, and a city-owned 440-stall parking garage. Two of the 18 retailers located within the redevelopment areas own their property, while the remainder rent their property via renewable 10-year leases.
The top retailer presently accounts for 35% of total sales tax revenues and the top 10 account for 97%. 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 small 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 could, in turn, stress the city's finances given its commitment to support these obligations.
Debt service on the contingent obligations is slightly ascending with aggregate maximum annual debt service (MADS) occurring on the year of final maturity. Assuming the final maturity is partially subsidized by cash-funded debt service reserves and that the turbo repayment feature on the STAR bonds continues to reduce outstanding principal, MADS totals $8 million. The turbo feature, whereby all excess pledged revenues associated with the STAR bonds must retire outstanding related principal, has already prepaid $4.7 million in principal.
All 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 tenuous given the June 2011 addition of Dick's Sporting Good, which materially increased monthly collections. Sales tax collections have increased in excess of 30% for the first quarter of 2012 compared to the same period a year prior.
MANAGEABLE PENSION OBLIGATIONS
Manhattan's long-term liabilities related to employment benefits are modest. Most employees are in state-sponsored pension plans, and the city annually funds its full actuarial required contribution. Additionally, 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. The city's future ARC payment will likely increase, given the poor funding ratios of state plans; however, the potential increases should not create an intolerable burden on the city.
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, and IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
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