Fitch Ratings downgrades the following ratings for North Las Vegas, NV (the city):
--$1.475 million limited tax general obligation (LTGO) bond series 2002B to 'BBB' from 'A';
--$136.57 million limited tax general obligation (LTGO) bonds (additional secured by consolidated pledged revenues) to 'BBB' from 'A'
--$298.6 million outstanding LTGO bonds, water and wastewater improvement bonds (additionally secured by water and wastewater system pledged revenues) to 'BBB' from 'A'.
The bonds are on Rating Watch Negative.
The bonds are secured by the full faith and credit of the city, subject to Nevada's constitutional and statutory limitations on the aggregate amount of ad valorem property taxes. Additional security is provided to $136.57 million of the bonds by an irrevocable pledge of and lien on certain consolidated tax revenues and to $298.6 million of the bonds by pledged water/wastewater system net revenues. While the city intends to pay a portion of debt service from these dedicated revenue streams, Fitch's rating strictly reflects the city's LTGO pledge.
KEY RATING DRIVERS
SEVERE FISCAL DISTRESS: The downgrade reflects the city's severe fiscal distress driven by a steep drop in revenues coupled with long-term labor contracts with large increases in annual costs. The city plans to close one-third of its fiscal 2013 $33 million budget gap by declaring a state of emergency for one year and suspending public safety labor contracts. The state statue permitting this declaration does not include a fiscal emergency; however, the city plans to argue that the layoffs required following failure to achieve the needed concessions would create a public safety emergency.
POTENTIAL CHALLENGE TO EMERGENCY: The Negative Watch reflects the risk that public safety unions will challenge the city's ability to implement available actions under the declaration of emergency and alternatives (about 77 layoffs of public safety personnel) will either not fully offset the concessions or actions will be delayed by the potential challenge.
ECONOMICALLY SENSITIVE REVENUE CONCENTRATION: The rating also reflects the risk in the city's revenue base which is concentrated in the volatile consolidated tax (31% of general fund revenues not including utility transfers). On a positive note, these revenues have recovered modestly starting in fiscal 2011. Property taxes, down 67% since fiscal 2009 now make up only 9% of the general fund budget.
REDUCED RESERVES: The city entered the economic downturn with solid reserve levels. However after being used to balance recent budget shortfalls, the city's unrestricted general fund balance declined to a narrow $7.3 million, or about 4.9% of general fund spending in fiscal 2011. Given the concentration in volatile revenues, Fitch views the low level of available funds as a negative credit factor.
ADDITIONAL REVENUE DECLINES FROM UTILITY PILT: The general fund is heavily reliant upon large water/wastewater payments in lieu of taxes (PILT) revenue transfers, which are set to decline 47% as per state law over the next nine years. In addition, the financial position of the utility funds has declined substantially over the past several years.
STRESSED ECONOMY, HOUSING MARKET: The city and region's housing market is among the hardest hit by the collapse of the housing market, resulting in a combined TAV decline of 52% from fiscal 2009 to 2013. The North Las Vegas market performed weaker than the region and with high foreclosure rates, Fitch expects persistent weakness for the foreseeable future.
INDUSTRY CONCENTRATION: The regional economy is dominated by tourism and gaming and both industries have experienced significant revenue and employment declines. Meanwhile, the construction industry, once a major economic driver, has shrunk to a more sustainable level.
MANAGEABLE LONG-TERM LIABILITIES: Debt levels are moderate to high, but the city's five-year capital plan includes very limited additional debt. The city makes 100% of its annual required contributions to the state's pension system, which is adequately funded.
WHAT COULD TRIGGER A RATING ACTION
CHANGE IN BUDGET BALANCING PLAN: If the city is unable to achieve the level of cuts planned for fiscal 2013 due to a legal challenge or if council takes alternative action, there would be negative rating pressure.
Steep Revenue Declines and Rising Costs Result in Declaration of Emergency
Since peaking in fiscal 2008 at $164.5 million, general fund revenues have declined to an estimated $89.3 million for fiscal 2012 not including utility transfers, a drop of 45%. Despite a 6.9% increase in the consolidated tax revenues as expected in fiscal 2011, overall revenues declined an additional 22% in fiscal 2011 primarily due to a 50% decline in property taxes and a 43% decline in charges for services.
The city has closed several years of budget gaps driven by this steep decline in revenues but also from multi-year labor contracts with annual wage increases. The city has eliminated about 800 positions through attrition, voluntary separation and layoffs since 2008. In addition, the city negotiated temporary memoranda of understanding (MOUs) with various unions providing concessions but also preventing layoffs while in effect.
The fiscal 2013 budget estimates an additional 1% decline in revenue and had an initial $33 million shortfall. On May 15, City Council approved a fiscal 2013 budget closing the general fund gap with a large number of public safety layoffs, among other ongoing and one-time solutions. This followed unsuccessful negotiations with bargaining units to extend concessions under MOUs which having no layoff clauses expiring in June and July 2012. Notwithstanding the MOUs, the multi-year contracts extend through fiscal 2014 and fiscal 2015. The budget cuts included $17 million from public safety and $3.9 million from general government. In addition, the budget reduced public safety tax fund expenditures by $11.5 million by closing a detention center and contracting with the city of Las Vegas for this service. This will be an ongoing savings of about $14 million annually beginning in fiscal 2014.
A resolution being put to Council for approval on June 1 would permits the city to declare an emergency under Nevada Revised Statue (NRS) 288.15 which allows the city to suspend labor contracts in order to avoid the public safety layoffs. The NRS 288.15 permits the suspension of contracts in 'situations of emergency such as a riot, military action, natural disaster or civil disorder.' The city's resolution declaring an emergency states that the 'mass layoffs of public safety personnel that would otherwise be required to balance the budget would result in a public safety emergency.' Pursuant to NRS 288.15, the city would not be required to pay back suspended wages. The emergency declaration would result in about $9.9 million in savings from layoffs: 57 firefighters and closing three fire stations as well as 20 police officers. Fitch believes there is a significant risk that this action would be challenged and such challenge could result in delays or other actions worsening the city's fiscal position.
Limited Financial Cushion
The city's financial condition continues has weakened after many years of large net deficits. Fiscal 2011 ended as expected with a $15.3 million net deficit after transfers resulting in a total general fund of $7.7 million, or 5.2% of spending, and an unrestricted (committed, assigned and unassigned as per GASB 54) ending fund balance of $7.3 million equal to 4.9% of spending. This is under the target of 6% and well under the original board policy of 18% which was revised during fiscal 2011. Fiscal 2012 projections show an additional 10% decline in revenues and 18% decline in expenditures resulting in a projected net surplus of $1.8 million (compared to $2 million expected in Oct 2011). The total general fund balance is expected to equal about 7.8% of spending.
Although the city retains 20% flexibility under the tax rate cap, it has not tapped this source to increase revenues and does not plan to do so. Furthermore, an additional 20% in property taxes would only net about $1.6 million. The city has levied the same property tax rate of $1.1587 per $100 of AV for past five years (includes operating rate, override rate and debt service rate), and management indicated that an increase in the tax rate would not be politically feasible.
Liquidity Continues to Decline
General fund liquidity has declined significantly from an average of $15.5 million from 2006 to 2009 to $4.1 million in fiscal 2010 and just $1.3 million in fiscal 2011. As noted in Fitch's October 2011 release, the series 2011 bonds were issued in order to alleviate cash flow problems by reducing debt service payments through fiscal year 2017.
PILT Transfers to Decline; Water/wastewater System Pressured
Providing some stability to historical revenues, the general fund receives PILT from the water and wastewater systems, capped at $32 million per year and representing 24% of total revenues in fiscal 2011. However, ongoing transfers to the general fund have reduced water and wastewater system reserves, which are forecast to decline fairly rapidly over the next several years, lending uncertainty to future general fund support from this source. Furthermore, state law (AB47) requires the city to reduce transfers from their current level of $32 million to $17 million by 2021. The city has budgeted to reduce the PILT by $500,000 in fiscal 2013.
Water and wastewater system unrestricted cash reserves continue a declining trend. Days cash on hand fell from $179 million, or 1,347 days cash on hand in fiscal 2009, to $44.8 million, or 380 days in fiscal 2011, less than the estimated $50.7 million. As of October 2011, the city had projected that it would bottom out at $18 million in 2015 before increasing in subsequent years. Historical debt service coverage from water and wastewater system revenues decreased from 10.6 times (x) in fiscal 2006 to a still good 2.7x in fiscal 2010 as debt service increased and connection fees declined substantially.
Estimated debt service coverage on combined senior and subordinate bonds, which began payments in fiscal 2011, equaled 2.3x in fiscal 2011. Fitch believes the current coverage levels and cash reserves are adequate and do not pose a risk to the systems' ability to pay debt service or PILT transfers to the general fund in the near term; however, sustained draws on reserves may pressure water and wastewater operations at some point and could add pressure to the rating, particularly if debt service coverage is pressured.
Potential State Involvement if Budget Problems Not Solved
State law authorizes the Department of Taxation (Taxation) to take over the management of a local government if the entity is not able to successfully deal with budget shortfalls. Taxation has broad financial powers, including approving all expenditures, negotiating with creditors, negotiating contracts and collective bargaining agreements, and increasing the ad valorem tax rate available to pay local government obligations from $3.64 to $4.50 per $100 of AV.
After fiscals 2010 and 2011, the city has now met two of the factors under the statute for Taxation to consider action. The city's two-year cumulative 48% decline in AV through fiscal 2011 (or 33% through fiscal 2012) exceeds the statute's 10% benchmark and two consecutive fund balance reductions of 38% and 80% exceed the state's benchmark of 20% or more for the past two fiscal years.
High Debt Levels
Overall debt levels are high at $3,761 per capita and 6.1% of market value with slow amortization. The city's five-year capital improvement plan through fiscal year 2016 includes about $300 million in projects, the majority of which have identified outside funding sources.
North Las Vegas encompasses approximately 100 square miles in Clark County with a population of 217,482. The city's housing market has been very hard hit and continues to experience high foreclosure rates and housing price declines. In fact, Clark County housing prices are down 62% from their peak, making it fifth nation-wide in housing price declines according to Case-Shiller.
The city's tax base grew rapidly through fiscal 2008 before declining precipitously by 47% between 2009 and 2012. TAV continues to decline, falling an additional 10% in 2013.
The city's economy is reliant upon gaming with most major employers and taxpayers hotel/casinos. The top 10 taxpayers, of which three are hotel/casinos, make up a moderately concentrated 8.4% of TAV. March 2012 unemployment remains elevated at 14.3%, though down from 16.2% year over year due to a 2.3% contraction in the labor force, which far outpacing the 0.1% decline in employment. Median household income is about even with the state average, but per capita income is only about 79% of the state and nation.
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.
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
Shannon Groff, +1-415-732-5628
650 California Street, 4th Floor
San Francisco, CA
Karen Ribble, +1-415-732-5611
Steve Murray, +1-512-215-3729
Elizabeth Fogerty, +1-212-908 0526 (New York)
Sandro Scenga, +1-212-908-0278 (New York)