Fitch Ratings assigns an 'AA+' rating to the City and County of Denver (the city), Colorado's approximately $104 million general obligation (GO) Better Denver and zoo bonds, series 2009A, and $14.0 million GO various purpose bonds, series 2009B. The 2009A and 2009B bonds are scheduled to sell via negotiation the week of June 8.
Fitch also affirms the following ratings on the city's outstanding debt:
--$551.7 million GO bonds at 'AA+';
--$417 million certificates of participation at 'AA';
In addition, Fitch affirms its 'AA+' rating on the City and County of Denver Board of Water Commissioners $42.7 million GO bonds.
The Rating Outlook on all of the above bonds is Stable.
The 'AA+' rating reflects Denver's broad and diverse economic base, strong financial management, voter support for capital programs and exemptions from state-wide revenue limitations, and notable progress in funding other post employment benefits (OPEB), balanced by the city's reliance on economically sensitive sales tax receipts for about one-half of general operations. Current year declines in sales tax revenues are pressuring the city's financial operations. The city is supplementing comprehensive budget cuts with the use of financial reserves, causing its cushion to fall below the city's target 15% fund balance level but above its 10% floor. By city policy, reserves in this range can be used to stabilize the city's finances when anticipated revenue growth is below the historical average but only when accompanied by equal or greater expense reductions. The city faces additional challenges in the development of its 2010 budget. In the previous recession, Fitch noted the city's impressive containment of structural imbalances in its finances due to sound financial stewardship. Fitch will monitor the city's overall revenue trends, sales and use tax revenues in particular, and management's response to any additional deterioration in revenues. The maintenance of adequate financial reserves will remain key to the city's credit profile in this period of slower economic growth.
Growth in the city's sales and use tax receipts slowed in 2008, growing by 3.0% versus the budgeted 5.1% level, resulting in an $8 million shortfall. The 2009 budget initially projected sales and use tax growth of 1.9%, which was subsequently revised downward to flat growth, resulting in a $56 million budget gap. Approved budget cuts closed 79% of the gap; the remaining imbalance, totaling $12 million, was to be absorbed with available reserves. Due to continued deterioration in sales and use tax revenues, the city is now projecting a significant 5.8% decline for the current year, resulting in another $10 million budget gap for the remaining half of 2009. The worst case scenario of a $10 million drawdown in 2009 would result in an unreserved fund balance of $114 million or 13% of spending, still above the city's 10% floor. Budget reduction proposals, which will address both current year and projected fiscal 2010 revenue shortfalls, are scheduled for city council consideration in late June 2009. Based on flat sales and use tax revenue growth from the reduced base projected in 2009, the city is facing a significant $60 million budget gap in 2010. Fitch observes that the four-year period of recovery for Denver's sales and use taxes in the last recession was notable for its length, and that such vulnerability is again present during the current economic slowdown.
The current offering represents the first installment of the $550 million bond program authorized by voters in November 2007 along with a 2.5 mill levy increase for capital maintenance. The bond program is projected to be mill levy neutral, assuming conservative assessed valuation (AV) growth assumptions. The 2009A bonds include $53 million to refund interim commercial paper, $25 million in new money, plus $26.5 million in remaining authorization from the city's 1999 zoo improvement bond program. The 2009B bonds will advance refund the city's series 2000 bonds.
Despite frequent debt issuances, the city's direct debt burden remains moderate; overall debt levels, including lease obligations and excise tax debt, are manageable but approaching high at over $5,000 per capita and 3.9% of full value. The principal pay out rate for GO bonds has been above average but may trend downward with the current offering, depending on final par amount and structure.
Notably, Denver is well ahead of most municipalities in regards to the implementation of GASB 45 which addresses the reporting of other post-employment benefits (OPEB) liabilities. In addition to reporting its liabilities, the city has funded its OPEB liabilities on an actuarial basis since 1992, posting a funded position of 73% for 2006.
Denver's economic diversity benefits from it being the hub of a large 10-county metropolitan area and the capital of Colorado. Nonetheless, employment in the area declined for three consecutive years in the last recession. Employment gains returned in 2004 but are now moderating again due to the ongoing economic slowdown. The area's unemployment rate totaled a moderate 5.5% in 2008 but has trended up notably to 9.0% in March 2009. The employment, property, and sale tax bases are benefiting from ongoing redevelopment throughout the city and substantial public and private investment in the downtown area, including hotel construction. However, as in many parts of the country, the city is experiencing a building downturn after several very active years.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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Fitch Ratings
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Amy S.
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or
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Email: cindy.stoller@fitchratings.com