Fitch Ratings assigns an 'AA-' rating to the $179 million City of Las Vegas, Nevada's (the city) certificates of participation (COPs)(City Hall Project), consisting of series 2009A, series 2009B (direct pay Build America Bonds) and series 2009C (taxable), with par amounts among the series to be determined later. The COPs are scheduled to sell on Dec. 2, 2009. In addition, Fitch affirms the 'AA' rating on the following outstanding obligations:
--$396.7 million outstanding parity limited tax general obligation (LTGO) bonds;
--$2.9 million Las Vegas Special Improvement District Nos. 1463, 1470,1471, 1473, and 1477, series 2002;
--$1.5 million Las Vegas Special Improvement District. No. 1481's local improvement bonds, series 2004A.
The Rating Outlook on all obligations is Negative.
The COPs are being issued to finance the construction of a new City Hall, which is part of a larger plan to spur private development in the city's downtown area. Debt service on the COPs is secured by base rental payments made by the city to a lessor that is an affiliate of Forest City Enterprises, Inc., a developer active in the Las Vegas area. The city's obligation to make base rental payments is secured by a lease-purchase agreement and deed of trust. The collateral for the base rental payments is the City Hall site, City Hall project (completion projected in June 2012), a parking garage site, and a parking garage. The parking garage is expected to be constructed by the city for about $29 million by Feb. 1, 2012. Beneficial use and occupancy of any of these facilities is not required for the city to make its base rental payments. Non-appropriation by city council of the lease payments is an event of default, resulting in immediate termination of the lease purchase agreement and requiring the trustee to pursue remedies, including evicting the city from the facilities and selling rights to the collateral. The lessor's formation document limits its purpose to participation in this project and financing, thereby minimizing its bankruptcy risk. This, along with the lessor's assignment of the lease payments to the certificate trustee also minimizes the risk of interruption in the lease payment flow to bondholders.
The Negative Outlook, assigned in March 2009, continues to reflect Fitch's concern that the duration and severity of the economic downturn in Las Vegas and its impact on the city's revenues could drain the city's currently very strong financial reserves to below a level consistent with an 'AA' rating considering the economic volatility inherent to a tourism-based economy. While reserve levels remain strong, the city expects them to decline over the medium term as its consolidated tax (a group of economically sensitive revenues) and property tax revenues fall. Fitch acknowledges management's significant and ongoing expenditure reductions made to date, and notes that continued resolve will be needed to achieve longer-term fiscal balance. A drawdown of the general fund below the city's 10% of expenditures policy level (temporarily reduced from 12%) and/or a reduction in the newly established fiscal stabilization fund (FSF) is likely to trigger a rating downgrade.
The 'AA' LTGO rating reflects the city's very strong financial reserves, the result of prudent operating policies and practices, enduring tourism draw (albeit vulnerable to cyclicality), and low debt levels, balanced by the severe current economic contraction precipitated by the decline in the residential real estate market and worsened by the nationwide recession. The real estate market weakness resulted in a dramatic 27% assessed value decline for fiscal 2010, with a smaller loss projected for fiscal 2011. Fitch notes that the revenue impact of the fiscal 2010 loss was largely offset by the state's property tax abatement act, which smoothes the year-to-year revenue impact of sizable value increases and decreases. However, the city expects to exhaust its accumulated abatement of property taxes in fiscal 2011, resulting in a 5% revenue loss unless the city council raises the tax rate. The abatement act and other levy restrictions do not apply to taxes levied to repay the bonds.
The national and global economic downturn has negatively affected the city's once strong tourism sector and affected both jobs and tax revenues. To date the city has responded effectively both mid-year and in its budget, initially by slowing capital expenditures and eliminating vacant positions, and more recently through labor agreement concessions and layoffs. The city also established the PLEASE SPELL OUT (FSF), setting aside $50 million for use while it adjusts ongoing spending to match ongoing revenues. This reserve, combined with the general fund unreserved fund balance, equals a high 25% of spending based on unaudited results for fiscal 2009. The fiscal 2010 budget uses some of the general fund balance, reducing these combined reserves to a still very good 18% of spending.
The city's five-year financial forecast adheres to the 10% general fund balance policy, but draws down the FSF to about 6%, which Fitch views as about as low as these levels can go without threatening the 'AA' rating level. The plan is based on an additional 5% in savings for fiscal 2011, and the economically sensitive consolidated tax returning to moderate growth in fiscal 2012. Fitch views the revenue assumption as slightly optimistic, but also notes that the city generally outperforms its budgets and forecasts, which are built assuming 98% of all authorized positions are filled, when typically only 94% are filled. Continued economic decline beyond the city's current expectations and/or the inability to regain fiscal balance as planned could result in a rating downgrade.
Led by dramatic losses in construction, the city's overall economic performance has changed. Employment in the Las Vegas-Paradise metropolitan statistical area declined 1.4% in 2008 and data for July 2009 show jobs down 6.6% from one year earlier. Hardest hit was the construction sector, which peaked at 15% of total employment in 2006 and now makes up a still above-average 10%. All employment sectors except education and health services now are experiencing losses, with the leisure and hospitality sector down 6.6% in July 2009 from one year earlier. The city's labor force continued to increase, resulting in a 13.3% unemployment rate in July 2009 compared to 7.1% a year prior. While a number of large casino/hotel/resort projects countywide have been cancelled or stalled, Fitch continues to believe the area will remain a strong global tourist destination.
Economic recovery will be hindered by severe dislocation in the residential real estate market, characterized by continued price declines, high foreclosure rates, and a well-above-average exposure to negative amortization mortgages. Data covering securitized mortgages for 2008's fourth quarter show 19.8% in foreclosure and 15.1% as negative amortization; in comparison, nationally these figures are 11.3% and 7.6%, respectively.
While property tax makes up nearly one-quarter of the city's operating revenue, the consolidated tax, which is collected at the state level and distributed to cities in the county based on assessed value and population growth, makes up a sizable 44%-49%. The consolidated tax declined 12% in fiscal 2009 (unaudited) and is budgeted to fall another 2% in fiscal 2010 before rising 5% in fiscal 2011. All tax revenues are forecasted to return to moderate growth beginning in fiscal 2012, which is projected to achieve about break-even operations assuming spending reductions implemented through fiscal 2011 are retained. Fitch will monitor the city's progress in achieving fiscal balance, with particular attention paid to reserve levels and the actions taken in response to changing economic conditions and their revenue impact.
As a result of its regular cash-funded capital spending, the city's debt burden is very low at $2,511 per capita and 2.4% of assessed value, including overlapping debt. The city's above-average debt amortization (56% matures in 10 years) will help keep the debt burden manageable. The city's other post-employment benefit liability is estimated at $220 million, and the annual required contribution of $23.5 million is well above current pay-as-you-go costs. The city has begun setting aside funds for its obligation, although the amount has been reduced in response to the weak revenue performance.
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