Fitch Ratings takes the following actions on bonds issued by the City of Tacoma, Washington (the city):
--$22.5 million unlimited tax general obligation (ULTGO) refunding bonds, series 2010A rated 'AA+';
--$7.28 million limited tax general obligation (LTGO) and refunding bonds, series 2010B rated 'AA';
--$7.39 million LTGO refunding bonds, series 2010C (taxable) rated 'AA';
--$30.31 million LTGOs, series 2010D (Taxable Build America Bonds- Direct Payment to Issuer) rated 'AA';
--$9.09 million LTGOs, Series 2010E (Taxable Recovery Zone Economic Development Bonds- Direct Payment to Issuer) rated 'AA';
--$26.4 million outstanding ULTGO bonds affirmed at 'AA+';
--$150.8 million outstanding LTGO bonds affirmed at AA'.
The Rating Outlook for the ULTGOs is Negative. The Rating Outlook for the LTGOs is revised to Negative from Stable.
Fitch also takes the following actions on the city's convention center and parking revenue bonds:
--$4.64 million convention center and parking revenue refunding bonds, series 2010 rated 'A+';
--$23.1 million in outstanding convention center and parking revenue bonds, series 2004 downgraded to 'A+' from 'AA-'.
The Outlook for the revenue bonds is Stable.
The bonds are scheduled to sell via negotiated sale on Oct. 26, 2010. Proceeds will be used to refinance and restructure existing debt, and to provide cash for new projects.
RATING RATIONALE:
--The Negative Outlook for the general obligation bonds reflects operational pressures from certain volatile revenue sources, enterprise funds that may need material general fund contributions, and escalating debt service resulting from this debt restructuring.
--The 'AA+' ULTGO rating reflects a currently sound financial position, including expectations of nearly balanced operations over the current and subsequent two fiscal years, diverse revenue sources, historically prudent management practices, and a significant degree of remaining expenditure flexibility.
--The economy is well diversified, and benefits from the presence of large, stable employers in government or growth industries (such as health care and education). Unemployment levels dropped year-over-year to below national levels; however, income levels are below average.
--Recent weakness in the tax base follows many years of diversity and stability.
--The city's debt profile is sound overall. Net debt levels are moderate, and the city's non-sworn pension system is over-funded. However, while this financing is structured to give near-term budget relief it increases costs in the near future and slows amortization to below-average levels.
Convention Center and Parking Revenue Bonds Only:
--The revenue bonds' downgrade reflects diminished maximum annual debt service (MADS) coverage levels caused by falling sales tax revenues, impaired parking system net revenues resulting from increased capital costs over the short term, and this debt restructuring, which while reducing debt expenses in the next few years raises long-term debt service.
--The revenue bonds' 'A+' rating reflects adequate coverage levels, and a weak additional bonds test that is mitigated by limited plans for more leverage and operational pressures that require use of excess pledged revenue.
WHAT COULD TRIGGER A DOWNGRADE FOR THE GO BONDS:
--Current operational deficits in the city's parking and convention center funds could widen in future years due to escalating debt service and weak revenue performance, thereby pressuring the general fund for subsidies. However, the city could take actions to mitigate this concern.
--Currently sound general fund balances may be pressured by escalating debt service beginning in fiscal 2013.
Key Rating Drivers for the Convention Center and Parking Revenue Bonds Only:
--Parking system and Public Facilities District (PFD) revenues currently provide sound coverage of debt service, and are expected to continue doing so in spite of economic vulnerabilities.
--Further bond issuances and pay-go capital projects are expected to be modest, resulting in limited additional leverage of secured revenue sources.
SECURITY:
The ULTGOs are secured by the city's irrevocable pledge to budget and levy an unlimited ad valorem tax on all taxable property within the city. Also, the full faith, credit and resources of the city are irrevocably pledged to bond payment.
The LTGOs are a general obligation of the city for which the city covenants to levy an ad valorem tax within the limits permitted to cities without a vote, along with other legally available money.
The parking revenue bonds are secured by a first lien on two sources, PFD revenues and parking system revenues. PFD revenues consist of a 0.033% sales and use tax collected within PFD boundaries, as well as an admissions and parking tax on PFD owned, operated, or financed facilities. These revenue sources make up 45%-50% of the revenue pledge and can only be used for tourism-related projects. The PFD encompasses the cities of Tacoma, Lakewood, Fife, and University Place, in addition to the unincorporated area of Pierce County. PFD revenues are remitted to Tacoma via an interlocal agreement, which cannot be rescinded until all bonds are repaid. Parking revenues consist of net operating revenues of the city's parking enterprise system and gross parking enforcement revenues. The additional bonds test (ABT) is a complex and liberal formula involving coverage levels by both sources of pledged revenues. This weakness is offset somewhat by a limited practical ability to leverage PFD revenues because the tax sunsets in 2025 and law restricts use of the revenues to tourism-related purposes and projects begun before 2005.
CREDIT SUMMARY:
Tacoma is located about 33 miles south of Seattle and is the second largest city in the Puget Sound region. Historically a more industrial-oriented city, more recent employment growth has focused on the service sectors. Nonetheless, income levels continue to lag the state and nation. Unemployment, which has historically been above average, recently has trended below the national average. Some of this improvement may stem from the presence of large and stable governmental employers including a strategically important military base and employers in the more stable health care and education sectors. Additionally, Tacoma is home to one of the largest container ports in the nation. House prices have fallen moderately from 2008 levels and both non-agency foreclosure rates and home prices have shown recent improvement. However, elevated delinquency rates may weigh on future residential real estate performance. For 2010, total assessed valuation (AV) fell by a significant 9.6%, reflective of price pressures, following years of high growth that reversed in fiscal 2009. The city's tax base is well diversified, with the top 10 property taxpayers making up just 4.2% of AV.
The city's financial operations currently are strong, but vulnerable to various pressures. In fiscal 2009, the last year audited financials were available, the general fund ran a large $14.1 million operating deficit, lowering the total and unreserved fund balances to a still sound $38.2 million (18.2% of expenditures and transfers out), and $13.7 million (6.5%), respectively. Fiscal 2010 operations are performing well versus budget, with revenues ahead by $152,000, and expenditures lower by $1.7 million. As a result, management expects fiscal 2010 to result in a modest operating surplus. Additionally, debt service payments for fiscal 2010 are lower than budgeted due to this financing; however, in fiscal year 2013 and beyond debt service requirements will increase as a result of the restructuring. Utility and property tax revenues have held up well. The city benefits from a formula that adjusts the property tax rate upward to generate the previous year's tax levy, plus the lower of 1% or inflation, which somewhat offsets the negative effect of falling house prices on property tax revenues. However, sales and business taxes have deteriorated significantly in recent years and, while showing some evidence of stability, continue to pose a financial vulnerability. Management prudently has responded to tax revenue deterioration by keeping open vacant positions, delaying capital projects, and by restructuring service delivery. Because the city has not implemented furloughs or layoffs, these options remain and provide expenditure flexibility.
In addition to the vulnerabilities posed by volatile sales and business taxes, the city will face escalating debt service in future years. This debt refinancing does not extend final maturity beyond that of the refinanced debt, but amortization has slowed materially as the goal of the LTGO restructuring is to defer some debt service from fiscal years 2010-2012 to 2013 and beyond. As a result, total governmental operations in fiscal years 2010-2012 benefit from approximately $4.6 million of reduced annual debt service, but fiscal years 2013-2022 face significantly elevated costs.
Fitch believes the general fund may be vulnerable to deficit operations in the convention center and parking funds. These enterprises are running sizeable deficits that are expected to deplete most of their reserves by fiscal year end 2012. Given escalating debt service requirements of the enterprises and budgeted expectations of minimal financial cushions by fiscal year end 2012, the general fund may have to support their operations at increased levels beginning in fiscal 2013. In the proposed fiscal 2011-2012 biennium budget, the general fund is contributing just $1.2 million to the parking enterprise, with no subsidy to the convention center enterprise. Although this risk is material, Fitch notes that improved economic conditions and further city actions could reduce or eliminate this vulnerability.
Tacoma's parking system is sizable, including seven garages, two lots, and meters, which together make up 34% of all off-street downtown parking spaces. MADS coverage on the parking revenue bonds has weakened in fiscal 2010 to 1.58 times (x) from 2.09x in fiscal 2009. The coverage deterioration results from recent declines in sales tax and net parking revenue and higher MADS as a result of this debt restructuring. Net parking system revenues have declined by a substantial 30% due to a multi-year capital project to install on-street parking meters. Once all the new meters are installed, operations and pledged revenue will benefit from the revenue generated.
The city's debt profile is sound overall, in spite of the current debt restructuring. Amortization has slowed, but net debt levels are moderate at approximately $1,296 per capita (1.4% of AV), the city's non-sworn pension system was actuarially overfunded per the fiscal 2009 audit, and capital needs are manageable.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, LoanPerformance, Inc., Financial Advisor, and the City.
Applicalbe Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated 16 Aug 2010.
--'U.S. Local Government Tax-Supported Rating Criteria', dated 21 Dec 2009.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566
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