Fitch Ratings downgrades the following ratings for North Las Vegas, Nevada (the city) as part of its continuous surveillance effort:
--$308 million outstanding limited tax general obligation (LTGO) bonds, water and wastewater improvement bonds (additionally secured by water and wastewater system pledged revenues) series to 'A+' from 'AA-';
--$125 million in outstanding LTGO bonds (additionally secured by consolidated tax pledged revenues) to 'A+' from 'AA-'.
The Rating Outlook is Negative.
RATING RATIONALE:
--The downgrade to 'A+' reflects the reduced financial flexibility driven by area's worse than expected economic decline;
--The Negative Outlook reflects continued general fund fiscal pressure, overall economic weakness and projections for weakening cash reserves in the water and wastewater systems (the systems), which supports general fund operations through sizable fixed annual utility payments in lieu of taxes (PILT) and debt service payments on the bonds for which system revenues are additionally pledged;
--The city's financial operations have been considerably weakened by the economic downturn despite numerous budget adjustments and spending cuts to mitigate the revenue declines. Although the city projects balanced operations in fiscal 2012, this is dependent upon significant as yet unidentified spending cuts;
--Budgeting and planning efforts are strong and mid-year budget adjustments are aided by the city's quarterly meetings with City Council. Nevertheless, the city's structural imbalance continues to increase;
--The city and region's housing market is among the hardest hit by the collapse of the housing market, and while there are indications that regionally prices may have bottomed out, the North Las Vegas market is weaker and the city has very high foreclosure rates;
--The regional economy is dominated by tourism and gaming. Both industries have experienced significant revenue and employment declines.
WHAT COULD TRIGGER A DOWNGRADE:
--Continued economic decline beyond the city's current expectations and inability to correct the ongoing structural imbalance;
--A decline in the systems' financial results beyond current expectations such that they cease to be self-supporting as this could pressure the general fund given its reliance on the systems to make debt service payments on the current bonds and transfer the PILT to the general fund.
SECURITY:
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 by pledged revenues: $125 million by a portion of the city's share of consolidated tax revenues, $163 million by a closed senior lien on the net revenues of the water and wastewater system, and $145 million by a subordinate lien on the net revenues of the system. The senior/subordinate lien structure was put in place because the state is now providing sales tax revenues to the city as it is operating its own water and wastewater system.
CREDIT SUMMARY:
North Las Vegas encompasses approximately 100 square miles in Clark County with a population of 217,482. While the city's tax base grew rapidly through fiscal year (FY) 2008, the housing market downturn led to a taxable assessed value (TAV) decrease of 43% over the past two years and the city expects an additional 6% decline in FY 2012. Based on Fitch's non-agency loan data, the city's high foreclosure and delinquency rates are well above national averages and slightly above the Las Vegas regional area average.
The city's economy is reliant upon gaming and its major employers and taxpayers are largely hotel/casinos. Unemployment remains elevated at 17%, well above state and national levels.
The city's financial condition has weakened after several years of deficits due in part to revenue concentration in consolidated tax receipts, which include sales taxes, cigarette and liquor taxes, and motor vehicle privilege taxes. These taxes account for about 30% of general fund revenues. After peaking in fiscal 2008, overall revenues declined 18% through fiscal 2010 due primarily to a 32% decline in consolidated tax revenues over that time period. However, the city believes these revenues will increase by about 4% in FY 2011 based on year to date receipts.
Providing some stability to revenues, the general fund receives payment in lieu of taxes transfers from the water and wastewater systems, capped at $32 million per year representing 19% in FY 2010. Expenditures increased annually through FY 2009 before declining by 5% in FY 2010 due to voluntary separation packages and layoffs.
Fiscal 2010 ended about as expected with a $15.3 million deficit resulting in a general fund balance of $23 million, or a still good 12.2% of spending following a FY 2009 deficit of $6.7 million. The city has budgeted to draw down an additional $16.5 million in FY 2011 resulting in a $6.5 million ending fund balance equal to 4.7% of spending; however, management believes it will end slightly higher at about 6%. The city has recently made numerous spending adjustments, including successfully negotiating significant labor concessions and deferring capital spending.
Fiscal 2012 projections show balanced operations including the labor concessions already achieved; however, the projections are contingent upon $18.6 million in yet to be identified additional cuts subject to city council approval. These cuts, which may include the reorganization of departments, continued capital spending deferrals, and continued and additional labor concessions, will need to be ongoing, followed by considerable additional ongoing cuts in FY 2013 and 2014, assuming flat to weak revenue growth. While the city has some flexibility in that it could increase its tax rate subject to city council approval, this option might not be politically feasible.
Water and wastewater system unrestricted cash reserves have declined in recent years, from $179 million, or 1,347 days cash on hand in FY 2009 to $63 million, or 477 days in FY 2010. Reserves are expected to decline further to an estimated $50 million in FY 2011, and a projected low of $18 million in 2015 before increasing to $20 million by 2017.
Historical debt service coverage from water and wastewater system revenues decreased from 10.6 times (x) in FY 2006 to a still good 2.7x in FY 2010 as debt service increased and connection fees declined substantially. Projections of debt service coverage on combined senior and subordinate bonds, which begin payments in FY 2011, are equal to 1.6x in FY 2011 rising to 3.0x by 2016 with assumed 3% annual increases in rates and no customer growth until FY 2013.
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 general fund operations and may not be consistent with the current rating level.
Overall debt levels are moderate to high at $3,769 per capita and 4.8% of market value with slow amortization. The city's five-year capital improvement plan through FY 2016 includes about $300 million in projects, all of which have identified funding sources.
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, University Financial Associates, LoanPerformance, Inc., IHS Global Insight.
Related Research:
'Tax-Supported Rating Criteria,' dated Aug 16, 2010.
'U.S. Local Government Tax-Supported Rating Criteria', dated Oct 8, 2010.
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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