AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has upgraded the Issuer Default Rating (IDR) of Bullhead
City, AZ (the city) to 'AA-' from 'A+'. In addition, Fitch has upgraded
the following Bullhead City Municipal Property Corporation, AZ bonds to
'AA-' from 'A+':
--$5.7 million excise tax revenue bonds, series 2006;
--$10.1
million excise tax revenue refunding bonds, series 2009.
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The Rating Outlook is Stable.
SECURITY
The bonds are payable from rental payments from the city
secured by a priority lien and pledge of the city's excise taxes. The
city's obligation to make lease payments under the use agreement is
absolute and unconditional and is not subject to appropriation or
abatement.
KEY RATING DRIVERS
The upgrade of the IDR to 'AA-' results primarily from positive credit
trends, such as Bullhead City's prudent budget management that has
rebuilt financial flexibility in recent years, and reflects application
of Fitch's revised criteria for U.S. state and local governments,
released on April 18, 2016. Operating reserves and demonstrated spending
flexibility are key mitigating factors for the city's high revenue
volatility and limited revenue raising ability. The upgrade of the
excise tax bond rating to 'AA-' reflects application of the new
criteria. The dedicated tax bond rating is capped at the IDR and
incorporates the healthy debt service coverage afforded by the pledged
revenue stream, which provides resilience against slow revenue growth
prospects and high revenue volatility.
Economic Resource Base
Bullhead City is located along the Colorado
River in western Arizona, roughly 100 miles southeast of Las Vegas. The
population is just over 39,000, and the local economy is largely driven
by tourism and retail.
Revenue Framework: 'bbb' factor assessment
Revenue growth prospects
are slow, although operating revenues have improved notably over the
past three fiscal years. The city has limited ability to independently
raise operating revenues.
Expenditure Framework: 'aa' factor assessment
Fitch expects the
current pace of expenditure growth to trend in line with to slightly
above expected revenues given the city's flat population trend. Bullhead
City has demonstrated its ability to curtail spending during a revenue
downturn, and carrying costs are moderate.
Long-Term Liability Burden: 'aaa' factor assessment
The liability
burden for debt and pensions is low. Fitch expects the burden to remain
in this range based on limited capital needs and debt amortization.
Operating Performance: 'aa' factor assessment
The city's operating
reserves and expenditure flexibility provide very strong gap-closing
capacity through the economic cycle. Strong financial management and
conservative budget practices support rapid rebuilding of flexibility
during periods of economic recovery.
RATING SENSITIVITIES
Financial Management Practices: A sustained
reversal of the city's solid financial operations and prudent fiscal
practices would pressure the rating.
Dedicated Tax Bond Coverage: The sales and use tax bond rating is
sensitive to changes in the level of pledged revenues over time compared
to maximum annual debt service (MADS) as well as to changes in the
city's IDR.
CREDIT PROFILE
Bullhead City serves as the population, retail, and service center for
the region, and is a frequent host to a variety of tournaments and
special events. The city is adjacent to Laughlin, NV, which features 10
casino resorts for which Bullhead City provides the bulk of the labor
force. Improvement in the local housing market since 2012 has largely
followed the trend of slow but steady recovery throughout the state. The
unemployment rate is above average and wealth metrics trail the state
and U.S. averages. However, management anticipates employment growth
from recent investments in the mining and distribution sectors near
Bullhead City.
Revenue Framework
City operations are heavily reliant on
economically sensitive excise taxes, which constitute the largest source
of general fund revenue (over 90%). Excise tax revenues include the city
sales tax, state shared sales and income tax revenues, charges for
services, fines and forfeitures, and franchise taxes; city sales taxes
and state-shared revenues make up 45% and 33% of unaudited fiscal 2016
collections, respectively.
Compounded annual growth in general fund revenues was stagnant for the
10 years ended in fiscal 2014, with severe recessionary declines offset
by steady improvement since fiscal 2012. The current trend of modest
economic expansion supports Fitch's longer-term expectation of slow
revenue growth in line with inflation.
The city has limited independent ability to raise revenues, as any
increase in the sales tax rate would require voter approval. Revenue
flexibility is limited to locally controlled franchise taxes, charges,
and fees. The city does not levy a property tax, and to do so would also
require voter approval.
Expenditure Framework
General fund spending was led by public
safety and general government at about 60% and 30% of expenditures,
respectively, in recent years.
Fitch expects that the natural pace of expenditure growth will trend in
line with or slightly above projected slow revenue growth, given the
mature city's stable population trend.
Bullhead City's fixed cost burden is moderate, with carrying costs for
debt service, pension actuarially determined contributions, and other
postemployment benefits equal to 18% of governmental fund spending in
fiscal 2015. The city has demonstrated an ability to curtail operational
spending in response to extended revenue declines in order to achieve
operational balance. Management retains strong control over key elements
of workforce spending; about one-third of city employees are under a
flexible one-year collective bargaining contract that enforces binding
arbitration in the event of conflict, while the remaining workforce is
nonunionized.
Long-Term Liability Burden
The city's direct debt includes excise
tax bonds and special assessment debt; a portion of the excise tax bonds
is repaid from net revenues of the wastewater utility and is therefore
considered self-supporting by Fitch. The long-term liability burden,
which includes overall debt and pension liabilities, is low at 4.4% of
personal income. Fitch expects that the metric will remain low given the
city's maturity and the region's limited capital needs.
Bullhead City contributes to a state-sponsored pension plan for
uniformed employees and maintains a defined contribution plan for
non-uniformed employees. Recent legislative changes to the state plan
are projected to address sizable pension liabilities over the long term
but will provide no intermediate-term relief to contribution rates. The
city's portion of the plan's net pension liability is manageable at 2%
of personal income.
Operating Performance
The city's revenue recovery over the past
four years bolstered operating reserves following recessionary
drawdowns. Unrestricted general fund balance was $8.5 million at the end
of fiscal 2015 (36% of spending) and unaudited fiscal 2016 results point
to another surplus of about $1 million. The city's healthy reserves and
expenditure flexibility provide important financial flexibility to
manage through a moderate economic downturn given the high volatility of
operating revenues.
Bullhead City made extensive cuts to operating costs in fiscals
2009-2012 as local economic softening resulted in a modest decline in
excise taxes that was exacerbated by the national recession. Measures to
achieve balanced operations included personnel reductions and use of
furlough days. Officials report that recent enhancements in operational
efficiency have maintained service levels and allowed for modest pay
raises. The city has demonstrated a commitment to rebuilding reserves in
support of flexibility with no material deferral of required spending.
The 2017 budget is balanced.
Excise Tax Revenue Bonds
Fitch believes that slow but steady growth
prospects for pledged revenues are comparable to those for the city's
operating revenues, as excise taxes make up nearly all general fund
revenues.
To evaluate the sensitivity of the dedicated revenue stream to cyclical
decline, Fitch considers both the revenue sensitivity results (using the
same 1% decline in GDP scenario that supports assessments in the IDR
framework) and the largest decline in revenues over the period covered
by the revenue sensitivity analysis. Based on the city's pledged revenue
history, Fitch's analytical sensitivity tool (FAST) generates a 5.2%
scenario decline in pledged revenues. The largest actual cumulative
decline in historical revenues is 30.1% in fiscals 2007-2012.
The revenue stream performs well when subjected to Fitch's stress
analysis. Assuming issuance to the additional bonds test (ABT) that
requires 2.25 times (x) coverage of MADS, well below actual current
coverage, the stream could tolerate a 56% drop in pledged revenues, or
nearly 11x the scenario results and 1.9x the largest actual revenue
decline in the review period.
In addition to the 2.25x ABT, additional issuance is more effectively
restricted by the city's need of pledged revenues in excess of debt
service to fund general operations.
The rating on the excise tax revenue bonds is capped at the city's IDR.
Fitch does not view the pledged revenues as special revenues under
section 902(2)(B) of the bankruptcy code, which defines 'special excise
taxes imposed on particular activities or transactions' as special
revenues.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's
applicable criteria specified below, this action was informed by
information from Lumesis and InvestorTools.
Applicable Criteria
U.S. Tax-Supported Rating Criteria (pub. 18 Apr
2016)
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
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Contacts
Fitch Ratings
Primary Analyst
Shane Sellstrom
Associate
Director
+1-512-215-3727
Fitch Ratings, Inc.
111 Congress
Avenue
Austin, TX 78701
or
Secondary Analyst
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Murray
Senior Director
+1-512-215-3729
or
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