Fitch Assigns 'AA+' Initial Rating to Bernalillo Co, NM GO Bonds.

AUSTIN, Texas -- Fitch Ratings assigns an initial rating of 'AA+' to Bernalillo County (the county), New Mexico's $3 million general obligation bonds, series 2004, which are scheduled to sell competitively on Oct. 12. The Spectrum Capital Group, LLC serves as the county's financial advisor. Bids will be accepted electronically through Kirkpatrick Pettis' bidding web site. Fitch also assigns an 'AA+' rating to the county's outstanding $83.9 million general obligation bonds. The Rating Outlook is Stable.

The bonds are payable from ad valorem taxes, which may be levied against all taxable property within the county without limitation as to rate or amount. Proceeds will be used for road and drainage improvements.

Fitch's initial rating of 'AA' reflects the county's sound financial management and large financial reserves, diversfied and growing tax base, modest debt levels, and above-average pay-out rate. The county's role as New Mexico's principal population center has resulted in steady gross receipts tax (GRT) revenue growth, even during recent recessionary periods. The absence of an additional margin in its operating levy limits some of the county's financial flexibility, although this may be alleviated by a pending ordinance to impose some of the county's available GRTs and rolling back recent operating levy increases. If enacted, the county's dependence on more economically sensitive GRTs will increase; however, the maintenance of sizable reserves offsets this risk.

As the state's largest county, Bernalillo County's population grew 17% in the 2000 census and totaled over 580,000 residents in 2003, fueling strong property tax base growth that has increased by a compound annual average of over 6% since fiscal 1998. Located within the county, the City of Albuquerque (general obligation bonds rated 'AA' by Fitch) comprises about 80% of the county's population. The remaining population in the unincorporated areas of the county represents the second largest population in the state.

As a sign that economic recovery may be under way, employment growth for the 12-month period ended July 2004 totaled 6,200 jobs, or 1.7%, aided by the city's strong housing construction market but offset by 2003's closure of the Philips Semiconductor plant that employed 1,200. Accordingly, the county's unemployment rate declined to 4.8% in July 2004 and is well below state and national averages, indicative of the generally broad economic base. Kirtland Ar Force Base, Sandia National Labs, and Intel are among the area's largest employers, helping transform the area economy into a hub for electronics, aviation and aerospace, and defense-related research and development.

Record levels of residential development continued through the recent recessionary period, with building permit values totaling almost $600 million in calendar 2003. The issuance of over 3,400 single-family home permits through August 2004 points to another record year, which also benefits the county's broad-based GRT revenue stream. GRTs have grown by a compound annual average of 3.5% since fiscal 1997, including increases of almost 3% and 5% in fiscal years 2002 and 2003, respectively. Although conservatively budgeted at 2.5% growth in fiscal 2004, GRT revenues are actually up almost 9% for the first nine months, compared with the same period in fiscal 2003, indicating improving economic conditions. The services sector is the leading source of taxable GRT revenues, acccounting for over 39% of revenues in fiscal 2003, followed by retail trade (25%) and wholesale trade (16%).

The current offering is part of the county's formal capital improvement plan, whose local portion has been historically financed with $16 million in voter-approved general obligation bond authorizations every two years. Along with almost $84 million in general obligation bonds outstanding, the county has about $192 million in GRT-secured debt outstanding (rated 'AA' by Fitch), resulting in modest direct debt levels of $480 per capita and less than 1% of full market value. Overall debt levels are low to moderate at $1,275 per capita and 1.8% of full market value. The GO bonds' pay out rate is rapid at over 62% in 10 years. The county's next bond authorization is scheduled for November 2004 for $16 million. The county has no plans to issue additional GRT-secured bonds.

The county's general fund has historically maintained large reserves with total fund balances of at least 34%-50% of expenditures and transfers out since fiscal 1999. In addition to the state's mandated three-month reserve for subsequent year's expenditures, the county has typically generated unencumbered reserves and further cushions its position with a $4 million-$5 million stabilization reserve. Substantial liquidity has also been maintained in the general fund with cash totaling over $42 million in fiscal 2003, equal to over four months operating expenses. Preliminary unaudited fiscal 2004 results point to a $4.4 million operating surplus, and the adopted fiscal 2005 budget projects balanced operations, although conservative revenue estimates may allow the county to outperform its projections.

An ordinance adopted by the county commissioner's would amend the fiscal 2005 budget by imposing two additional GRTs comprised of the county's third 1/8% increment for general purposes and a 1/16% levy for correctional facilities. Together, these would generate an additional $25.5 million to be used for public safety and roads. The proposed additional GRTs would become effective Jan. 1, 2005 unless voters force a positive referendum, which reportedly is not expected. The proposed plan would also reduce the property tax mill levy by almost 1 mill, resutling in a net revenue increase of almost $18 million. As a result, GRTs as a percentage of general fund revenues would increase from 28% in fiscal 2004 to 42% in fiscal 2006. The resulting GRT of 6.0625% would still be lower than all New Mexico counties, the City of Albuquerque (6.75%), and all major cities in the southwest U.S.

As the county's largest expenditure category, public safety constituted almost 50% of total general fund spending in fiscal 2003 and increased by over 17% during this period due to the opening of the Metropolitan Detention Center (MDC) in July 2003. Jointly financed by the county and the City of Albuquerque, both parties also evenly split the operating costs of the facility, which total over $40 million per year. With MDC operating costs projected to increase 10% annually, imposition of the proposed GRTs would relieve operating pressures on the general fund for this new facility. The county's recent adoption of its first biennial operating budget for fiscal years 2005-2006 should help control other costs and stabilize tax rates.

On Nov. 7, 2000, New Mexico voters statewide approved a constitutional amendment that would allow the City of Albuquerque and Bernalillo County governments to begin the process of forming an entirely new unified government. In November 2003, voters rejected the proposed charter for the unification of the city and county government, requiring the formation of a new charter commission and another special election in November 2004. Although expected to be less costly, financial and debt information about the potential new unified government is not available. Fitch will continue to monitor unification developments and assess any credit implications. A more recent unification development was prompted by Senate Bill 887 which, effective June 20, 2003, created the Albuquerque-Bernalillo County Water Utility Authority (public project revolving fund loan rated 'AA' by Fitch).