Fitch Rates Seattle, Washington's $133MM Limited Tax GOs 'AA+'.
Seattle's (the city) credit quality rests in its role as a regional economic and commercial center, its strong management practices, and low debt burden. Credit strength is challenged by the area's economic volatility and the property tax limitations of I-747. Currently, however, economic indications show recovery and I-747 is less problematic because inflation is low. Also, the city has responded effectively to preserve its financial strength, reducing spending to cope with the declining revenues and the strict property tax limitation. The city's year-end financial cushion remains sound, showing improvement in 2003 and 2004 following several years of operating losses. Seattle's credit quality is enhanced by its prudent and numerous fiscal policies and guidelines regarding reserve levels, pay-as-you-go capital spending, debt issuance, budget practices, and investments.
The Seattle area economy is recovering from its most severe downturn in over 20 years. The weakness follows nearly a decade of substantial growth, with this cyclicality characteristic of the area. Preliminary figures for 2004 suggest small job growth in the Seattle area, following a 5.4% loss from 2000-2003. Gains were led by tourism and other services, and construction showed its first gain since 1998. Prior years' declines were led by The Boeing Company and employment reductions and business failures in technology. The area's unemployment rate is improved significantly to an estimated 4.9% in 2004 from the 7.1% peak in 2003. City retail trade is expected to show its second consecutive gain in 2004, following two years of decreases. Wealth indicators are above average. Based on a positive regional economic forecast, the city projects economic recovery to increase in pace over the next few years. Fitch factors the city's economic volatility into the current ratings.
Seattle's financial position is strong and remained so despite the impact of measure I-747, a decline in sales and business and occupation taxes, and the end of the state-shared motor vehicle excise tax. Initially, these factors resulted in general fund operating deficits (2001 and 2002), but since then strong fiscal discipline along and economic recovery have reversed these results. The general fund balance rose to $118.8 million in 2003, a sound 16.3% of expenditures and transfers out. A small increase is expected for 2004 as well.
Even during the weak years, the 2002 fund balance remained high at $109.4 million, 15% of spending. The unreserved amounts also are above average at $42.2 million (5.3%) and $33.6 million (4.6%) in 2003 and 2002, respectively. The city has maintained its sound year-end position through spending reductions, hiring freezes, management's prudent response to mid-year revenue shortfalls, and a diverse revenue base that softened some of the economic-related declines. The city continued to demonstrate strong fiscal management in the current year's budget process. Continued fiscal prudence will be needed as the severe constraints of I-747 limit property tax growth to 1% annually. However, the city benefits from a diverse revenue base including sales, business, and real estate excise taxes.
Seattle's debt burden is low, largely the result of a significant pay-as-you-go capital program. By policy, the city's real estate excise tax and 10% of the business and occupation tax are used for capital purposes including debt service. The city issues unlimited tax debt as well as limited tax, with the former being voter approved and thereby exempt from the I-747 levy limits. Proceeds from this sale with fund various capital projects, provide for a litigation settlement, and refund existing debt.