Fitch Rates Tacoma, Washington's 2006B Rfdg LTGOs 'AA-'.

SAN FRANCISCO -- Fitch rates the City of Tacoma, Washington's $12,420,000 Limited Tax General Obligation Refunding Bonds, Series 2006B 'AA-'. In addition, Fitch affirms the 'AA-' rating to $88.7 million in outstanding parity limited tax general obligation (LTGO) bonds. The Rating Outlook is Positive, revised from Stable on Sept. 6. The new issue will sell via negotiation with Banc of America Securities LLC on or about Oct. 17. The city's co-financial advisors are Leora Consulting Group and Regional Financial Advisors, Inc.

The 'AA-' rating reflects the city's low to moderate debt burden, good economic growth with prospects for continued improvement, low taxpayer concentration, sound financial profile, and strong management practices. These strengths are offset somewhat by the city's relatively low income levels and above average unemployment rates. Also, Fitch continues to regard Initiative 747 (I-747)'s stringent limitation on property tax revenue growth as a credit risk while an appeal of the superior court ruling declaring the initiative unconstitutional is pending.

The recent Outlook revision to Positive stems from the city's continued economic growth and diversification and build-up of financial reserves. A Positive Rating Outlook indicates that Fitch could raise the city's tax-supported ratings within the next one to two years. An upgrade will be dependent on the city's future economic and financial performance and the convention center's ability to be largely self-sustaining from identified tax and revenue sources, including paying debt service on bonds sold to finance the project.

Tacoma's economy continues to show excellent growth and development. Recently completed projects, coupled with a large military presence and the Port of Tacoma, have resulted in some economic stability during a period of regional economic distress. Assessed valuation gains have averaged 8.1% per year since 2000, and taxpayer concentration is low. Employment in the Tacoma area (Pierce County) has risen 2% per year since 2001, when the job base saw only a minimal recessionary impact. Fitch believes the city's continued focus on revitalizing downtown, including the convention center project, and other business-friendly initiatives should bode well for future economic development. Nevertheless, unemployment remains an above-average 6.3% in 2005 and wealth levels remain below the state average.

Tacoma's financial condition is marked by sound revenue growth, prudent spending restraint, a diverse revenue base, and strong reserves. The general fund has run operating surpluses in four of the last six years, with a good year expected in 2006. The positive results have bolstered reserves; the ending general fund balance for 2005 was $43.4 million, a very solid 25% of spending. The unreserved amount also was healthy at $36.6 million, 21% of spending. Nevertheless, key labor agreements that expired in 2005 remain unsettled, and the final outcome could create financial pressure. Fitch believes I-747's impact (if its constitutionality is sustained) is lessened somewhat by Tacoma's diverse revenue base. Property taxes make up about one-quarter of general fund revenues, with much of the remainder coming from sales and business taxes and transfers from city-owned utilities. Risk also is softened by the city's strong fund balance policy and sound management actions in restraining expenses in recent years.

Proceeds from the new issue will refund $13 million of the city's LTGO bonds series 1997A, with $1.5 million in present value savings expected. The refunded bonds will be called Dec. 1, 2007.

Tacoma's debt burden is low to moderate, largely the result of a reliance on pay-as-you-go spending. The direct debt burden is a very manageable 0.9% of market value, with overall debt a more moderate 3.7%. The debt burden is expected to remain affordable with no new money parity LTGO bond issuance planned at this time.

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