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Fitch Affirms Tukwila, WA's LTGOs at 'AA-'; Outlook Stable.

SAN FRANCISCO -- Fitch Ratings affirms the following Tukwila, Washington limited tax general obligation (LTGO) bond ratings:

--$3.2 million LTGO bonds, series 2003A at 'AA-';

--$0.9 million LTGO refunding bonds, series 2003B at 'AA-'.

Fitch also affirms the city's implied unlimited tax GO bond rating at 'AA'.

The Rating Outlook is Stable.

SECURITY

The LTGO bonds are secured by the city's irrevocable pledge to budget and levy taxes annually within the constitutional and statutory tax limitations provided by law on all taxable property within the city.

KEY RATING DRIVERS

STRONG BUT CONCENTRATED LOCAL ECONOMY: The city's local economy, large relative to its modest population, is anchored by significant commercial and industrial sectors and dominated by Boeing, which represents 10% of the city's assessed valuation (AV) and 16% of its employment.

PROLONGED AV DECLINE PROJECTED TO END: Following a 10.4% decline in 2009-2012, the city is projecting AV stabilization or improvement from 2013 onwards based on building permit growth and new developments underway or planned.

TEMPORARY GENERAL FUND DRAWDOWN: The city ended fiscal 2011 with strong general fund balance results which it will erode somewhat in fiscal 2012 due to planned drawdowns for capital investments. Receipt of planned property sales in fiscal years 2013 and 2014 will allow the city to swiftly bring its general fund reserves into line with its reserve policies.

GOOD FINANCIAL FLEXIBILITY: The city's strong general fund liquidity is further bolstered by the presence of significant borrowable monies in other funds.

MANAGEABLE DEBT BURDEN: The city has a favorable debt burden, limited future borrowing plans, and affordable debt, pension, and other post-employment benefit (OPEB) carrying costs.

LIMITED REVENUE-RAISING FLEXIBILITY: The rating distinction between limited and unlimited tax ratings is a function of the city's limited revenue-raising flexibility, given statutory limits on property tax levy growth and the dependence upon economically sensitive sales taxes. The maintenance of comfortable reserve levels is crucial given this lack of revenue-raising flexibility.

CREDIT PROFILE

Tukwila is advantageously located approximately 12 miles south of downtown Seattle, 17 miles north of Tacoma, and one mile east of the Seattle-Tacoma International Airport, at the juncture of two major interstate highways.

MIXED SOCIOECONOMIC PROFILE

The city's local economy is centered on its sizable commercial and light industrial sector. While the city's resident population is a modest 19,500, its daytime population is estimated as high as 150,000 during peak shopping times. The city's socio-economic characteristics are noticeably below average in terms of income and individual poverty rate; however, the city should benefit from its location within the Puget Sound region which is experiencing economic and employment recovery.

After years of double-digit expansion, tax base growth stalled in 2009. Over 2009-2012, the city has experienced a cumulative 10.4% AV decline. The city is projecting AV stabilization or improvement from 2013 onwards based on increased issuance of building permits and new developments which are currently underway or planned.

Tax base concentration remains a concern despite the presence of approximately 2,000 businesses located in the city. The top 10 taxpayers accounted for 27% of AV in 2011. The largest taxpayer, Boeing (IDR of 'A/F1' with a Stable Outlook by Fitch) alone accounts for almost 10% of AV. Similarly, there is significant employment concentration. The top 10 employers account for 29% of the city's approximately 42,000 jobs, with Boeing supplying 16%. Given this concentration, the city remains vulnerable to any significant retrenchment by its largest taxpayers and employers, although none is currently anticipated.

GOOD GENERAL FUND BALANCE PROJECTIONS

The city's revenue streams are diverse, although limited in flexibility. General fund revenues are composed of approximately 30% each property and sales taxes, with the balance comprised of other taxes, charges, and fees. The ability to raise revenues is limited by statutory restrictions on property taxes, and by the cyclical nature of sales tax collections. However, sales tax collections were up in fiscal 2011 ($1.1 million over final budget).

The city ended fiscal 2011 with a strong total general fund balance of $8.3 million or 16.5% of spending. The results were derived from the city's first net operating surplus after transfers in four years, reflecting a 17.5% year-over-year revenue improvement and a 2.1% year-over-year expenditure reduction (aided by reducing 24 positions). Under GASB 54, the fiscal 2011 results included $1.5 million for a contingency fund and $0.9 million for a fire equipment reserve fund which had previously been separately reported, although both had been funded by the general fund.

The city is projecting a lower total general fund balance of $6.6 million at fiscal 2012 year end as a result of pay-as-you-go funding of infrastructure projects and a $1.1 million advance to the city's Metropolitan Park District for operations, to be repaid once that district starts collecting tax. This planned drawdown is part of the city's strategy to invest in its infrastructure as a way of maintaining its disproportionately large commercial sector and is expected to reduce the city's total general fund only temporarily. The city has budgeted to restore its total general fund balance to $11.8 million in fiscal 2013, largely due to planned property sales, followed by a further slight drawdown to a still strong $9.8 million in fiscal 2014 as a result of further capital and equipment investments.

As part of the city's enhancement of its total general fund balance in fiscal years 2013-2014, the city is budgeting to increase the contingency fund portion by $3.7 million to $5.2 million. This will comply with the city's reserve policy to set-aside 20% of its funds, with 10% in the contingency fund and a further 10% in the general fund balance. The city has additional borrowable resources, totaling $14.5 million, in other funds which augment its already strong general fund liquidity.

While the city has been able to fund recent cost-of-living adjustments for employees, smooth labor relations allowed the city to rescind previously agreed pay increases for firefighters in 2011 in exchange for retaining three firefighter positions. The city's labor agreements are somewhat flexible, allowing for salary reopeners for sworn personnel salaries and benefits, layoffs and furloughs, and compensation negotiations without recognition of regional compensation. On the other hand, these labor agreements do not permit the city to unilaterally suspend or eliminate contracted compensation increases and they do provide for binding arbitration (which has not been utilized to date).

MANAGEABLE DEBT BURDEN

The city's favorable debt profile is characterized by low overall debt levels and above-average amortization. The overall debt burden is a modest 1.5% of AV. Approximately 63% of the city's debt is scheduled for retirement within 10 years. This amortization schedule likely will be accelerated as the city plans to fully defease its LTGO bonds, series 2003A ($3.2 million principal outstanding) 11 years early using available capital funds. Future borrowing plans are limited. The city is currently in the process of issuing $945,000 in bonds to loan the proceeds to the new Metropolitan Park District. The park district will repay this loan from its property tax receipts. The city also anticipates issuing up to $9 million in special assessment debt in 2013 for costs associated with a major arterial route construction project.

Pension liabilities are limited to participation in several state pension plans, and a small, single employer plan for fire fighters. For the state-run plans, the city's annual contributions, which are determined by state statute, were $1.5 million in fiscal 2011, or a manageable 3% of spending. Future year contributions are expected to continue increasing. By fiscal 2014, the city's total contribution (an estimated $2.1 million) will represent a 30% increase since fiscal 2009. This cost increase has been incorporated into the city's general fund projections through fiscal 2014. For the fire fighters' pension plan, the city's annual contributions are predominantly funded by the state from proceeds of a tax on fire insurance premiums. The city had to contribute a modest $47,065 to that closed plan in fiscal 2011 and future year contributions are not expected to increase significantly.

The city provides OPEBs for law enforcement personnel hired prior to 1978, funded on a pay-as-you-go basis (at a total cost of $335,090 in fiscal 2011). By fiscal 2014, the city's estimated annual OPEB contribution will have increased 39% since fiscal 2009. Again, this increase has been incorporated into the city's outyear financial projections. The city's total carrying costs for its debt service, pension, and OPEB costs were an affordable 9% of general fund expenditures in fiscal 2011.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, and National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
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Publication:Business Wire
Geographic Code:1U9CA
Date:Dec 12, 2012
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