Fitch Rates Manhattan, KS ULTGO Bonds 'AA+'; Outlook Stable.
--$10,170,000 unlimited tax general obligation (ULTGO) bonds series 2017-D.
Bond proceeds will be used to fund various city capital projects, to retire certain temporary notes, and to refund the 2008C and 2010B GO bonds. The bonds will be sold competitively on November 14.
In addition, Fitch has affirmed the following ratings:
--Issuer Default Rating (IDR) at 'AA+';
--Approximately $124.2 million outstanding GO bonds and GO temporary notes at 'AA+';
--$2.4 million sales tax special obligation revenue (STAR) bonds, series 2009-1 at 'AA';
--$22.9 million taxable STAR bonds, series 2009-2 at 'AA';
--$17.2 million senior lien special obligation revenue (TIF) bonds, series 2009A at 'AA';
--$5 million transportation development district (TDD) sales tax bonds, series 2010 at 'AA'.
The Rating Outlook is Stable.
The GO bonds and notes are backed by the city's full faith and credit and its ad valorem taxing power, without limitation as to rate or amount.
The TDD, STAR, and TIF bonds are payable by the city's pledge of any legally available funds, subject to annual appropriation, as well as a cash-funded debt service reserve for each series. Each of these bond programs is payable in the first instance by various dedicated tax revenue streams - the TDD bonds have a lien on a 0.5% sales tax levied within the TDD (coterminous with a development known as the north project area); the STAR bonds have a lien on the state sales tax (6.5%, up from 6.15% as of July 1, 2015) collected within the north project area (coterminous with the TDD), and state, city (1%) and local (0.306%) sales tax collected within another development known as the south project area; and the TIF bonds a lien on city and local sales tax collected within the north project area along with an incremental property tax collected within the north and south project areas. Local sales tax revenues from the south project area are also available if the STAR bonds are fully repaid prior to final maturity.
The 'AA+' IDR and GO rating reflects the city's significant ability to raise revenues, adequate expenditure flexibility, manageable long-term liabilities, high fundamental financial flexibility and sound operating performance. Fitch considers the appropriation pledge to be stronger than the intended source of repayment for the TDD, STAR, and TIF bonds; as such, the rating on these bonds is one notch below the IDR, reflecting the slightly higher degree of optionality associated with appropriation-backed obligations relative to the IDR.
Economic Resource Base
Manhattan is located in northeastern Kansas in Riley and Potawatomie Counties, roughly 55 miles west of Topeka. The city serves as the economic and cultural center for the region. Fort Riley, a military base with approximately 15,000 military personnel located 10 miles west of the city limits, and Kansas State University (KSU) with roughly 24,000 students located within the city, anchor the local economy.
KEY RATING DRIVERS
Revenue Framework: 'aa'
Revenues are expected to increase above the rate of inflation based on expectations for continued growth in the city's population, tax base, and general economic conditions. The city has ample ability to raise revenues sufficient to cover expected cyclical revenue declines.
Expenditure Framework: 'aa'
The city has an adequate ability to cut expenses, including pay-go capital, in times of economic downturn. Carrying costs are elevated and the labor environment is manageable.
Long-Term Liability Burden: 'aa'
Long-term liabilities are moderate when compared with the city's economic resource base.
Operating Performance: 'aaa'
The city's reserve levels, significant revenue control and adequate spending flexibility combine to provide an exceptional level of financial resilience against cyclical revenue declines.
Financial Flexibility: The rating is sensitive to the maintenance of financial flexibility, inclusive of non-general fund resources, and conservative budgeting practices.
Manhattan's regional economic prospects are strong, with continued assessed valuation growth, low unemployment rates, and sustained population growth. The 2015 population, at approximately at 55,000, has increased 26% since 2000 through both real gains and limited annexations. The presence of KSU's large student population skews the per capita personal income level downward, which is below state and national performance. Taxable assessed valuation (TAV) grew 4% in 2016 over the prior year, increasing about 40% since 2007 due to several new residential developments. Management reports TAV growth of 3% for 2017. Approximately one-fifth of the city's value is tax-exempt due to KSU's notable presence.
The city is heavily reliant on economically sensitive sales tax revenues, which comprise approximately 50% of general fund revenues. Property taxes account for a relatively low proportion of general fund revenue relative to most U.S. local governments in part due to the presence of tax-exempt property within city limits.
Fitch expects future revenue growth to increase at a rate above inflation, but below U.S. GDP growth. Sales tax revenues tend to track closely to inflation and should benefit from increased student and year-round population within the city. Assessed values have seen significant growth in the last several years, but the impact of the gains on revenues has been limited as property taxes comprise a small 9% of general fund revenues.
Effective January 2018 the city is subject to property tax-lid limitations that restrict tax revenue growth to the five-year rolling average of the consumer price index. Property tax levies in excess of the lid require voter approval. Several property tax categories are exempt from the tax-lid; these include increases in bond principal and interest payments, payment of court judgments or settlements, police and fire spending, tax increment financing districts, and state or local emergency - including financial emergencies. Fitch believes the exemptions for key spending areas provide ample flexibility for the city and alleviate budgetary restrictions imposed by the tax-lid limitations.
Public safety is one of the city's largest expenditures. The city is responsible for 80% of the operational budget for the Riley County Police Department, a city/Riley County consolidated law enforcement agency. The city supports public safety through both the general fund and the Riley County Police Department Fund, which has a dedicated property tax rate that is controlled by the county. Combined public safety spending makes up approximately 22% of the city's general fund expenditures.
Fitch expects the pace of spending growth to be in line with to marginally above expected revenue growth. Fitch expects that labor costs will increase at a rate approximating inflation, while debt service costs are expected to decline over the next several years.
Carrying costs for debt, pensions, and other-post employment benefits (OPEB) are elevated at 29% of government expenditures. Approximately 93% of carrying costs are attributable to debt service. Fitch expects that the city's carrying cost metric will decline moderately over the next several fiscal years, as the rate of outstanding principal amortization outpaces planned issuances.
Manhattan has an adequate level of flexibility to reduce main expenditure items and is committed to cutting non-essential spending, including pay-go capital, in times of economic downturn. Management has moderate control over labor expenses. While they have full control over headcount and strikes are prohibited, public employee union contracts are subject to binding arbitration. Despite this limitation, management has a positive working relationship with labor and has been able to find public safety cost savings when needed. The general fund budget also allocates a considerable amount of spending to cultural and recreational programs, which we view as inherently more flexible relative to public safety or public works spending, for example.
Long-Term Liability Burden
Overall debt plus Fitch-adjusted net pension liability as a percent of personal income is moderate at approximately 16%, of which about 67% is attributable to direct debt. The city has modest future debt plans for capital improvements in 2018. The current debt structure features a rapid amortization schedule for existing debt, retiring about 73% within the next 10 years.
Employees are covered by the Kansas Public Employees Retirement System (KPERS) and Kansas Police and Firemen's Retirement System (KP&F) cost-sharing multiple-employer defined benefit pension plans. Combined, the plans have a ratio of assets to liabilities of approximately 51% when adjusted by Fitch to a 6% rate of return.
The city has a high gap-closing ability and Fitch expects the city will maintain reserves in excess of a 'aaa' reserve safety margin in an economic downturn. Manhattan had available reserves in excess of 33% of general fund expenditures from 2010 through 2015, inclusive of special revenue fund reserves that could be transferred to the general fund by a budget amendment and a vote by the City Commission, most notably amounts held in the sales tax fund and economic development fund. Fitch also expects that the city would use its revenue-raising capacity and expenditure controls to maintain a high level of financial flexibility in a moderate downturn.
Management has maintained consistent efforts in support of financial flexibility, having built and maintained high available reserves levels. While sales tax revenue growth slowed somewhat in fiscal 2017, management expects to balance operations through expenditure cuts.
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|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||Jan 22, 2018|
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