Fitch Affirms North Las Vegas, NV LTGOs at 'B'; Outlook Stable
--\\$128.4 million LTGO bonds (additionally secured by consolidated tax pledged revenues);
--\\$278.4 million LTGO water and wastewater improvement bonds (additionally secured by water and wastewater system pledged revenues).
The Rating Outlook is Stable.
SECURITY
The bonds are backed by the full faith and credit of the city, subject to Nevada's constitutional and statutory limitations on the aggregate amount of ad valorem property taxes. As noted above, the bonds are additionally backed either by an irrevocable pledge of and lien on certain consolidated tax revenues (15% of these revenues) or by water/wastewater system net revenues.
KEY RATING DRIVERS
MEANINGFUL SOLUTIONS OUTSIDE CITY CONTROL: The 'B' rating continues to reflect Fitch's view that the city has virtually no remaining budget flexibility. Given tax caps and the scope of service cuts already made, Fitch believes any meaningful solutions are outside the city's control.
UTILITY PROVIDES CRUCIAL LIQUIDITY: Unrestricted balances in the utility fund serve as the city's only meaningful source of liquidity and are at just adequate levels to support governmental operations over the intermediate term. Under current state law, these must be eliminated by fiscal 2021.
WEAK AND CONCENTRATED ECONOMY; FUTURE UNCERTAIN: The city and region's economy were among the hardest hit in the U.S. by the collapse of the housing market with a combined loss of 56% of taxable assessed valuation (TAV). While TAV has rebounded some, Fitch is concerned that long-term economic growth will remain weak.
GROWING LONG-TERM LIABILITIES: Debt is high relative to the tax base, amortization is slow and debt service is escalating in the intermediate term. Carrying costs, including debt and retiree liabilities, are expected to increase with rising debt and pension payments.
NO ENHANCEMENT FOR ADDITIONAL PLEDGES: Fitch does not believe the additional pledges of consolidated tax and water/wastewater revenues provide sufficient additional strength to warrant higher ratings than that of the LTGO given the ongoing use of utility cash to support general fund operations.
RATING SENSITIVITIES
TRANSFER REDUCTION: Positive rating action could result if the city is able to implement a medium-term plan to address the required reduction in utility transfers by fiscal 2021.
ECONOMIC VULNERABILITY: Fitch believes the fragile economy leaves the city ill-prepared to manage any further contractions before the economy has more fully recovered. A near-term down cycle in the economy would likely result in further financial stress and a rating downgrade.
CREDIT PROFILE
North Las Vegas encompasses approximately 100 square miles in Clark County with a population of 227,585. The city is approximately 43% built out with a large quantity of undeveloped land. The city has nearly doubled in population since 2000 but growth slowed with the housing and economic downturn. The regional economy is dominated by tourism and gaming, both of which experienced significant revenue and employment declines but appear to be stabilizing.
STRUCTURAL IMBALANCE; HEALTHY UTILITY BALANCES SUPPORT LIQUIDITY
The city's forecast through fiscal 2020 (updated December 2015) is improved from a September 2014 forecast in that it indicates nearly balanced operations assuming current minimal staffing levels and continued fairly level subsidies from the utility funds. In this scenario, the estimated fund balance remains positive at 5.7% in fiscal 2020, down from 10% at fiscal-year end 2016. The subsidy represented about 18% of total general fund revenues in fiscal 2015.
However, under a scenario including the continued utility fund subsidies but contemplating realistic increases in staffing levels to support modest economic growth, the deficit grows to \\$107 million by fiscal 2020.
Ongoing utility transfers have resulted in low cash flow to depreciation rates and indicating that the utility does not generate sufficient cash to fund system maintenance. However, Fitch-calculated all-in debt service coverage increased to an average of 1.5x after transfers the three years ending fiscal 2015 from less than 1x from fiscals 2010 through 2012. Unrestricted utility cash balances have averaged approximately \\$50 million or 436 days cash over the last five years.
Management expects continued annual rate increases of approximately 3%. The city believes that general fund revenue growth from anticipated residential and commercial development will eventually allow it to reduce its dependence on utility transfers as required by the state. Fitch views this solution as highly uncertain given economic cyclicality.
NEAR-TERM BUDGET BALANCE FOLLOWING SEVERE BUDGET STRESS
The city's financial position improved in fiscal 2015 with a general fund surplus of \\$4.5 million resulting in a fund balance of \\$12.6 million, equal to 9.8% of spending and transfers and meeting this city's requirement of 8%. Revenues improved primarily due to a \\$3.7 million (8%) increase in consolidated tax revenue combined with flat spending. Management estimates a small surplus for fiscal 2016.
The recent stability follows a period of severe budgetary stress. During the recession, the city experienced several years of large operating deficits through fiscal 2011. After two years of minor surpluses, fiscal 2014 ended with an unrestricted general fund balance equal to the city's reduced policy requirement of 6% of spending.
General fund fiscal 2015 year-end cash was less than half of liabilities (less deferred revenue) for the fifth consecutive year. Although nominal cash increased about \\$2 million to \\$4.6 million, liabilities also increased. However, the city has access to approximately \\$50 million in utility funds borrowing (as of fiscal year-end 2015).
The city was able to pass the fiscal 2015 and 2016 budgets due to temporary budgetary relief resulting from the union's agreement to defer drawing on compensated absences in fiscal 2015 as well as delayed hiring and departmental budget cuts. The city is currently in negotiations with its two largest bargaining units and management expects continued flat compensation.
VERY LIMITED REVENUE & EXPENDITURE FLEXIBILITY
Fitch believes the city retains virtually no additional expenditure flexibility, having eliminated about 800 full-time equivalent positions (35% since the peak in 2009) through attrition and voluntary separation and layoffs. Management reports that the city's current staffing level is unsustainable over the long term even without economic growth.
Under the state property tax cap, the city could only raise about \\$1 million from a property tax rate increase, leaving the city dependent on economic growth or a change to state law to increase its revenue base.
General fund revenues increased in fiscals 2014 and 2015 after five consecutive years of declines. The revenue increases of 15.8% and 8.3% (not including utility transfers) in fiscals 2014 and 2015, respectively) were primarily due to improved consolidated tax revenues as well as licenses and permits reflecting improvements in the economy. However, revenues remain just 66% of the peak level in fiscal 2015.
NEAR TERM STATE INVOLVEMENT APPEARS UNLIKELY
Fitch believes the likelihood of state intervention remains low. State law bars Nevada municipalities from filing for bankruptcy, but allows for the state to become the receiver. The Nevada Tax Commission could also eventually ask voters to approve disincorporation. Current statute requires that taxes for bond repayment continue to be levied under disincorporation. However, under state receivership, the statute directs the state to formulate a debt liquidation program. Management expects to request that the state defer or delay the requirement that the city eliminate the utility transfers by fiscal 2021.
ELEVATED LONG-TERM LIABILITIES
In part due to the steep decline in TAV, overall debt levels including the water and wastewater GO bonds are above average at 5.5% of the tax base. In addition, amortization is slow with only 34% of principal retired within 10 years and an ascending debt service schedule in the intermediate term.
Carrying costs currently consume a relatively moderate 19.2% of governmental spending. However, Fitch expects the burden to increase as both debt service and retirement benefit costs rise.
The city participates in Public Employees' Retirement System of Nevada (PERS), which has a relatively low funded ratio of 68.7% using a Fitch-adjusted 7% discount rate. The city makes its annual required statutorily determined pension contributions. The city's liability related to other post-employment benefits (OPEBs) is approximately \\$13 million.
STRESSED ECONOMY
The city's tax base grew rapidly through fiscal 2009 before declining 56% from fiscal years 2010-2013. It has since rebounded a significant 38%, but remains about 60% of the 2009 peak. The city's housing market continues to experience high foreclosure rates relative to state and national averages as, despite recent increases, home prices are still more than 40% below their 2006 peak. Fitch expects only gradual improvement at best and believes economic contraction before the city has further regained its economic footing would stress revenues and the bond rating even further.
The city and regional economies are concentrated in gaming; most major employers and taxpayers are hotel/casinos. Employment in the city experienced a steep decline in 2010 but has since more than recovered the jobs lost. Nonetheless, the city's unemployment rate of 7.2% as of January 2015 was well above the county and state (both 6.5%), as well as the nation (5.2%). Median household income is slightly above the state and slightly below the nation, but per capita income is 17% below both state and 26% below national averages.
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