OREANDA-NEWS. Fitch Ratings affirms its 'AA' rating on the following Santa Fe, NM (the city) revenue obligations:

--Approximately \$11.7 million outstanding subordinate lien gross receipts tax/wastewater system refunding revenue bonds, series 2012B.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by an irrevocable and subordinate lien on the pledged tax revenues on parity with the lien on the city's parity tax bonds (rated 'AA' by Fitch) but subordinate to the lien on the city's superior tax obligations (rated 'AA+' by Fitch), and an irrevocable first lien on the net wastewater system revenues. Pledged tax revenues consist of state-shared gross receipts tax (GRT) revenues, one-half percent GRTs, infrastructure GRTs, environmental services GRTs, and any other GRT revenues received by the city and hereafter pledged to the payment of the bonds.

KEY RATING DRIVERS

DOUBLE-BARRELL PLEDGE: The rating reflects the combined pledge of the subordinate lien on the GRT revenues and net revenues of the wastewater system. In practice, debt service is paid from net wastewater system revenues and the city's environmental GRT revenues.

HEALTHY SYSTEM FINANCIAL METRICS: Combined wastewater and environmental GRT revenues produce strong debt service coverage (DSC) levels. Issuer projections point to DSC levels around 1.9 times (x) over the five year forecast period. Liquidity has been very healthy and stable at about 800 days over the last five years.

PROMINENCE OF GRT: The full spectrum of pledged GRT revenues are critical to general fund operations of the city and represent 73% of general fund revenues.

AFFORDABLE SYSTEM RATES: Wastewater rates are very affordable at 0.7% of median household income (MHI), offering the city ample rate raising flexibility.

MODEST CAPITAL NEEDS: Capital plans are modest and are expected to be funded on a pay-go basis. Leverage ratios for the sewer system are very low, but combined with the water system, total leverage is considered high. Amortization of sewer system debt is very rapid with all parity debt maturing within 10 years.

RATING SENSITIVITIES

MAINTENANCE OF STRONG FINANCIAL POSITION: The rating is sensitive to shifts in fundamental credit factors, including preservation of the system's strong financial profile. The Stable Outlook reflects Fitch's belief that such deterioration in the credit's fundamentals for the foreseeable future is unlikely.

CREDIT PROFILE

HEALTHY SYSTEM FINANCIAL METRICS

The wastewater system's financial performance over the fiscal 2010-2014 period has been strong, with net wastewater system and environmental GRT revenues producing DSC ranging from a low 1.6x in fiscal 2010 to a very high 2.8x in fiscal 2011. The DSC for fiscal 2011 reflects a dip in debt service requirements that year. City projections indicate DSC levels will remain solid, ranging from 1.7x-1.9x over the fiscal 2015-2019 forecast period. System cash levels have been very strong at about 800 days' cash on hand over the past five years. In spite of planned 100% pay-go funding of capital needs, liquidity levels are expected to remain strong with cash reserves consistently over a year's worth of operating expenses throughout the forecast period.

RATE AND TAXING FLEXIBILITY

Wastewater rates are approved by the City Council as part of the budget process. Effective Jan. 1, 2010, the council approved an 80% increase (30% volumetric charge increase) to the monthly bill. Rates remained unchanged until Jan. 1, 2015 when a 4.9% rate increase was implemented. Despite this increase, residential wastewater rates are very affordable at 0.7% of MHI or just under \$30 (assuming average usage of 6,000 gallons per month). The city also adopted annual rate hikes averaging 5% annually over the next five years. These rates are still expected to remain affordable at 0.8% of MHI, below Fitch's 1% affordability threshold.

Environmental GRTs typically account for around 14% of total wastewater system revenues. Total pledged GRT collections declined by 9% and 5% in fiscal years 2009 and 2010, respectively, but subsequently posted annual gains through fiscal 2014. The city's economic base and future collections of pledged tax revenues are directly affected by seasonal resort activities and tourism. But based on the strong performance during the economic recession, Fitch believes there are prospects for sound future collections. Nonetheless, GRT receipts could be affected by changes in state law related to the items or rate at which GRTs are assessed.

FAVORABLE DEBT PROFILE

The system's five-year capital improvement plan (CIP) totals \$17.5 million. All needs are anticipated to be funded on a pay-go basis. The CIP is very manageable at roughly \$90 average annual capital costs per customer. Needs focus primarily on major rehabilitation of sewer lines, and replacement of pumps and digesters.

System debt ratios compare favorably to Fitch's 'AA' rating category median with debt per customer at \$485. Debt ratios are forecast to decline given that the city has no additional debt issuance plans. Furthermore, debt amortization is very rapid with all debt maturing within 10 years.

SOUND ECONOMIC FUNDAMENTALS

Santa Fe (estimated population at 70,000) serves as the county seat and state capital and is located in north central New Mexico. The local economy is anchored by the large state government presence. Other important sectors include tourism and recreation, retail trade, healthcare, and some industry. The commuter line between Santa Fe and Albuquerque enhances employment and tourism opportunities for the region. The city unemployment rate at 4.9% as of February 2015 is below county (5.3%), state (6.3%), and national (5.8%) levels for the month and income levels for city residents are about 5% below national averages but are an estimated 12% higher than those of the state.