Fitch Rates Overland Park, KS GO Bonds 'AAA'; Outlook Stable
-- $33.3 million general obligation (GO) bonds, series 2016A.
The 2016A bonds are being issued to current refund a portion of the city's outstanding internal improvement refunding bonds, series 2006B for debt service savings. The bonds are scheduled to sell competitively on Aug. 15.
Fitch also affirms the following ratings for Overland Park:
--Issuer Default Rating (IDR) at 'AAA';
--Approximately $136.9 million in outstanding GO bonds at 'AAA'.
The Rating Outlook is Stable.
The bonds are a general obligation of the city, payable from an ad valorem tax on all taxable property within the city without limitation as to rate or amount.
KEY RATING DRIVERS
The 'AAA' GO ratings reflect the city's strong revenue and expenditure framework, low long-term liabilities, and ample reserve levels that contribute to an expectation that the city will maintain a high level of financial flexibility throughout various economic cycles.
Economic Resource Base
The city benefits from its location within the Kansas City metropolitan area which features an extensive transportation network and well-educated work force that help drive growth in population and the economy. The city is home to several Fortune 500 companies, with Sprint as its leading employer. Both the financial services and professional and business service sectors account for a greater percentage of total countywide employment than the national average.
Revenue Framework: 'aa' factor assessment
Fitch expects the city's revenue to grow at a pace in line with GDP and above inflation while maintaining substantial independent legal ability to raise revenue even after the implementation of a statewide property tax lid or cap in 2018.
Expenditure Framework: 'aa' factor assessment
The city's expenditure growth should grow at a rate in line with revenue growth. Flexibility is supported moderate costs for servicing debt and other long-term liabilities, strong management control over labor costs, and consistent funding for capital from operating resources.
Long-Term Liability Burden: 'aaa' factor assessment
Overland Park's long-term liability burden including pension liabilities and overall debt are low relative to personal income.
Operating Performance: 'aaa' factor assessment
The city has exceptionally strong gap closing capacity to manage through an economic downturn and has built reserve levels through the recent economic recovery.
Efficient Financial Management: The rating is sensitive to the maintenance of financial flexibility sufficient to address periods of economic downturn.
Tax Lid Implementation: The rating is sensitive to the city's retention of substantial control on the independent ability to increase revenues after implementation of the tax lid.
Overland Park is an affluent community located 10-15 miles southwest of Kansas City, Missouri. Economic growth is evidenced by labor force and employment gains, steady sales tax growth and increases in the city's assessed valuation (AV). The city's unemployment rate is low, trending below state and national levels.
Fitch expects the city's revenue growth to be solid given the vibrant tax base and diverse revenue stream. The city's sales tax makes up the largest source of revenue at 32% of fiscal 2015 general fund revenue with property tax at 24%. Other revenue sources include a franchise tax on electric, telephone, gas service, and telecable services at 7.6% of revenue collectively.
Fitch expects that the city's general fund revenue will grow slightly below historical trends (4% 10 year compound annual growth rate [CAGR]) but in line with national GDP and above inflation due to strong projected property tax growth and modest sales tax growth. AV grew by 7.1%, 6.3%, and 7.5% annually in fiscal 2014 through 2016. While the city does not expect growth to continue at such high levels in the long term, Fitch considers the city's projections of close to 3% growth to be reasonable. The city's sales tax has grown more moderately; leaving the city to project only 0.9% overall sales tax growth in fiscal 2016. These projections include local sales tax growth of 2.2%, use tax declines of 10.7%, and countywide sales tax growth of 2.5%.
The city should continue to have a substantial level of control over revenue increases even after the implementation of the tax lid, which will limit the ability to increase property taxes to CPI growth. Public safety expenditures and debt service are exempt from the law which allows the city to retain capacity to adjust revenues for these key components of the general fund budget. The city also maintains some ability to adjust other locally controlled revenues.
The city's main expenditure item is for public safety at 52% of fiscal 2015 general fund expenditures. An additional 18.6% is for general government and 12.9% for public works.
The natural pace of spending growth should be in line with the expected pace of revenue growth given expectations for continued growth in population and moderate increases in the cost of service provision.
The city has a solid degree of flexibility with its main expenditure items. Employee wages and benefits are not contractually negotiated providing the city with strong legal control over personnel related costs. Carrying costs are 15% of governmental expenditures and are expected to decline given the city's rapid repayment of existing debt and absence of future borrowing plans. Debt service declines from $20.9 million in fiscal year (FY) 2016 to $14.0 million by FY 2020 and an average of $10.6 million in FY 2021 through 2025. Close to 75% of the carrying costs are for debt service, which is more stable and predictable than payments for pension and other post-employment benefit (OPEB) obligations.
The city has demonstrated careful controls on spending with actual expenditures typically only 95% of its budget. The city also funds capital projects on a pay-as-you-go basis at approximately $5 million to $10 million annually (in relation to a 2015 general fund operating budget of $144.2 million) that could be cut or deferred.
Long-Term Liability Burden
Overland Park's long-term liabilities are low with the combined net pension liability and overall debt as a percentage of personal income projected by Fitch to be only 5% in fiscal 2016. More than 80% of direct debt matures within 10 years and the city has limited future debt plans.
The long-term liability metric reflects the city's participation in four separate pension plans including the multiple-employer defined benefit pension plan administered by the state, the Kansas Public Employees Retirement System, and separate single-employer plans for police, fire, and general employees. The city makes contractually-required contributions to the state plan that consistently fall short of the actuarially-determined levels, and actuarially determined contributions to each of the single-employer plans. Fitch estimates the ratio of the fiduciary net position to total pension liability for all four pension plans at 77% assuming a 7% discount rate.