Fitch Affirms Arvada, CO's Sales Tax Revs, IDR at 'AAA'; Outlook Stable
--$7.5 million sales and use tax bonds, series 2009 and 2013;
--the city's Issuer Default Rating (IDR).
The Rating Outlook is Stable.
The bonds are payable from a 3% sales and use tax in the city.
KEY RATING DRIVERS
The affirmation of Arvada's IDR at 'AAA' reflects the city's strong financial resilience and demonstrated expenditure flexibility, which together provide exceptionally strong gap-closing capacity through economic cycles. The 'AAA' rating also reflects the city's low long-term liability burden, composed mostly of overlapping debt obligations. The 'AAA' sales and use tax bond rating reflects low revenue volatility, a history of solid debt service coverage, and strong growth prospects for the dedicated tax revenues based on positive economic trends. The dedicated tax bond rating is capped at the IDR.
Economic Resource Base
The city of Arvada is located 20 miles northwest of downtown Denver, with an estimated 2016 population of about 117,000. This relatively affluent community is characterized by steady growth and development. The city is part of the broader Denver MSA, which is a hub for state and federal government, telecommunications, and energy.
Revenue Framework: 'aa' factor assessment
Revenue growth prospects are strong, continuing a historical trend in line with U. S. GDP. The city's independent legal ability to raise a small number of locally controlled revenues is satisfactory.
Expenditure Framework: 'aaa' factor assessment
Arvada's fixed costs are low and the city has demonstrated its ability to curtail spending during a revenue downturn. Fitch expects that the natural pace of spending growth will remain below expected revenue gains.
Long-Term Liability Burden: 'aaa' factor assessment
Fitch expects the long-term liability burden to remain low given the city's practice of cash-funding most capital projects. Most city employees participate in defined contribution pension plans, limiting the city's retiree benefit obligation.
Operating Performance: 'aaa' factor assessment
Arvada's expenditure flexibility and robust reserves provide exceptionally strong gap-closing capacity. Strong financial management practices support financial flexibility through economic cycles.
Financial Management Practices: Fitch expects rating stability in the absence of a shift in management practices and/or policy and any resultant weakening of the city's long-term operating profile.
Dedicated Tax Coverage Levels: The sales and use tax bond rating is sensitive to changes in the level of pledged revenues over time compared to maximum annual debt service (MADS) as well as to changes in the city's IDR.
The local economy benefits from a stable residential base, as well as extensive retail along its transportation corridors. The area experienced a sharp increase in housing starts following the recession, and management reports ongoing single-family and mixed-use development as well as growth in permit revenues.
Arvada's assessed valuation experienced a compound annual growth rate (CAGR) of 2.9% in fiscal years 2006 - 2016, moderated by a mild recessionary decline. A new regional light rail line is expected to promote additional construction in the city.
Sales and property taxes make up about 70% and 7% of general fund revenues, respectively. Another 17% of operating revenues comes from a variety of locally controlled sources, including franchise taxes, charges, and fees.
The revenue CAGR for the 10 years ended in 2014 was 3.7%, comparable to the growth rate of U. S. GDP and higher than the inflation rate. Fitch expects this trend to continue based on positive economic growth indicators for the city and MSA.
Any increase in the property or sales tax rate requires voter approval; therefore, the city's independent revenue-raising ability is restricted to moderate increases in other local revenues. A November 2016 ballot proposition will seek approval for an increase in the operating sales tax rate to 3.5% from 3.0%, which would generate an additional $10 million annually for street maintenance.
Public works and public safety each comprise about 30% of general fund spending and transfers out. The general fund typically supports annual pay-as-you-go capital spending ($11 million or 15% in 2015).
Fitch expects that the city's moderate population growth trend will produce a natural pace of spending slower than the strong revenue growth expected.
Carrying costs for debt service and employee benefits are low at 4.5% of 2015 governmental fund spending. Workforce costs are not subject to collective bargaining agreements and Arvada is not responsible for fire protection, which is provided by a separate governmental unit. The city has demonstrated its ability to promptly cut personnel costs during a revenue downturn, and also retains flexibility in its ability to reduce or defer annual capital spending.
Long-Term Liability Burden
The city's practice of funding most capital needs with cash results in a low long-term liability burden of 2% of personal income. The city will likely seek voter renewal of its sales tax bonds following the maturity of currently outstanding debt in 2019, and occasionally issues modest appropriation-backed debt ($11 million in 2016).
Most city employees participate in defined contribution retirement plans. The city's defined benefit police pension plan is closed to new employees, and as of September 2016, officials report no net pension liability.
Arvada's expenditure flexibility and solid reserves provide ample financial resilience and position the city well to manage through a moderate economic downturn while maintaining a high level of fundamental financial flexibility. The city historically maintains reserves in excess of its 17% of spending policy, which is well above Fitch's expectation for a reserve safety margin at the 'aaa' assessment level.
The city's conservative budget practices and multi-year financial projections demonstrate a commitment to building and maintaining flexibility while meeting capital needs. Arvada outperformed its deficit general fund budget in 2015 with a solid surplus of $6.7 million (9% of spending) after transfers, attributable to strong building activity and conservative spending assumptions. Management projects similarly strong budget performance in 2016 due to a new sales tax generator. The city's 10-year general fund projection maintains fund balance above the city's policy level using conservative assumptions for both revenues and expenditures.
Sales and Use Tax Revenue Bonds
Pledged revenues grew historically at a compounded annual rate of 5.5%, well above inflation and U. S. GDP, including a modest recessionary decline. Strong growth prospects for these revenues are based on an expectation of continued economic growth in Arvada.
To evaluate the sensitivity of the dedicated revenue stream to cyclical decline, Fitch considers both the revenue sensitivity results (using the same 1% decline in GDP scenario that supports assessments in the IDR framework) and the largest decline in revenues over the period covered by the revenue sensitivity analysis. Based on the city's pledged revenue history, Fitch's analytical sensitivity tool (FAST) generates a 1% scenario decline in pledged revenues. The largest actual cumulative decline in historical revenues is 3.2% in fiscal year 2009.
The revenue stream performs well when subjected to Fitch's stress analysis. Assuming issuance to the additional bonds test (ABT) that requires 3x MADS coverage, well below current coverage, the stream could tolerate a 67% drop and still cover MADS. This result is 67x the scenario decline and almost 21x the largest actual revenue decline in the review period.
In addition to the strong ABT, additional issuance is more effectively restricted by the city's application of pledged revenues in excess of debt service to fund general operations.
The rating on the sales and use tax bonds is capped at the city's IDR. Fitch does not view the pledged revenues as special revenues under section 902(2)(B) of the bankruptcy code, which defines 'special excise taxes imposed on particular activities or transactions' as special revenues.