OREANDA-NEWS. Fitch Ratings has affirmed the 'AA' rating on the following bonds of Rio Rancho, New Mexico (the city):

--\$17.8 million general obligation (GO) bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the city, payable solely from ad valorem property taxes that are required to be levied without limitation as to rate or amount.

KEY RATING DRIVERS

STABLE LOCAL ECONOMY: The city is part of the broad economic base of the Albuquerque metropolitan statistical area (MSA). Both the city and MSA have been slow to recover recessionary employment losses although the unemployment rate remains moderate. Wealth indicators are generally at or above national medians.

SOUND BUT PRESSURED FINANCIAL POSITION: City operations are heavily dependent on gross receipt taxes (GRT), which have experienced sluggish growth and are pressuring the city's financial position. Aggressive cost cutting measures have stabilized the city's financial operations although recent and planned pay-go capital outlays have caused the city's reserves to hover close to its reserve target.

MANAGEABLE LONG-TERM OBLIGATIONS: Fitch expects that limited debt issuance plans will allow the city to maintain a moderate debt burden. Pension and other post-employment benefit (OPEB) requirements are well-managed and total carrying costs are moderate.

RATING SENSITIVITIES

RELIANCE ON VOLATILE REVENUES: The rating is sensitive to shifts in budgeted reliance on economically sensitive revenues and the ability to return to compliance with its internal reserve target.

CREDIT PROFILE

The relatively new city of Rio Rancho, founded as a development in the mid-1960s, lies just northwest of Albuquerque. The 2013 population of 91,956 represents one of the fastest growth rates in the nation, increasing on average 5.2% annually since the 2010 census.

DIVERSE REGIONAL ECONOMY

The city benefits from the employment base of the adjacent city of Albuquerque and its environs, underscored by government, military, and high technology research and manufacturing concerns. Kirtland Air Force Base (6,095 civilians and 4,520 military active duty) is also one of the area's largest employers. The city's own employment base is anchored by the Intel Corporation (3,300 employees), Pueblo of Sandia Casino (1,800 employees), customer call centers, and the local government.

Socio-economic metrics are mixed but generally positive. Median household income is moderately above the U.S. average but has been stagnant in the wake of the recession. Sluggish employment growth and a modest labor force contraction reduced the unemployment rate to 6.6% in 2014, modestly above the state and U.S. average. The unemployment rate fell to 5.6% as of March 2015 from 6.8% a year prior due to strong employment gains.

MODEST GAINS IN HOUSING MARKET

Building activity is stirring again but remains well below pre-recessionary rates. The largest residential development, the Stonegate subdivision, has the potential to add a total of 823 residential units, totaling \$26 million, over the next decade.

Local prices show tepid signs of a recovery. While median prices continue to fluctuate, the city has experienced increases of 1.9% from 2014 to 2015 on a year-over-year basis. The AV increase signals stabilization within the housing market. In addition, housing sales and days on the market improved over the past year. Assessed Values (AV) remained flat in fiscal 2015 after declining by an aggregate 10.2% over the fiscal 2012-2014 period. The city has seen steady decreases in foreclosure rates since 2013. Fitch believes that the area's fundamentally stable and diverse employment and economic base supports sustained intermediate to long-term growth.

REAL ESTATE VOLATILITY AFFECTS PERFORMANCE

The revenue base is notably reliant upon sources that historically have fluctuated in tandem with the changes in the real estate market, as is common in most New Mexico municipalities. The economically sensitive GRT comprises about one-half of general fund revenues. At the height of the housing boom prior to the recession, taxable gross receipts from the construction sector equaled a large 40.6% of total receipts in fiscal 2007. The significant decline in homebuilding activity and general consumer spending during the downturn led to a cumulative decline of 26.5% in municipal and state-shared GRTs in fiscal years 2008-2010.

GRT growth returned in fiscal years 2011 due to the mid-year adoption of an additional 0.25% GRT for general purposes. A full year's collection of the 0.25% GRT led to a modest 2.3% GRT gain in 2012 before declining by 5.2% in fiscal 2013 due to the completion of a large hospital project in the prior year. A modest gain of 2.2% followed in fiscal 2014 during which taxable receipts from the construction sector accounted for a modest 12.4% of total receipts. The largest sectors of taxable gross receipts in fiscal 2014 are retail (42.8%) and services (29.5%) which have demonstrated considerably less volatility than the construction sector.

To mitigate the impact of GRT volatility, the city prudently dedicates GRT spikes attributable to large construction projects for one-time uses. To offset the 15-year phase-out of hold harmless funding for state-waivers on GRTs for food and medicine, the state authorized cities to impose a GRT (not to exceed 0.375%) starting in fiscal 2016. If imposed in its entirety, the 0.375% GRT would generate an estimated \$3.3 million in revenue (6.3% of estimated fiscal 2015 spending) although its adoption is currently not under consideration. Other available GRTs require voter approval.

Property tax collections comprise nearly one-quarter of the city's general fund revenues. Collections have risen, as assessed valuation declines have been moderate and the city has consistently adjusted the tax rate within effective tax rate limitations. The city is currently at the yield control cap of 11.85 mills.

PAY-GO OUTLAYS DRIVE MODEST DRAWDOWNS

The city's reserves remain sound but somewhat pressured by sluggish revenue trends and pay-go capital outlay needs. The city ended fiscal 2014 with a modest general fund drawdown of \$480,000 equal to 0.9% of spending due in part to \$956,000 in pay-go capital outlays. The unrestricted fund balance remained solid at \$13.8 million or 25.4% of spending.

The city typically far exceeds the state-required one-month reserve (8.3%). The city further targets an aggregate reserve of 15% (inclusive of the one-month reserve) on a budgetary basis which the city did not achieve in fiscal 2014. However, on a GAAP-basis, the fiscal 2014 audit's days cash on hand totaled 68 days or 18.7% of fiscal 2014 expenditures and transfers out.

Management expects to achieve its 15% budgetary-basis fund balance target in fiscal 2015 although on a GAAP-basis it projects a \$1 million drawdown due partly to \$600,000 in fleet replacement outlays. Fiscal 2015 revenue trends are positive with GRT core growth of 4.5%. Including construction-related GRTs (which the city allocates for capital projects) increases the projected gain to 6.7%.

The proposed fiscal 2016 budget includes a \$1.6 million drawdown (2.7% of spending) due entirely to a \$1.7 million use of reserves for matching grant purposes. As a result, management expects to fall short of its 15% target. The budget assumes a 3.4% gain in GRTs and funds a modest 1.5% pay hike. The city's five-year forecasts projects moderately larger annual gains in GRTs (4.2% - 6.3%) which Fitch views cautiously.

MANAGEABLE DEBT PROFILE

The debt burden is moderate at \$2,672 per capita and 3.7% of market value. Amortization is very rapid at 74.9% of principal retiring within ten years.

Future capital needs appear manageable. The city's \$277 million fiscal 2015 - 2020 infrastructure and capital improvement plan (CIP) decreased 2% from the prior year, as the city removed projects due to a lack of funding. Approximately 48% of the projects are attributable to the city's water and wastewater system utility revenue bonds (rated 'A+'/Outlook Stable by Fitch). Intermediate tax-supported debt plans are limited.

Nearly all city employees participate in the Public Employee's Retirement Association (PERA) of New Mexico, a cost-sharing multiple-employer (CSME) defined benefit (DB) retirement plan. The city fully funds the statutorily determined contribution amount. PERA reforms effective in 2013 increased annual contribution rates and established a new tier of benefits for new hires which Fitch considers prudent.

Such reforms increased PERA's funded position to 75.8% as of June 30, 2014, up from 65% two years prior (pre-pension reform). Using Fitch's adjustment to reflect a 7% rate of return, the 2014 estimated funded position is lower but adequate at 70%.

Similarly, employees participate in a CSME DB OPEB plan, with a statutorily determined contribution determined by the state legislature. Carrying costs for debt service, pensions, and OPEB equaled a moderate 19% of governmental spending in fiscal 2014 and do not pressure the city's financial profile.