Fitch Rates Anchorage, AK's GO Bonds 'AA+'; Outlook Stable
--$45.6 million GO bonds (general purpose) series 2015A;
--$116 million GO refunding bonds (general purpose) series 2015B;
--$67.1 million GO bonds (schools) series 2015C;
--$81.7 million GO refunding bonds (schools) series 2015D.
The bonds are scheduled to sell via negotiation on or about Nov. 4, 2015. Proceeds will refund outstanding debt, pay cost of issuance and finance the municipality's and Anchorage School District's ongoing capital improvement programs.
In addition, Fitch affirms the ratings on the following Anchorage, Alaska bonds at 'AA+':
--$1 billion outstanding GO bonds.
The Rating Outlook is Stable.
The bonds are payable from an unlimited ad valorem property tax.
KEY RATING DRIVERS
STRONG FINANCIAL POSITION: The municipality's financial profile is solid with budgets roughly balanced and reserves at a healthy level. The municipality also maintains a large permanent trust fund.
MANAGEABLE OPERATING ENVIRONMENT: Anchorage benefits from very stable revenues but has quite limited revenue raising flexibility. Expenditure flexibility is limited by the local collective bargaining framework, but the municipality has managed to control expenses well through headcount control.
STRONG ECONOMIC BASE: The Anchorage economy serves as a hub for government, trade, business, education, healthcare and tourism in the state of Alaska. It solidly outperformed the nation during the last recession, but the local economy is beginning to show signs of a cyclical downturn due to weak oil prices.
ENERGY SECTOR EXPOSURE: The economy is concentrated in the cyclical oil and gas sectors and is vulnerable to volatility.
DIVERSE, STABLE TAX BASE: The tax base is large and diverse. Assessed value (AV) has exhibited considerable stability even during the national real-estate downturn.
MANAGEABLE LONG-TERM LIABILITIES: The municipality's debt profile is healthy with a moderate debt burden and rapid principal amortization. Pension and other post-employment benefit (OPEB) liabilities are moderate, and the municipality benefits from significant state support for local pension obligations.
CONSERVATIVE, PROFESSIONAL FINANCIAL MANAGEMENT: The municipality benefits from strong financial oversight, good long-term planning and conservative budgeting.
FUND BALANCE RISK: The rating could come under downward pressure if unrestricted fund balance declined meaningfully, particularly if it fell below the municipality's fund balance policy. The Stable Outlook means that Fitch does not expect that to happen over the next two years. The rating is unlikely to rise due to the concentrated economic base.
Anchorage is Alaska's largest city with an estimated 301,010 residents in 2014. The city, located on the Cook Inlet in south central Alaska, is home to 41% of the state's population.
HEALTHY FINANCIAL POSITION
Anchorage's financial position is healthy. Budgets have alternated between slight surpluses and deficits in recent years but appear roughly balanced on the whole, but surplus years have generally been slightly larger than deficit year, keeping fund balance in a reasonable range as a percentage of rising expenditures. The municipality drew unrestricted general fund balance down by $3.6 million or 0.5% of expenditures and transfers out in fiscal 2014, the second consecutive year of small operating deficits. Small deficits of this size are not a credit concern so long as the municipality maintains balance on average over time and a healthy reserve position. The municipality expects budgets to remain roughly balanced with a small addition ($7.9 million) to fund balance in 2015 and a small reduction ($5.2 million) proposed in the 2016 budget. However, ongoing deficit spending would put downward pressure on the rating.
Unrestricted general fund balance (the sum of committed, assigned and unassigned categories) equalled a sound $72 million, or 10.1% of general fund spending as of Dec. 31, 2014. Unrestricted fund balance was solid at 15.1% of non-educational expenditures and transfers out.
The Anchorage School District's property tax levy is booked as a revenue and expense of the municipality, but the school district revenues are merely passed through the municipality's accounts and do not put significant additional strain on the municipality's budgets. As such, Fitch considers the municipality's unrestricted fund balance as a percentage of non-educational expenditures to be the best measure of its financial cushion. The school district, reported as a component unit, had its own, healthy 14.1% unrestricted general fund balance at the end of the fiscal year ended June 30, 2014.
The municipality also maintains a permanent trust fund with a balance of $149 million, or 20.9% of general fund spending, at the end of 2014. The trust fund is restricted as to use and could only be transferred to the general fund with voter approval, but it adds an additional potential source of financial flexibility that is unusual among U.S. local governments.
SOMEWHAT RESTRICTIVE REVENUE, EXPENDITURE FRAMEWORKS
The municipality benefits from very stable revenues. Property taxes provide about 60% of general government revenues, and local property tax limits allow rates to offset losses in values. The revenue stream was very stable throughout the last recession. Policymakers and the public are somewhat tax averse, but the municipality has made minor adjustments to tax rates as needed to maintain gradual revenue gains through a period when many other communities suffered declines in revenues. The municipality maintains very limited flexibility to raise additional tax revenues under its tax cap, which limits the total tax levy growth with a calculation that starts with prior year tax revenues (including non-property taxes) as a base and adds adjustments for new construction, inflation and population change.
Rising labor costs created significant spending pressure in recent years, and the municipality's collective bargaining framework somewhat limits policymakers' ability to manage spending with binding arbitration provisions for important labor groups. However, the municipality has maintained rough budget balance over time through position control and negotiations with public employees.
SOUND ECONOMIC BASE
Anchorage's economy and tax base are beginning to show the strain of a deep decline in oil prices, but exhibited notable stability through the most recent recession. The municipality is the center of business, trade, transportation, healthcare, education, government and tourism for the Gulf of Alaska region and accounts for about 55% of the state's economic output. While the economy is strong, it is also concentrated due to heavy reliance on the energy extraction sectors.
Tax base growth slowed during the recent economic downturn, but the municipality's tax base never declined. The $33.7 billion tax base grew a healthy 4.3% in 2014. It is largely residential and benefits from a healthy diversity of payers. The top 10 taxpayers accounted for just 4.9% of 2014 AV.
The labor market appears to be softening with lower oil prices but unemployment remains low. The municipality's non-seasonally adjusted unemployment rate was below state and national averages at 4.5% in August 2015, but payroll employment shrank by 0.9% over the prior 12 months. Median household income is high at 146% of the national level, and the individual poverty rate is low at just 7.9%.
MANAGEABLE LONG-TERM LIABILITIES
The municipality's overall debt burden of $1.2 billion is above average on a per capita basis at $4,131, but remains moderate as a percent of AV at 3.7%. The debt burden is likely to fall over the next few years given rapid amortization of the municipality's bonds (about 77% in 10 years) and limited issuance plans. It will have about $98.4 million of unused GO bond authorizations after the current issue.
The municipality's pension and OPEB liabilities are significant, but state support is also significant. State pension reforms closed the defined benefit plans in 2006 and required newly hired employees to take part in defined contribution pension plans instead, which will slowly relieve pension funding concerns over the next several decades. The municipality's combined debt service, pension and OPEB expenditures - the carrying cost of its long-term liabilities - are manageable at about 14.2% of governmental funds spending.
The municipality's main current pension plans are offered through the Alaska Public Employees' Retirement System (PERS), which provides both pension and OPEB benefits. The plans have large unfunded liabilities, but the burden of increases in pension contributions and investment risks are largely borne by the state. The state reimburses the municipality for pension contributions over 22% of payroll for PERS members, providing stability and predictability to the city's pension contributions.
The municipality's three closed Police and Fire Pension System plans are the primary local pension and OPEB concern, but the long-closed local plans are small relative to the larger liabilities that benefit from state support.