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MOODY'S ASSIGNS A1 RATING TO CITY OF SOMERSET (KY) $5 MILLION G.O, BONDS, SERIES OF 2010

03 Nov 2010

AFFECTS $5 MILLION OF PARITY DEBT, FOLLOWING NET IMPACT OF CURRENT ISSUE

Municipality
KY

Moody's Rating

ISSUE

RATING

General Obligation Refunding Bonds, Series of 2010

A1

  Sale Amount

$4,965,000

  Expected Sale Date

11/04/10

  Rating Description

General Obligation

 

Opinion

NEW YORK, Nov 3, 2010 -- Moody's Investors Service has assigned an A1 rating to the City of Somerset, KY's $4.97 million General Obligation Refunding Bonds, Series of 2010. This series will refund the city's only outstanding parity debt, Series 1999, for a net present value savings expected to approximate 5% and no extension of final maturity. In addition, the current issue will refinance an outstanding bank loan issued on behalf of the city's Water Park as general obligation debt.

RATING RATIONALE:

In addition to the general obligation unlimited tax pledge, the rating reflects the city's modestly sized taxbase characterized by below average socio-economic indicators but which has benefitted from moderate growth. The city's boundaries are largely developed with future growth expected via annexation. The rating also reflects the city's satisfactory financial position that incorporates substantial General Fund support from the city's utility funds as well as a moderate debt burden.

RELATIVELY STABLE TAX BASE

Somerset is located in Pulaski County, approximately 70 miles from Lexington (rated Aa1 with a negative outlook). In fiscal 2011 the city's taxbase reached $949.6 million, growing 3.7% on average annually over the last five years. The city's taxbase demonstrates above average taxpayer concentration with the top ten taxpayers representing 17% of assessed value. The largest taxpayer is the for-profit regional hospital (8.4% of 2010 assessed value), which is reportedly growing. Toyetsetsu America, which supplies automotive parts largely for Toyota, is outside the city limits but is a key regional employer as is Super Service, an interstate trucking carrier. Socio-economic indices are below average with per capita and median family income at 65% and 62% of the national average respectively. Unemployment for Pulaski County is elevated but in line with the state average at 10% in August vs. 10.1% for the state and 9.5% for the nation for the same time period. Full value per capita is a satisfactory $77,864.

MANAGEABLE DEBT BURDEN WITH POTENTIAL TO INCREASE

The city's direct debt burden is 0.8%. While the city does not maintain a formal CIP, it is currently considering a number of General Fund supported projects, which have yet to be quantified, but which could impact debt burden. The city also plans to draw down a $14M rural development loan to be retired by the city's water fund and an $8.5 million KY Infrastructure Authority loan to be covered by the city's waste-water treatment plant. Management reports rates structures have been implemented to ensure continued debt service coverage and satisfactory margins in these funds. In addition to the current issue, the city has a $2.5 million bank note, which is a city obligation but repaid by the local YMCA whose facility the city purchased in light of financial weakness of the not-for-profit. Management reports the building is being leased back to the YMCA for annual debt service and that the note will be paid down and rolled annually over the next three years at which time the YMCA will have the option to repurchase the facility. This note is included in the city's debt burden.

SATISFACTORY BUT DECLINING FINANCIAL POSITION

Moody's expects the city will maintain a satisfactory financial position with ample cash balances outside the General Fund boosting still satisfactory, albeit declining, General Fund reserves. Use of cash for capital has resulted in a significant reduction in General Fund balance in recent years. Fiscal years 2006-2009 reflect a cumulative $6.9 million decline in General Fund balance, largely reflective of $6 million in transfers to the city's Water Park-of which only $800,000 occurred in the last two fiscal years. Management reports the General and Sanitation Funds will continue to budget to cover the operating shortfalls of the city's Water Park-inclusive of debt service. Fiscal 2009 ended with a $1.2 million in reduction in reserves reflective of $600,000 of pay-go capital and an operating imbalance of approximately the same amount, bringing General Fund balance to a still satisfactory $3.2 million or 27.8% of revenues, of which 23.5% is unreserved and undesignated. Unaudited fiscal 2010, ( June 30 fiscal year end), reflect a $1.2 million draw on reserves, which reportedly largely reflects capital spending, including an $800,000 capital contribution to an expansion project at the Water Park. The city's fiscal 2011 budget includes appropriation of $610,000 of fund balance, of which $500,000 is for capital. Despite the city's use of fund balance largely for capital projects, failure to maintain satisfactory financial flexibility could impact credit quality.

Primary General Fund revenues include the property tax, combined net profits and employee withholding and insurance premium taxes, which comprise 21%, 14%, and 20% respectively. Profit-sharing transfers from the city's profitable Gas and Water utilities comprise an additional 16% of 2009 revenues. Property tax rates have been reduced in each of the last three fiscal years, thereby increasing reliance on the more economically sensitive revenues. The city budgets and plans to use its Water, Gas, Sewer and Sanitation funds both as General Fund liquidity and cash flow sources. While these funds maintain strong liquidity ($11 million or 42% of combined enterprise fund revenues) and operations, failure to stabilize General Fund operations , restore structural balance, and maintain satisfactory stand-alone reserves could impact credit quality.

KEY STATISTICS:

2009 Population: 12,195 (U.S. Census estimate)

FY 2011 Full Value: $949.6 million

Full value per capita: $77,864

Direct debt burden: 0.8%

Payout of principal: 100% in 10 years

2009 General Fund Balance: $3.2 million (27.8% of General Fund revenues)

Median Family Income: 76.3%/62.4% of state and national averages respectively

Per Capita Income: 77.6% /65.1% of state and national averages respectively

Parity debt outstanding following current issue: $4.97 million

What could change this rating up:

"Significant tax base growth and diversification

"Improvement in socio-economic indicies

"A trend of General Fund structural balance leading to balance sheet augmentation

"Elimination of Water-Park enterprise risk exposure

What could change this down:

"Failure to restore structural balance to the General Fund and stabilize reserves at a satisfactory level

"Further weakening of Water-Park operations requiring greater General Fund support

"Weakening of cross-fund liquidity and/or ability of utility funds to subsidize General Fund operations

The principal methodology used in rating the City of Somerset (KY) was General Obligation Bonds Issued by U.S. Local Governments, rating methodology published in October 2009. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of assigning a credit rating.

MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Robyn Rosenblatt
Analyst
Public Finance Group
Moody's Investors Service

Leslie Lukens
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service
250 Greenwich Street
New York, NY 10007
USA

MOODY'S ASSIGNS A1 RATING TO CITY OF SOMERSET (KY) $5 MILLION G.O, BONDS, SERIES OF 2010
No Related Data.
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