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MOODY'S ASSIGNS Aa1 RATING TO CITY OF DES MOINES (IA) $75.5 MILLION GO REFUNDING CAPITAL LOAN NOTES, SERIES 2010H

21 Oct 2010

Aa1 RATING APPLIES TO $360.8 MILLION IN POST-SALE PARITY DEBT

Municipality
IA

Moody's Rating

ISSUE

RATING

General Obligation Refunding Capital Loan Notes, Series 2010H

Aa1

  Sale Amount

$75,515,000

  Expected Sale Date

10/27/10

  Rating Description

General Obligation Unlimited Tax

 

Opinion

NEW YORK, Oct 21, 2010 -- Moody's Investors Service has assigned a Aa1 rating to the City of Des Moines' (IA) $75.5 million General Obligation Refunding Capital Loan Notes, Series 2010H. At the same time, Moody's has affirmed the Aa1 rating on the city's outstanding general obligation debt, affecting $360.8 million post-sale.

RATINGS RATIONALE

Debt service payments on the Series 2010H bonds are secured by the city's general obligation unlimited tax pledge; however officials anticipate abating a portion of the debt service with tax increment revenues. Proceeds from the current sale will advance refund outstanding maturities from Series 2002E, 2002F, 2003D, and 2005B currently callable on various call dates. The refunding analysis shows net present value interest rate savings of $3.5 million or about 5% of the refunded par amount. Assignment and affirmation of the Aa1 rating reflects the city's role as the dominant anchor to the state's primary economic and population center; pressured financial operations supported by an adequate level of General Fund reserves; and an above-average debt profile offset by non-levy support for debt service payments.

DOMINANT ROLE AS THE PRIMARY ECONOMIC HUB FOR CENTRAL IOWA

The city's tax base should continue to exhibit moderate growth due to the stable nature of the economy, as officials continue to release tax increment value back to the tax roll, and as substantial land remains for development. The Des Moines economy is anchored by the city's role as the state capitol and is complemented by a diverse business environment that includes financial, insurance, health care and manufacturing concerns. As a result of an average annual increase in the full value equal to 4.5% over the past three years, the city's tax base grew to a sizeable $11 billion in 2009. Additionally, the combined value for the city's tax increment districts totaled $1.2 billion in 2009, of which over $600 million was released for full taxation in fiscal 2011. Despite ongoing weak development patterns throughout the nation, officials report that local construction projects are moving forward including the $194 million Wellmark Blue Cross Blue Shield downtown headquarters building, the Riverpoint West mixed use housing and office project valued at $180 million, and various condominium and residential housing projects, which will promote downtown population growth. Most recently a Belgium-based firm has announced plans to renovate an existing building in downtown Des Moines in order to locate its U.S. headquarters in the facility. Additionally, officials were successful in retaining Aviva Investors, which kept 190 jobs in Des Moines and will add 100 new positions over the medium term. Other favorable economic news includes expansion of Kemin Industries with a $20 million investment to its existing operations with plans to add 100 new jobs over the next five years. We note, Wells Fargo (senior unsecured rating A1/under review for upgrade) one of the city's major employers and taxpayers, recently divested itself of a business line that was primarily located within the city. As a result of the elimination, Wells Fargo will reduce its workforce in downtown Des Moines by 1,000 people. The reduction will be phased in over a multi-year period and officials indicate Wells Fargo will shuffle employees from other locations into its downtown campus. Despite a relatively stable economy, the city's unemployment has increased but continues to trend well below the national rate with August 2010 reflecting 7.8% (compared to the state's 6.6% and national rate of 9.5%). Due to the large government presence city wealth indices approximate state levels, with per capita and median family income at 98.9% and 97.1%, respectively.

ADEQUATE RESERVE LEVELS; MANAGEABLE OPERATING PRESSURES OFFSET BY FINANCIAL FLEXIBILITY

We expect the city's somewhat narrow, though satisfactory financial operations will be maintained due to prudent financial management and ample revenue raising flexibility. The city completed fiscal 2008 with near balanced operations, posting a General Fund balance of $15.1 million, or an adequate 11.3% of General Fund revenues. Of this amount, $10.9 million (or 8.2% of General Fund revenues) remains undesignated. Although the city adopted a balanced budget for 2009, audited results show an operating deficit of approximately $1.5 million, bringing the total General Fund reserve down to $13.8 million or an adequate 10.4% of revenues. At fiscal year-end 2009, the undesignated General Fund reserve declined to approximately $9.4 million or a narrow 7.1% of revenues. Officials indicate the deficit was primarily the result of revenue softening during the second half of the fiscal year and some one-time personnel costs. The major lagging revenues were the city's franchise tax related to utility sales and interest income. The city adopted a balanced budget for fiscal 2010 that initially included a surplus of just under $1.0 million. However, revenue collections continued to trend lower than budgeted projections, requiring officials to significantly reduced expenditures in order to maintain balanced operations for fiscal 2010. The city implemented several expenditure reductions including an ongoing hiring freeze and eliminating 55 positions in April 2010, saving several months of personnel costs. Year-end 2010 projections show the General Fund reserve will remain relatively unchanged. Favorably, the fiscal 2011 budget was adopted closing the budget gap of $5.5 million and closing the projected fiscal 2012 gap of $11.5 million. By eliminating sufficient expenditures in fiscal 2011 to balance the fiscal 2012 budget, officials anticipate ending fiscal 2011 with a $2.0 million surplus, which will assist in rebuilding the General Fund balance to the city's goal of maintaining 10% of expenditures in undesignated reserves.

Despite the city's challenged financial position, ample financial flexibility remains upon which the city could draw to support future budget obligations. Currently the city's General Fund tax rate is at the levy limit of $8.10; however, included under the cap is about $8.5 million in expenditures that could be transferred to the Trust and Agency fund levy, which is unlimited as to rate or amount. Additionally, revenue raised if officials implemented the $0.27 Emergency Fund levy would total $1.7 million while the city could reallocate $5 million in gaming revenue to the General Fund, which is currently diverted to capital projects. While we believe the city's financial position will remain pressured, prudent budget planning and management's commitment to rebuilding reserves coupled with significant financial flexibility provides credit strength to support the current rating level. Any indication that reserves will decline further or that management is unwilling to utilize its budgetary flexibility to stabilize reserve levels, could pose credit pressure. We will continue to review financial results for fiscal 2011 and updates to the fiscal 2012 budget, but we currently do not believe that these negative pressures will arise.

SOMEWHAT LEVERAGED DEBT POSITION; ANNUAL BORROWING EXPECTED

Both Des Moines' direct and overall debt levels are above average at 3.2% and 4.1%, respectively, represented net of debt service supported by non-levy resources. Approximately 35% of debt service requirements are supported by non-levy sources, such as solid waste and tax increment revenues. The city continually re-evaluates its capital improvement plan in order to reduce planned issuance or retire outstanding debt early. Going forward, officials anticipate reducing debt service requirements by an average of $2.5 million annually over the next several years by either refunding debt when financial savings can be realized, narrowing the scope of existing projects, or reprioritizing projects to future years. Annually borrowing will approximate $29.7 million over the next three years. Other borrowing slated for fiscal 2011 includes $9 million in sewer revenue bonds and ongoing evaluation of refunding the Series 2000A parking revenue bonds. We expect the city's debt profile will continue to trend somewhat higher than its similarly rated peers, but remain manageable as direct debt obligations are retired at a favorable 72.4% in ten years, moderate tax base growth continues and as officials remain committed to supporting outstanding debt service requirements with non-levy revenues. All of the city's debt is fixed rate mode and there is no exposure to derivatives or swap agreements.

WHAT COULD CHANGE THE RATING - UP

-Favorable tax base growth and ongoing economic diversification as well as an improved demographic profile

-Substantial improvement in the General Fund reserves

WHAT COULD CHANGE THE RATING - DOWN

-Deterioration of taxable values pressuring the city's major operating revenue stream

-Ongoing weakening of General Fund reserves below similarly rated entities

-Failure to implement revenue enhancements to bolster General Fund reserves or maintain balanced operations

KEY STATISTICS

2000 Census population: 198,682

2009 Full valuation: $11 billion

Full value per capita: $56,086

2000 Median family income as % of state: 97%

2000 Per capita income as % of state: 98%

Des Moines Unemployment (8/10): 7.8% (6.6% IA; 9.5% US)

Overall debt burden: 4.1% (3.2% direct)

Principal amortization (10 years): 72.4%

Fiscal 2009 General Fund Balance: $13.8 million (10.4% of General Fund revenues)

Fiscal 2009 Unreserved General Fund Balance: $9.4 million (7.1% of General Fund revenues)

Post-sale general obligation debt outstanding: $360.8 million

The principal methodology used in rating the City of Des Moines (IA) 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, public information and confidential and proprietary Moody's Analytics' information.

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

Nora Wittstruck
Analyst
Public Finance Group
Moody's Investors Service

Emily Robare
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

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


Moody's Investors Service
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USA

MOODY'S ASSIGNS Aa1 RATING TO CITY OF DES MOINES (IA) $75.5 MILLION GO REFUNDING CAPITAL LOAN NOTES, SERIES 2010H
No Related Data.
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