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MOODY'S ASSIGNS Aa1 RATING WITH A NEGATIVE OUTLOOK TO MINNEHAHA COUNTY'S (SD) $2.1 MILLION CERTIFICATES OF PARTICIPATION, SERIES 2011A

22 Aug 2011

Aa1 RATING AND NEGATIVE OUTLOOK APPLIES TO $35.6 MILLION POST-SALE PARITY DEBT

County
SD

Moody's Rating

ISSUE

RATING

Certificates of Participation, Series 2011A

Aa1

  Sale Amount

$2,075,000

  Expected Sale Date

08/23/11

  Rating Description

Certificates of Participation (GOLT)

 

Opinion

NEW YORK, Aug 22, 2011 -- Moody's Investors Service has assigned a Aa1 rating with a negative outlook to Minnehaha County's (SD) $2.1 million Certificates of Participation, Series 2011A (GOLT). Concurrently, Moody's has affirmed the Aa1 rating and assigns a negative outlook to the county's $35.6 million of its outstanding post-sale parity debt.

SUMMARY RATING RATIONALE

Certificate security is provided through the lease agreement requiring the county to include in its annual budget funds sufficient to pay for all lease payments. The county's obligation to make lease payments is backed by its absolute and unconditional limited tax pledge. Proceeds will be used to refund all or a portion of Certificates of Participation, Series 2004, 2007B and 2008 originally issued for various capital improvements. Assignment of the Aa1 rating reflect the county's sizeable tax base anchored by the city of Sioux Falls; pressured financial operations with satisfactory reserves; and manageable debt levels. The assignment of the negative outlook reflects our expectation that the county's General Fund reserve level may continue deteriorate in fiscal 2012 given the tentative nature of budget plans, which could diminish overall credit quality of the county over the near to medium term

STRENGTHS

-Stable economic base bolstered by low unemployment and continued development

-Limited debt burden with rapid repayment

CHALLENGES

-Ongoing General Fund operating deficits resulting in a draw on reserves

-Decline in economically sensitive revenue streams

DETAILED CREDIT DISCUSSION

COUNTY'S STABLE TAX BASE ANCHORED BY SOLID SIOUX FALLS ECONOMY

Located in southeast South Dakota, Minnehaha County encompasses a large, 810 square mile area, much of which is devoted to corn and livestock production. The county's sizeable $14.0 billion tax base has grown at a solid 5.0% five year average annual rate between 2005 and 2010. Approximately 78% of the population however lives in Sioux Falls (sales tax rated Aa2) which serves as the county seat and acts as the regional economic driver. The county's 2010 population of 169,468 is a 14.3% increase over 2000. The economy is anchored by financial services, with Citigroup (long-term rating A3, rating under review - possible downgrade) and Wells Fargo (long-term rating A1, rating under review - possible downgrade) together employing nearly 6,000, but is further diversified by health care and food processing/agricultural support industries. Sioux Falls is also home to two large hospital campuses, making it a regional medical center. As a result of the broader national economic downturn, the local housing market has seen a softening of the overall value of permits issued through 2010, though officials report the lowest foreclosure activity over the last three years. Minnehaha County's wealth levels exceed state indices, but equate national levels, while its June 2011 unemployment rate of 4.6% continues to equate to the state rate and compare favorably to the national rate (9.3%) for the same time period. It is expected that the local economy will to continue to experience solid growth, fueled by strong population growth; business costs among the lowest in the nation as the state does not levy a personal income tax, corporate income tax, or inventory tax; and high-wage employment opportunities.

PRESSURED FINANCIAL OPERATIONS RESULTING IN SIGNIFICANT DRAW ON RESERVES; ONGOING RIGHT SIZING OF EXPENDITURES TO REVENUES PLANNED

The county has recently experienced a sharp decline in key revenue streams, resulting in pressured financial operations and the need for the county to right size expenditures to available revenues. In fiscals 2006 and 2007, revenues from the county jail and strong bank franchise tax receipts resulted in a $11.1 million General Fund balance at the close of fiscal 2007, which was equal to a healthy 28.7% of General Fund revenues. Starting in fiscal 2008, the county started to post operating deficits in its General Fund, a trend that was exacerbated by the recent economic downturn. The result was a draw of reserves through fiscal 2009, bringing the General Fund reserves to $9.2 million or 22.2% of revenues. Notably, much of the decline in 2009 was due to one-time planned capital projects. Officials report the General Fund posted another operating deficit in fiscal 2010, totaling $2.2 million, further depleting reserves to $7.0 million at the end of the fiscal year and are currently projecting an operating deficit of $2.0 million in fiscal 2011. Key drivers for the recent operating deficit include declines in major revenue streams, including bank franchise fees, prisoner revenue and interest income. Bank franchise taxes have declined sharply over the last two years, falling from $2.0 million of General Fund revenues in fiscal 2009 to a projected $690,000 in fiscal 2011, a $1.3 million or 65% decline. Prisoner revenue, which was realized from a sizeable portion of the prisoners being imported from various jurisdictions (including both federal and surrounding counties), fell from $2.9 million in fiscal 2009 to a projected $2.2 million in fiscal 2011 as the population composition became more concentrated with local inmates. Interest income fell by nearly $313,000 over the two year period, falling from $398,000 in fiscal 2009 to $85,000 in fiscal 2011. Favorably, the county has begun to implement significant expenditure reductions in 2011, including a hiring freeze and $1.45 million in General Fund expenditure reductions. The county will use the $1.8 million of savings from the current issuance for operating expenditures in the current year. For fiscal 2012, the county is projecting balanced operations as it looks to implement additional expenditure reductions, including reducing wages across-the-board by 5% for all employees, along with a 7.25% budget reduction for individual departments. It is noted that if the county is not able to enact sufficient budgetary adjustments in fiscal 2012 and draws down its fund balances further below projected fiscal 2011 levels, this could impact long-term credit quality. We will continue to monitor the county's financial operations and its ability to maintain sufficient liquidity in the General Fund.

Counties in South Dakota are governed by property tax mill rate caps equal to $12.00 per $1,000 of assessed value for the General Fund and $0.90 per $1,000 for its Building Fund, both of which are subject to annual growth limited by the lesser of 3% or CPI, plus new construction. Local governments under state law are required to assume only 95% collection rates on all revenue sources, which generally results in some budgetary flexibility given the county's high collection rates. The county has additional revenue flexibility via room under its property tax cap and its ability to implement 'opt out' levies with the approval of two-thirds of the county's commissioners. Several opt out levies have been approved in the past to cover increased expenses associated with specific functions or to offset a revenue loss, including permanent levies in 2000 and 2003 and 20 year term levies approved in 2005 and 2006. The county has indicated it may consider another opt out levy over the near term. Minnehaha does not own or operate a hospital or nursing center and participates in a state-wide, multi-employer pension system that posted a 96% funded ratio at the close fiscal 2010.

MANAGEABLE DEBT BURDEN EXPECTED TO CONTINUE

At 0.3% of full valuation of property, the County's direct debt level is low, yielding a very low $210 direct debt per capita. The certificates constitute general obligations of the county and are not subject to appropriation. Like the General Fund, the Building Fund is subject to levy limits, though the growth limit is for the total levy. Minnehaha County retains the option as to how to allocate its allowable levy growth between the two funds. Minnehaha County still retains significant margin under its property tax caps for the General and Building funds. No major issuance plans have been identified over the near term although the county's detention center needs will likely need to be addressed over the medium term. Given limited future borrowing needs, average principal amortization and continued tax base growth, it is expected that the county's debt burden will remain manageable.

Outlook

The negative outlook reflects our expectation that the General Fund reserve level may continue deteriorate in fiscal 2012 given the tentative nature of budget plans, which could diminish overall credit quality of the county over the near to medium term. We believe the county's ability to maintain structural balance for its operating budget and rebuild its operating reserves may be challenging given ongoing revenue pressures.

What could change the rating - UP (or removal of the negative outlook)

- Continued trends of balanced or surplus General Fund operations with limited reliance upon non-recurring revenue enhancements or expenditure reductions

- Maintenance of tax base and demographic profile

What could change the rating - DOWN

- Continued structural imbalance in the General Fund leading to material declines in fund balance and liquidity

- Further economic deterioration, resulting in continued stagnation of major revenue streams and increasing pressures on county operations

- Significant declines in the county's tax base or income indices

KEY STATISTICS

2010 Population: 169,468 (14.3% increase since 2000)

2010 Full Valuation: $14.0 billion

2010 Estimated Full Value Per Capita: $82,439

Minnehaha County Unemployment Rate (June 2011): 4.6%

2000 Per Capita Income as a % of State: 117.9% (96.0% of US)

2000 Median Family Income as a % of State: 120.3% (104.0% of US)

Fiscal 2009 General Fund Balance: $9.1 million (22.2% of revenues)

Direct Debt: 0.3%

Overlapping Debt: 1.4%

Post-Sale GOLT debt: $35.6 million

Outlook

The negative outlook reflects our expectation that the General Fund reserve level may continue deteriorate in fiscal 2012 given the tentative nature of budget plans, which could diminish overall credit quality of the county over the near to medium term. We believe the county's ability to maintain structural balance for its operating budget and rebuild its operating reserves may be challenging given ongoing revenue pressures.

What could change the rating - UP (or removal of the negative outlook)

- Continued trends of balanced or surplus General Fund operations with limited reliance upon non-recurring revenue enhancements or expenditure reductions

- Maintenance of tax base and demographic profile

What could change the rating - DOWN

- Continued structural imbalance in the General Fund leading to material declines in fund balance and liquidity

- Further economic deterioration, resulting in continued stagnation of major revenue streams and increasing pressures on county operations

- Significant declines in the county's tax base or income indices

KEY STATISTICS

2010 Population: 169,468 (14.3% increase since 2000)

2010 Full Valuation: $14.0 billion

2010 Estimated Full Value Per Capita: $82,439

Minnehaha County Unemployment Rate (June 2011): 4.6%

2000 Per Capita Income as a % of State: 117.9% (96.0% of US)

2000 Median Family Income as a % of State: 120.3% (104.0% of US)

Fiscal 2009 General Fund Balance: $9.1 million (22.2% of revenues)

Direct Debt: 0.3%

Overlapping Debt: 1.4%

Post-Sale GOLT debt: $35.6 million

PRINCIPAL METHODOLOGY USED

The principal methodologies used in this rating was General Obligation Bonds Issued by U.S. Local Governments published in October 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a 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 Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

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

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's 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 www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Analysts

Genevieve Nolan
Analyst
Public Finance Group
Moody's Investors Service

Edward Damutz
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

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


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

MOODY'S ASSIGNS Aa1 RATING WITH A NEGATIVE OUTLOOK TO MINNEHAHA COUNTY'S (SD) $2.1 MILLION CERTIFICATES OF PARTICIPATION, SERIES 2011A
No Related Data.
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