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New Issue:

MOODY'S ASSIGNS Aa3 RATING TO THE CITY OF COLORADO SPRINGS, COLORADO, REFUNDING CERTIFICATES OF PARTICIPATION SERIES 2011

27 Apr 2011

Aa2 ISSUER RATING AFFIRMED

Colorado Springs (City of) CO
Municipality
CO

Moody's Rating

ISSUE

RATING

Refunding Certificates of Participation Series 2011

Aa3

  Sale Amount

$15,300,000

  Expected Sale Date

04/27/11

  Rating Description

Certificate of Participation

 

Opinion

NEW YORK, Apr 27, 2011 -- Moody's Investors Service has assigned a Aa3 rating to the City of Colorado Springs Public Facilities Authority Refunding Certificates of Participation Series 2011 in the amount of $15.3 million. The certificates of participation (COPs) are secured by base rental payments, subject to annual appropriation, from the City of Colorado Springs, under a lease purchase agreement issued through the City of Colorado Springs Public Facilities Authority that is subject to annual termination at the city's option. At this time, Moody's has also affirmed the city's Aa2 issuer rating, Aa3 ratings on the city's sales tax bonds, as well as the Aa3 rating on outstanding essential COPs. Proceeds from the sale of the leased assets will fully refund the city's outstanding Series 1999, 2000 and 2003 COPs.

RATING RATIONALE

The Aa3 rating on the current offering reflects the sound combined quality of the pooled leased assets (city hall, Red Rock Canyon Park, and an adult sports complex) and legal provisions which are otherwise standard despite the absence of a debt service reserve.

The rating also incorporates the general credit characteristics of Colorado Springs, including a sizeable tax base, wealth indices consistent with those of other highly populated Aa2-rated municipalities, modest debt burdens, and improving and adequate general fund balances which are nonetheless below the median for Aa2-rated municipalities, especially considering the city's historic dependence on volatile sales tax receipts for operations and limited financial flexibility given restrictive anti-tax measures.

STRENGTHS

- Large tax base with strong institutional presence

- Low debt and lease burdens

- Essential nature of pooled leased assets

CHALLENGES

- Recent trend of declining general fund reserves against declining sales tax receipts

- Restrictive anti-tax measures limit city's financial flexibility

DETAILED CREDIT DISCUSSION

CERTIFICATES SECURED BY ANNUAL BASE RENTAL PAYMENTS

Moody's believes that the possibility of non-appropriation is remote given the affordability of the city's lease burden and the generally sound quality of the pooled essential leased assets. The certificates are secured by the city's pledge to annually appropriate base rental payments equal to debt service to the trustee under a lease purchase agreement, subject to annual termination at the city's option, entered between the City of Colorado Springs Public Facilities Authority (lessor) and the City of Colorado Springs (lessee). Should Colorado Springs choose not to appropriate, the trustee may terminate the lease and give notice to the city to vacate the properties immediately or within 30 days of notice. Legal provisions are largely standard, but lack a debt service reserve fund. The absence of a debt service reserve is partially mitigated by the city's low lease burden, essentiality of the assets, and the current offering's short duration.

The leased assets securing the certificates are valued at $28.5 million and include city hall valued by the city's recent market assessment at $10.3 million, an adult sports complex valued by the city's recent market assessment at $5.6 million, Red Rock Canyon Park valued at $12.5 million based upon the property's 2003 purchase price. Debt service is expected to be paid from a combination of sources: ultimately all legally available revenues are pledged, but funds are expected to come from the general fund and supplemented with monies from the city's 0.1% Trails and Open Space Tax, Conservation Trust Fund (funded by state lottery funds), and Ballfield Capital Improvement Fund. Including the current offering and existing leases, the city's average annual lease burden is modest at $3.9 million (2.1% of fiscal 2010 general fund revenues). Proceeds from the sale of the leased assets will fully refund the city's outstanding Series 1999, 2000 and 2003 COPs, which are being issued under a new master indenture.

MILITARY AND DEFENSE RELATED INDUSTRIES ARE SIGNIFICANT PRESENCE IN ECONOMY

Colorado Springs is the state's second largest city with a total population just over 400,000 in El Paso County (Aa1 Issuer rating). Public sector employers and the military dominate the local economy, providing a large institutional and stable employment base. However, in the second half of the decade troop deployments, housing market slowdown, and expanding retail offerings outside of the city contributed to lowered consumer-related activity and sluggish sales tax collections. In recent years, the return of military troops from Iraq and the addition of new battalions gained from the 2005 BRAC re-alignment helped moderate the recession's impact. It is anticipated that by 2013, up to 15,000 troops and an estimated 24,000 dependents will have been added to Fort Carson.

Growth in full and assessed value has averaged 3.6% and 3.8% annually over the last five years, respectively, reaching a sizeable $39.9 billion and $4.9 billion in 2011. Although city officials project a 10% drop in assessed value, the city's tax base will remain sufficiently large for its rating group. As of February 2011, the city's unemployment rate was 10.2%, above state (9.7%) and national (9.5%) levels. Colorado Springs' wealth indices remained relatively stable and favorable to similarly-rated large cities. As of the 2000 Census, the city's per capita and median family income levels were 93.5% ($22,496) and 95.7% ($53,478) of national levels, respectively.

IMPROVED BUDGET MANAGEMENT ADDRESSES STRUCTURAL IMBALANCES FOLLOWING UNPRECEDENTED SALES TAX REVENUE DECLINES

Typical of Colorado cities, Colorado Springs is highly dependent on sales and use tax revenues for operations, and is beginning to emerge from half a decade of significant financial hardship brought about by unexpected and unprecedented sales tax revenue declines. The city's finances have rebounded in fiscal 2010 after five years of operating deficits as city officials enacted major structural budget changes. Unaudited ending total and undesignated general fund balances for fiscal 2010 were an adequate 20.2% ($44.0 million) and 13.8% ($30.0 million), respectively, which city officials project to maintain through the end of fiscal 2011. Moody's notes the city has returned to above its minimum available reserve policy of 10%, excluding an additional 3% Taxpayer's Bill of Rights (TABOR) reserve. Such reserve levels are above the city's 15.0% average total reserves from fiscal 2005-2009, but significantly below the city's 25% average total reserves from fiscal 1998-2002. Moody's notes that though satisfactory, the city's general fund balances are nonetheless below-average for sales tax reliant cities. In fiscal 2010, sales and use tax revenues generated 56.6% of general fund revenues, followed by charges for services (10.8%), utility surplus transfer (14.3%), property taxes (10.1%), and intergovernmental revenues (9.7%).

City management attributes the prior five years' declining fund balances to a trend of structural imbalance in the budget process, which frequently relied on one time revenue streams and draws on reserves to balance the budget. Notably, the operating deficits of fiscal 2005 and 2006 were due in part to sales and use tax collections falling short of budgeted levels, not actual declines in pledged revenues. In the five years prior to fiscal 2008, sales and use tax receipts averaged a modest 1.8% annual growth, reaching a peak of $125.7 million in fiscal 2007. The city's last multi-year sales tax decline was declines of 3.7% and 2.2% in fiscal 2002 and 2003, respectively. In fiscal 2008 and 2009 the city's sales tax dropped 7.7% and 3.5%, respectively, to $111.9 million. Positively, in fiscal 2010, sales tax receipts returned to 3.3% growth to $115.7 million. For fiscal 2011, city officials have budgeted a modest 1.6% sales tax increase to $117.5 million, and an overall sales and use tax increase of 0.5%.

Positive changes in budget practices began in fiscal 2009, including addressing budget gaps through permanent expenditure cuts, such as wage freezes and the cumulative reduction of 325 positions in all departments, including public safety, rather than one-time measures such as utilizing reserves. Notably, management indicates the fiscal 2011 budget does not rely on one-time savings. Positively, fiscal 2010 sales tax collections were 9.2% above budgeted amounts, while general fund expenditures were 4.4% below budget. Moody's will continue to monitor the city's financial trends, commenting as warranted. Failure of council and management to maintain structurally balanced budgets, resulting in further deterioration of reserves to below adequate levels, combined with a prolonged weak economy could result in downward rating pressure over time.

The city's police and fire pension plans are with Fire and Police Pension Association of Colorado, and as of January 1, 2010 are 100% funded for personnel hired after September 30, 2006. Police and fire pension plans for those hired between April 1978 and October 2006 are 80.0% funded for police personnel and 83.0% for fire personnel, Police and fire pension plans for those hired before April 1978, are 84.1% funded for police personnel and 85.9% for fire personnel hired thereafter, with the city making its full annual required contribution over the last three years. All other employees participate in the Public Employee's Retirement Association of Colorado's Local Government Division (PERA), contributing to both PERA's defined benefit plan and Health Care Trust Fund. As of January 1, 2010 the Local Government Division defined benefit plan is 76.2% funded against an unfunded actuarial accrued liability of $918 million, and the Health Care Trust Fund for all divisions is 21.3% funded against an unfunded actuarial accrued liability of $1.5 billion. Moody's notes that unfunded accrued actuarial liability for other post employment benefits has increased to $74.1 million in 2009 from $57.8 million in 2007 and the net obligation was $7.4 million as of 2009.

OPERATIONS ARE MORE CONSTRAINED THAN MOST CITIES IN THE STATE DUE TO TAX LIMITATIONS, LOCAL VOTED REVENUE RESTRICTIONS

City management is challenged to operate within fiscal constraints brought about by a 1992 state constitution amendment, known as the Taxpayer's Bill of Rights (TABOR), which limits year-to-year revenue growth to a formula based on inflation plus the net growth in the city's assessed valuation; any revenue growth in excess of TABOR limits must be rebated to voters unless they approve an increase in spending. Unlike most major municipalities in the state, Colorado Springs has not "de-bruced," or received voter approval to lift the TABOR revenue restrictions. Moody's notes that at the local level, the city has additional tax limitations under its Charter which limit the general property tax levy to 7 mills, inclusive of debt service. The city's levy is currently well below 7 mills due to TABOR restrictions which require annual mill levy reductions due to tax base growth.

Additionally, in November 2009 voters acted to further restrict city financial flexibility through the rejection of a measure to increase the city's general property tax levy by 1 mill, concurrent with passage of a measure phasing out the city's ability to charge a payment in lieu of taxes (PILT) over eight years beginning fiscal 2010. PILT from Colorado Springs Utility (Aa2 senior revenue rating), the city's combined utility enterprise, historically constitute a large portion of city general fund revenues, averaging $27.2 million annually since fiscal 2006 and accounting for 14.3% of general fund revenues in fiscal 2010. In January 2010, city management remedied the PILT phase-out by replacing the PILT with an equivalent utility surplus transfer, which is scheduled to bring in $31.6 million in fiscal 2011. The continuation of the utility surplus transfer as a legally viable general fund transfer mechanism reinforces the city's budgetary flexibility into the future.

DEBT BURDENS ARE LOW AND FUTURE BORROWING IS LIMITED

Moody's expects the city's debt profile to remain sound given current low debt levels and limited plans for future borrowing. For a large municipality, Colorado Springs has very little direct debt, the bulk of which consists of annual appropriation leases. Direct and overall debt burdens are modest at 0.3% and 1.9%, respectively. However, budget pressures over the years have delayed capital spending, and deferred maintenance issues may become more pressing over time. Due to budget pressures, the city postponed issuing a $23.8 million annual appropriation lease certificate of participation for fire stations and the Venezia Park projects. The city's long term capital plans include the construction of numerous projects which would require returning to voters for general obligation authorization.

WHAT COULD MOVE THE RATING-UP

- Significant growth in the city's full valuation

- Significant improvement in the city's financial position

- Significant improvement in socioeconomic measures

WHAT COULD MOVE THE RATING-DOWN

- Significant deterioration in the city's financial position

- Protracted decline in the city's full valuation

- Protracted decline in the city's sales tax receipts

KEY STATISTICS

2011 full value: $39.9 billion

Full value per capita: $98,362

2009 estimated population: 406,137

2000 census per capita income: $22,496 (104.2% of U.S.)

2000 census median family income: $53,478 (106.9% of U.S.)

Direct debt burden: 0.3%

Overall debt burden: 1.9%

Fiscal 2009 total general fund balance: $26.4 million (11.5% of revenues)

Fiscal 2010 total general fund balance (unaudited): $44.0 million (20.2% of revenues)

Fiscal 2009 unreserved and undesignated GF balance: $11.9 million (5.2% of revenues)

Fiscal 2010 unreserved and undesignated GF balance (unaudited): $30.0 million (13.8% of revenues)

Pension funding, 2009: 79.0% (PERA Retirement Fund)

Other postemployment benefits (OPEB) liability, 2009: $74.1 million UAAL

PRINCIPAL METHODOLOGY AND LAST RATING ACTION

The principal methodology used in rating Colorado Springs, Colorado was Moody's The Fundamentals of Credit Analysis for Lease-Backed Municipal Obligations, published in October 2004.

The last rating action with respect to the Colorado Springs, Colorado, Colorado, was on October 06, 2009, when a municipal scale issuer rating of Aa3 and certificate of participation rating of A1 was assigned to Certificates of Participation Series 2009. The issuer rating was subsequently recalibrated to Aa2, and the certificate of participation rating recalibrated to Aa3, on May 1, 2010.

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, confidential and proprietary Moody's Investors Service 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

Bryan A. Quevedo
Analyst
Public Finance Group
Moody's Investors Service

Dan Steed
Backup Analyst
Public Finance Group
Moody's Investors Service

Matthew A. Jones
Senior Credit Officer
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 Aa3 RATING TO THE CITY OF COLORADO SPRINGS, COLORADO, REFUNDING CERTIFICATES OF PARTICIPATION SERIES 2011
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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