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Rating Update:

MOODY'S DOWNGRADES LAS VEGAS, NEVADA GENERAL OBLIGATION BONDS TO Aa2 FROM Aa1; OUTLOOK REVISED TO STABLE FROM NEGATIVE

17 Dec 2010

APPROXIMATELY $397 MILLION IN LIMITED TAX GENERAL OBLIGATION AND $188 MILLION IN LEASE REVENUE DEBT AFFECTED

Las Vegas (City of) NV
Municipality
NV

Opinion

NEW YORK, Dec 17, 2010 -- Moody's Investors Service has downgraded the City of Las Vegas, Nevada's general obligation limited tax bonds to Aa2 from Aa1 and the city's Certificates of Participation (City Hall Project), Series 2009A&B have also been downgraded to Aa3 from Aa2. The outlook on Las Vegas' long-term debt has been revised to stable.

RATING RATIONALE

The downgrade to Aa2 from Aa1 reflects the expectation that additional budgetary pressures will remain through at least fiscal 2012, especially given the likelihood of an additional decline in assessed value which will result in a similar rate of decline in property tax revenues. The downgrade also recognizes that while visitor volume has rebounded somewhat, lower spending by visitors continues to result in tepid growth in consolidated tax revenues. The Aa2 limited tax rating primarily reflects the city's favorable long-term credit characteristics including healthy financial reserves when factoring in the revenue stabilization fund, generally conservative budgeting practices and a timely response to the effects of the recession, and a manageable level of debt, much of which is paid from dedicated revenue sources. Moody's notes that these strengths help mitigate the potential budgetary risks associated with the city's concentrated economy, which in the current downturn is having a negative effect on certain tax revenues and on the growth in taxable values.

ECONOMY HURT BY THE RECESSION ALTHOUGH DECLINE IN VISITOR VOLUME APPEARS TO BE MODERATING; PROPERTY TAX BASE GROWTH TO BE NEGATIVELY IMPACTED BY RESIDENTIAL AND COMMERCIAL SECTOR WEAKNESS

The Clark County / Las Vegas metropolitan area has been among the fastest-growing in the nation for years, though the current recession has brought that growth rate down significantly. Las Vegas experienced a large housing boom in recent years, and has experienced a proportionate fall, experiencing high foreclosure rates and a decline in median prices. The housing market downturn has therefore resulted in property tax base declines, and along with decreased visitor volumes to Las Vegas, has had a negative impact on locally generated revenues and area employment.

As a result of decreased travel to the Las Vegas metropolitan area and diminished spending once there, gaming and related industries are experiencing a serious downturn. According to the Las Vegas Convention and Visitors Authority (LVCVA), annual visitor volume to Las Vegas in calendar year 2009 declined by 3.0% to 36.35 million, the second year in a row of visitor declines. Visitor counts have rebounded, however and current year-to-date figures through October 2010 show a 2.8% increase over the prior year period, as compared to the 3.9% decline as of October 2009. Should the current trend continue through the end of 2010, visitor volume will be roughly equivalent to the 2004 level. Gaming revenues generated within Clark County (GOLT bonds rated Aa1/stable outlook) in calendar year 2009 were down 9.8% over the prior year which represents a similar decline to that experience in 2008. Through October 2010, the gaming revenues have experienced a modest 1.7% rebound county-wide, and a 5.4% increase on the Las Vegas Strip. Although these figures provide one metric regarding economic activity in the Las Vegas metropolitan area, Moody's believes that it is important to note that local governments like the city, and unlike the State of Nevada, do not rely on gaming tax revenues to support operations.

Although the opening last year of the MGM CityCenter and the imminent opening of the Cosmopolitan may provide some employment relief for the metropolitan area, unemployment levels in the city are also being pushed up because of losses in retail and construction, which combined compose about 20% of total metro employment (leisure and hospitality represents 30%). As of October 2010 the preliminary unemployment rate decreased slightly to 14.1% from the September peak of 15.0%, but remains amongst the city's highest unemployment levels since December 1982 (13.0%). Until the national economy improves and supports increased visitation volumes and local housing affordability improves resulting in eventual residential construction activity, the local economy will remain in a prolonged recession.

Although tourism continues to be the primary draw and economic driver for Las Vegas, the city has spearheaded redevelopment efforts for its downtown area, including the remodeling and renovation of existing hotels and casinos, planned future construction of retail and restaurant establishments. The new Las Vegas City Hall, currently under construction, is part of the city's broader redevelopment strategy for its downtown area. The Smith Center for the Performing Arts is a component of a 61 acre redevelopment of the former Union Pacific Railroad depot adjacent to downtown and to the Clark County Government Center, World Market Center, and the Premium Outlet Mall. The World Market Center is a national destination for the furniture industry with over 5 million square feet of showroom space, and an additional 7 million square feet planned. The redevelopment project area also includes the Frank Gehry designed Cleveland Clinic Lou Ruvo Center for Brain Health and is also expected to be comprised of a variety of residential and office projects. It is highly likely, however, that private sector development in the area will be stunted by the recession.

Resident wealth levels are consistent with state and national norms according to the 2005 - 2009 U.S. Census estimates. Given the decline in assessed values for 2011 the city's full value per capita of $66,275 is below the median of all U.S. cities, and well below the national Aa1 rated city median. Between 2004 and 2009 the five-year average annual increase in full valuation was a healthy 16.8%, although recent years were below average. In 2010 and 2011, however, the city experienced substantial decreases in taxable values of 26.8% and 25.0%, respectively, resulting in a 45% contraction over the two year period. As a result, full valuation declined over the most recent five-year period (2006 - 2011) at an average annual rate of 3.6%. The top ten taxpayers compose a moderate 8.0% of 2011 AV. Of those ten, two of the largest, composing 2.4% of 2011 AV filed for bankruptcy in the last eighteen months: General Growth Properties Inc. and Station Casinos. To date both entities have paid property taxes on time; Moody's will continue to monitor the effects of the bankruptcy proceedings on each entities' ability to pay property taxes on time. City management anticipates a further decline in AV in 2012, although preliminary estimates will not be known until March 2011.

ABATEMENT ACT PROVIDED INITIAL CUSHION AGAINST DECLINES IN PROPERTY TAX REVENUES, THOUGH CUSHIONING EFFECT HAS BEEN ELIMINATED GOING FORWARD

The Abatement Act, which is comprised of Assembly Bill 489 and Senate Bill 509 and became effective in fiscal 2006, limits annual increases in property tax bills for residential properties to 3% plus new construction. Commercial properties and second home owners have a tax cap equal to the lesser of 8% or the average annual change in taxable values over the last ten years, plus new construction. When the city was experiencing rapid tax base growth, the legislation did not have a significant financial impact on the Las Vegas given its ability under the Abatement Act to capture new growth on the tax rolls. Indeed, because the city did not completely capture the benefit of the large double-digit tax base growth experienced from 2005 to 2008, the act provided a fiscal 2009 cushion of approximately $46.8 million in the event of declines in assessed value. As a result of the steep taxbase declines in 2010 and 2011, the value of the abatement has effectively been eliminated. It is likely, therefore, that in the absence of any new construction being added to the tax rolls, any further drop in assessed value will result in a corresponding decline in property tax revenues.

LAS VEGAS ENTERED THE RECESSION SOMEWHAT WELL-POSITIONED FINANCIALLY; CITY EXPERIENCED LARGE OPERATING DEFICIT IN 2010 AND WILL FACE SIGNIFICANT CHALLENGES OVER THE NEXT TWO FISCAL YEARS

City financial operations have historically been well-maintained, generating regular operating surpluses and healthy unreserved general fund balances averaging approximately 18% of general fund revenues between fiscal 2005 and fiscal 2009. The state's consolidated tax, a population and assessed value based distribution of sales, gaming, motor vehicle, cigarette, and real estate taxes, represents the city's largest revenue source at approximately 43% of general fund revenues in fiscal 2010. Property taxes (25% of general fund revenues), and licenses and permits (17%) represent the majority of remaining general fund resources. Following double-digit growth rates in for the consolidated tax during the earlier part of the decade, growth in these revenues flattened in 2007, then declined by 6.4% in 2008, followed by declines of 12.3% in 2009 and 8.4% in 2010 resulting in a five-year average annual contraction rate of 3.3% between 2005 and 2010. Property taxes increased by 5.1% over the same period due to the affects of the Abatement Act, but declined by 6.9% in 2010. While expenditure cuts kept pace with revenue declines during 2008 and 2009, in 2010, however, general fund expenditures exceeded general fund revenues by a significant margin, resulting in a nearly $18 million deficit. As a result, the general fund balance declined to $74.8 million (16.0% of revenues). Moody's notes that this decline is an improvement over the city's mid-year projections, largely as a result of expenditure cuts, and still remains above the city's general fund reserve policy.

Officials have responded to revenue fluctuations with timely budget adjustments over the last three fiscal years in response to the economic slowdown. Over past four years 590 position have been eliminated to date; 270 of which were layoffs. The remaining positions were eliminated through voluntary separation program or the elimination of vacancies. Twenty-four management and appointed (non-union) positions will be eliminated in January 2011 which is expected to result in savings of $3 million. The city negotiated a new contract through fiscal 2013 with the Las Vegas City Employee Association (LVCEA - the city's largest bargaining unit) expected to save $10 million per year. The terms include no COLA or step increases, and a 5% salary reduction resulting from a shorter work week. A new fire contract is expected to generate savings of $5.6 million. The terms include no COLA increase, no uniform allowance and the reduction of city funding of a trust fund by $1.8 million. The city council also approved a variety of fee increases expected to increase revenues by approximately $2.5 million.

For the duration of the economic downturn, the city council relaxed its general fund reserve policy for planning purposes to 10% from 12%, although in fiscal 2009 it also established additional reserves outside the general fund initially in the amount of $50.5 million. This fiscal stabilization special revenue fund (FSF) is available for any general operating purposes. Including the FSF and the unreserved general fund balance the city's fiscal 2010 available fund balance equals $126.5 million, or 27.1% of general fund revenues. The city's revised projections for fiscal 2011 to fiscal 2015 indicate a structural deficit which will result in a steady decline in general fund balance over the period. In the near-term, the general fund balance will decrease to 15.0% in 2011 and 12.8% in 2012. The projections include flat total revenue growth and a 3.3% decline in expenses (depending on the outcome of labor negotiations) in 2011 and a 4.4% decline in revenues (which incorporates 2.7% growth in consolidated tax and a 14% decline in property tax revenues) and a 2.7% decline in expenditures in 2012. However, the financial projections indicate that the revenue stabilization special revenue fund will be maintained through 2015.

MODERATE DEBT POSITION; SIGNIFICANT PORTION OF DEBT IS SUPPORTED BY SOURCES OUTSIDE THE GENERAL FUND

Moody's notes that the majority of the city's limited tax general obligation debt is secured by specific revenues such as 15% of the consolidated tax, net revenues of the sewer system, and other revenues outside the general fund. Approximately 35% of the city's general obligation debt is supported by the consolidated tax although Moody's notes that coverage by this pledged revenue has declined somewhat in recent years to 3.0 times in 2010. Approximately 17% of the city's general obligation debt is supported by the sewer fund providing healthy coverage of debt service (4.7 times in 2010) and which maintains substantial financial reserves ($155 million in 2010 which results in 1,271 days cash on hand). Given the city's policies regarding enterprise fund operations, including the biennial review of rates and user fees, and a demonstrated history of adhering to or exceeding these policies which have resulted in healthy operations for the wastewater enterprise, Moody's believes the potential need for general fund support for the utility's debt and operations is remote.

In 2009, the city issued $188 million in certificates of participation which represent the city's only major lease obligation. The city's lease burden is a somewhat modest 3.9% of fiscal 2010 general fund revenues. Over time, the city anticipates that a portion of the lease payments may be paid with tax increment revenues generated in the downtown area. The combination of an above-average rate of debt repayment (57% of limited tax G.O. debt in ten years) and the significant amount of self-supporting debt help moderate direct and overall debt levels. At 3.3%, the city's overall debt burden is manageable and is composed largely of local school district debt. The city's 1.3% direct debt burden is slightly above the national median for cities, and will likely exceed the median as taxable values decline. Moody's notes the city does have variable rate debt outstanding representing 5% of total obligations ($32 million) consisting entirely of the General Obligation Variable Rate Various Purpose Bonds, Series C (unrated by Moody's). Lloyds TSB is the liquidity provider for the direct pay letter of credit with an expiration of August 21, 2013; there are no swaps associated with transaction. Additional general obligation borrowing plans are modest and include approximately $15 million in addition general obligation debt to be issued in early 2011.

What could change the rating - UP

- Significant economic diversification away from tourism

- Long-term improvement in wealth measures

- A formal commitment to higher reserve levels given exposure to economically-sensitive revenues

What could change the rating - DOWN

- Continued, significant economic slowing, with sustained weakened revenue performance

- Unmanageable budget imbalance and reliance on one-time resources, with no plan for a return to structural balance

- Depletion of reserves below median levels for large Aa-rated cities

Outlook

The stable rating outlook recognizes that the city has thus far weathered the effects of the national and local recession despite the city's reliance on volatile revenue sources. Further reviews will continue to assess the city's ability to maintain its financial position relative to similarly rated cities if revenues continue to underperform.

KEY STATISTICS:

2009 estimated population: 591,422

2005 - 2009 estimated per capita income: $27,062 (98.8% of state)

2005 - 2009 estimated median family income: $62,919 (98.4% of state)

2011 full value, net of redevelopment increment: $39.2 billion

Average annual tax base growth, 2006-2011: -3.6%

Full value per capita: $66,275

Direct debt burden: 1.3%

Overall debt burden: 3.3%

Lease burden as a % of fiscal 2010 general fund revenues: 3.9%

FY09 general fund balance: $92.7 million (18.4% of revenues)

FY09 available general fund balance: $142.9 million (28.4% of revenues)

FY10 general fund balance: $74.8 million (16.0% of revenues)

FY10 available general fund balance: $126.5 million (27.1% of revenues)

PRINCIPAL METHODOLOGY

The principal methodology used in this rating update was General Obligation Bonds Issued by U.S. Local Governments 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 and public 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

Patrick Ford
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


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MOODY'S DOWNGRADES LAS VEGAS, NEVADA GENERAL OBLIGATION BONDS TO Aa2 FROM Aa1; OUTLOOK REVISED TO STABLE FROM NEGATIVE
No Related Data.
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