Public Finance
Tax Supported / U.S.A. Manhattan, Kansas General Obligation Bonds New Issue Report
New Issue Details Ratings New Issues Sale Information: $5,930,000 General Obligation Bonds, Series 2015-A, and $5,290,000 General Obligation Bonds, Series General Obligation Bonds, Series 2015-B, scheduled to sell competitively on Nov. 17. 2015-A AA+ General Obligation Bonds, Series Security: The unlimited tax general obligation bonds and notes are secured by Manhattan’s 2015-B AA+ Outstanding Debt (the city) full faith and credit and its ad valorem taxing power, without limitation. The Unlimited Tax General Obligation transportation development district (TDD), sales tax special obligation revenue (STAR) and tax Bonds AA+ Temporary Notes AA+ increment financing (TIF) bonds are secured by the city’s pledge of legally available funds, Sales Tax Special Obligation subject to annual appropriation, cash-funded debt service reserves, state and local sales taxes Revenue Bonds AA– and incremental property tax collected within designated development areas. Taxable Sales Tax Special Obligation Revenue Bonds AA– Senior Lien Special Obligation Tax Purpose: Bond proceeds will be used to redeem previously issued short-term debt that funded Increment Funding Bonds AA– various city capital projects. Transportation Development District Sales Tax Bonds AA– Final Maturity: Series 2015-A: Nov. 1, 2035; series 2015-B: Nov. 1, 2027.
Key Rating Drivers Rating Outlook Stable Regional Economic Engine: The city serves as the economic and cultural center for the region, which includes Fort Riley and Kansas State University (KSU). Regional economic
prospects are strong, with continued assessed valuation growth, low unemployment rates, above-average per capita personal income and notable economic developments projected to come online over the long term.
Sound but Declining Reserves: The city’s finances are marked by conservative budgeting and a reliance on economically sensitive sales tax revenues. Fund balance levels remain adequate. However, further deterioration in the city’s financial flexibility may result in downward rating action.
Strong Management: The city’s financial management is strong, with frequent and robust financial, economic and debt reporting, careful cost controls, conservative budgeting of
economically sensitive revenues and a good expenditure cushion should revenues underperform.
High Debt Burden: The city’s debt burden is high but has declined in recent years. Pension Related Research payments are rising but will remain low. Fitch Rates Manhattan, KS ULTGO Bonds ‘AA+’; Outlook Stable (November 2015) Appropriation Debt Rating: The ‘AA–’ rating on the TDD, STAR and TIF bonds reflects the
city’s commitment to appropriate annually for debt service and the lack of a security interest in
and non-essentiality of the financed projects.
Rating Sensitivities
Financial Flexibility: Fitch Ratings expects the city to maintain its long practice of
conservative budgeting. Maintenance of strong financial flexibility is a key mitigant to Fitch’s Analysts concerns about high debt and dependence on economically sensitive revenues. Any Monica Guerra +1 646 582-4924 deterioration in the financial profile would likely cause a downgrade. [email protected] High Debt Levels: Fundamental to the ‘AA–’ rating is the expected reduction of debt levels over Eric Friedman +1 212 908-9181 the intermediate term due to city issuance of new debt at a slower pace and the rapid [email protected] amortization of outstanding debt. Continued high debt levels could pressure the rating negatively.
www.fitchratings.com November 17, 2015
Public Finance
Rating History Credit Profile Outlook/ Manhattan is located in northeastern Kansas in Riley and Potawatomie Counties, roughly Rating Action Watch Date AA+ Affirmed Stable 11/10/15 55 miles west of Topeka. The 2014 population estimate of 56,078 increased 25% since 2000 AA+ Affirmed Stable 11/12/14 through both real gains and limited annexations. AA+ Affirmed Stable 5/13/14 AA+ Affirmed Stable 11/15/13 AA+ Affirmed Stable 11/15/12 Regional Economic Engine AA+ Affirmed Stable 5/11/12 AA+ Affirmed Stable 11/9/11 The city’s stable economy is anchored by Fort Riley, a military base with 21,065 military AA+ Affirmed Stable 11/2/10 AA+ Affirmed Stable 5/14/10 personnel located 10 miles west of the city limits, and KSU, with roughly 24,500 students AA+ Revised Stable 4/30/10 located within the city. In the long term, the city is anticipating additional economic growth AA Downgraded Stable 11/3/09 AA+ Affirmed Stable 5/14/09 associated with the construction of the U.S. National Bio and Agro-Defense Facility (the facility), AA+ Affirmed Stable 11/18/08 which broke ground in 2010 and which management projects will be fully operational around AA+ Affirmed Stable 5/19/08 AA+ Affirmed Stable 11/2/07 2020. In the short term, construction activity related to the facility will benefit the city. AA+ Affirmed Stable 5/10/07 AA+ Upgraded Stable 11/6/06 Taxable assessed valuation (TAV) grew 4.8% in both 2014 and 2015 and weathered the AA Affirmed Positive 5/15/06 housing market downturn well, up 21% since 2008. Approximately one-fifth of the city’s value is AA Revised Positive 10/28/05 AA Affirmed Stable 5/16/05 tax-exempt due to KSU’s notable presence in the city. While private developers have several AA Affirmed Stable 10/29/04 projects in progress, the recently tempered pace of development has resulted in a 55% decline AA Assigned Stable 5/14/04 in building permit revenues. State legislators recently approved a property tax lid, effective fiscal 2018, that will require municipalities to receive voter approval for increases in the
property tax levy that exceed the rate of inflation. While property tax revenues represent a small 10% of general fund resources, Fitch will monitor the effect of the tax lid for potential restriction on revenue-raising flexibility.
City income indicators are mixed, and the city’s poverty rate (24.2%) is high compared with 13.6% for the state and 15.5% for the national rates. The city’s large student population skews the city’s poverty rate and may not accurately reflect the students’ full economic impact, with
Fitch recently published an exposure purchasing power garnered from external sources. This factor is an important contributor to the draft of state and local government tax- city’s sales tax-dependent financial profile. supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a The city’s unemployment rate was very low at 3.3% in August 2015, down from August 2014 number of proposed revisions to existing (3.8%) and well under state (3.8%) and national (4.9%) rates. criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch Sound Reserves Provide Important Flexibility expects that final criteria will be approved and published by Jan. 20, The city ended 2014 with a $2.6 million unrestricted fund balance, representing 10% of 2016. Once approved, the criteria will be applied immediately to any new issue spending. Fitch’s ‘AA+’ rating relies on the city’s additional financial flexibility outside of the and surveillance rating review. Fitch general fund in various discretionary accounts. Combined, available balances totaled a strong anticipates the criteria to be applied to all ratings that fall under the criteria within a 60% of general fund spending in 2014. 12-month period from the final approval date. The city beat its 2014 budget and reported results ahead of break-even projections. The 2014
audited results showed a $280,000 operating surplus after transfers, equal to 1.08% of spending and up from 2013’s deficit of $471,000. Management reports that the marginal
increase in fund balance was the result of an increase in both sales tax revenues and in the property tax levy due to positive TAV trends. Management expects that sales tax (roughly 60% Related Criteria Tax-Supported Rating Criteria (August of general fund revenues) will continue to grow. 2012) U.S. State Government Tax-Supported The city’s 2015 budget represents a largely steady state budget, with an increase in spending Rating Criteria (August 2012) driven by a full year of operations at two new fire stations. As with prior years, the city budgeted Exposure Draft: U.S. Tax-Supported use of fund balance, as well as contingency operational and debt service support. Furthermore, Rating Criteria (September 2015) the city conservatively assumes a 3% increase in spending in 2015 from the 2014 budget.
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Public Finance
Performance year to date is positive, with expenditures coming in under budget and sales tax ahead of the prior-year’s flat performance. The city has additional budgetary flexibility from the county sales tax, renewed in late 2013, of which the city receives two-thirds. This additional revenue was not included in the county’s 2015 budget. The city has dedicated 30% of this source to the city’s bond and interest fund.
The ‘AA+’ rating is based on Fitch’s expectation that the city will maintain a good financial cushion given the city’s regular and comprehensive interim reporting, coupled with strong cost controls, conservative budgeting and a comfortable expenditure reduction cushion. In 2016, the city will likely maintain these budgeting practices and continue reflecting a positive performance.
General Fund Financial Summary ($000, Years Ended Dec. 31)
2010 2011 2012 2013 2014 Total Tax Revenue 12,001 12,423 12,440 12,725 14,079 Licenses and Permits 1,013 824 663 736 669 Fines and Forfeits 1,473 1,508 1,694 1,462 1,516 Charges For Services 3,730 3,879 2,326 2,110 2,600 Intergovermental Revenue 466 480 484 514 575 Other Revenue 748 610 701 850 416 Total Revenues 19,431 19,724 18,308 18,397 19,855
General Government 7,633 7,608 8,178 8,591 9,132 Public Safety 4,901 5,015 5,290 5,727 5,643 Public Works 2,888 3,071 3,071 3,402 3,475 Culture and Recreation 4,735 5,119 5,914 5,969 6,304 Educational — — — — — Capital Outlay 310 268 184 65 264 Debt Service — — — — 261 Other 545 550 547 570 535 Total Expenditures 21,012 21,631 23,184 24,324 25,614
Operating Surplus/(Deficit) (1,581) (1,907) (4,876) (5,927) (5,759) Transfers In (Including Bond Proceeds) 2,117 2,346 4,707 5,696 6,277 Transfers Out (Including Bond Proceeds) 379 505 485 240 238 Net Transfers and Other 1,913 1,841 4,222 5,456 6,039
Net Operating Surplus/(Deficit) After Transfers 332 (66) (654) (471) 280
Total Fund Balance 179 5,138 4,484 4,013 4,293 As % of Spending (Adjusted for Bond Transfers) 0.8 23.2 18.9 16.3 16.6 Unrestricted Fund Balancea — 3,583 2,685 2,440 2,596 As % of Spending (Adjusted for Bond Transfers) — 16.2 11.3 9.9 10.0 aReflects GASB54 classifications: sum of committed, assigned and unassigned. Notes: Pre-GASB54 (2010). Numbers may not add due to rounding.
Contingent Obligation to County Police Department City taxpayers support almost all of the Riley County Police Department (the department) with a dedicated property tax levy outside of the city’s direct control. However, the department is presented in the city’s governmental fund financial statements. The city has back-stopped the county police department previously but not since implementation of the dedicated property tax levy in 2001. Expenditures in 2014 represented 14% of city governmental spending.
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High Debt Burden; Moderate Capital Needs A key credit factor supporting the high ‘AA+’ rating is Fitch’s expectation that Debt Statistics rapid amortization of existing debt (74% of ($000) GO debt retiring in 10 years) will outpace This Issue 11,220 the additional bond issues, thereby Total Outstanding Debt 197,380 reducing the very high debt level over the Total Direct Debt 208,600 long term. In addition, Fitch expects new Overlapping Debt 85,416 issuance to slow in the coming years, Total Overall Debt 294,016 which will aid future declines. The city’s Debt Ratios a overall debt load totaled $5,269 per capita Net Direct Debt Per Capita 3,720 As % of Market Valueb 5.9 and 8.3% of market value in 2014, fueled a Net Overall Debt Per Capita 5,243 by the city’s rapid growth. As % of Market Valueb 8.3 a b Tax-supported debt service represents a Population: 56,078 (2014). Market value: $3,557,478,000 (2015 estimate). Note: Numbers may not add due to rounding. considerable claim on resources at 22.3% of governmental fund spending in 2014. STAR bond prepayments reflect a required turbo structure, which elevates debt service payments, but supports quicker debt reduction.
The city has a $177 million capital improvement plan (CIP) through 2020, which management believes is a conservative estimate of the city’s capital needs. Included in this plan is a major airport expansion project totaling about $30 million, which is expected to be chiefly financed with federal moneys and revenue bonds. Management expects that the remainder of the CIP will be funded through bond proceeds, including GO and revenue bond issuances.
Self-Supporting Appropriation-Backed Debt Requires Growth The various development project debt is first paid from sales tax revenues and incremental property tax revenues generated in the north and south project areas. Overall coverage has been thin during the past three years, but the bonds have been self-supporting since issuance. The city has also pledged any legally available funds, subject to annual appropriation, if the primary security pledge proves insufficient.
An economic downturn could cause concurrent declines in the city’s sales tax and sales-tax- supported special district debt that compound pressure on the city’s finances. However, KSU provides the city a great deal of insulation: retail sales grew in each year of the most recent economic recession. Furthermore, Fitch believes that the city’s healthy cash balances have the potential to help the city manage ably an economic contraction.
The STAR bonds include a turbo repayment feature, whereby all excess pledged revenues associated with the bonds must retire outstanding related principal. The feature has already prepaid $7.4 million in principal ahead of schedule. However, Fitch views changes in the state sales tax as a risk to STAR bond coverage. The state’s recent increase in its sales tax rate to 6.50% from 6.15% (as of July 1, 2014) reflects a positive outlook. However, when coupled with the prior sales tax change down to 6.15% from 6.3% (July 1, 2013), the sales tax increase highlights the inherent instability of the tax. Consequently, it is important to note the risk of future material sales tax changes and the threat to coverage. Currently, coverage remains strong, with the bonds originally secured at a state tax rate of 5.3%.
Coverage remained thin for TIF and TDD bonds at 1.18x and 1.20x, respectively, in 2014. TDD bonds will require 3.5% annual growth in pledged revenues to cover maximum annual debt
Manhattan, Kansas 4 November 17, 2015 Public Finance
service (MADS) in 2032. TIF bonds will require 1.5% annual growth to cover MADS in 2025, assuming full use of DSRF at final maturity. Management projects stable coverage for 2015 even with the reduction in the tax rate.
Concentrated Taxpayer Base for Contingent Obligations The north project area encompasses a small 20-acre area that currently consists of 21 retailers including HyVee Supermarket; Petco; Bed, Bath & Beyond; Dick’s Sporting Goods; and Best Buy. The south project area is even more limited at 10 acres, with two hotels (Hilton Garden Inn and Candlewood Suites); Hertz; a conference center; a city-owned discovery center; and a city-owned 440-stall parking garage. Most of the retailers rent their property via renewable 10-year leases.
The top retailer accounted for 7% of total sales tax revenues and the top 10 account for 25% in 2015. Taxpayer and geographic concentration, required lease renewals during the term of the debt and potential local competition create risk of future tax revenues declining, which could stress the city’s finances, given its commitment to support these obligations. Sales tax concentration is expected to decline with the anticipated addition of new retail establishments but remain high.
Modest Post-Employment Benefit Costs Manhattan’s long-term liabilities related to employment benefits are modest. Employees are covered by state-sponsored pension plans, and the city annually funds its full actuarial required contribution. Additionally, the city allows retirees to participate in its healthcare plan at 102% of the stated premium, resulting in an immaterial unfunded actuarial other post-employment benefit (OPEB) liability.
The combined pension annual required contribution (ARC) and OPEB pay-as-you-go contribution was a low 2.3% of governmental spending in 2014. The ARC was fully funded by the state for both uniform and municipal employee pension plans in 2014, although state statute has allowed for underfunding of the ARC in prior years.
Recent legislative changes at the state level will increase local contribution rates and introduce a new tier of employees. These changes should address poor funding levels and eventually result in more stable annual contributions, which will be shared by employers and employees after the five-year ramp-up period.
Fitch does not believe these increases will present financial pressure to the city, as the city’s annual cost will be very low even if it roughly doubles, as projected. The municipal and uniform plans were poorly funded at 62% and 74% as of Dec. 31, 2014, respectively, or a weaker estimated 56.1% and 66.7%, respectively, using Fitch’s 7% rate of return assumption.
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The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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