Fitch Affirms Las Cruces, NM's State-Shared GRT Revenue Bonds at 'AA'; Outlook Stable

Fitch Ratings has affirmed the 'AA' rating on the following Las Cruces, NM (the city) outstanding revenue bonds:

--$22.71 million state-shared gross receipts tax (SSGRT) bonds, series 2005;

--$22.27 million SSGRT bonds, series 2010.

In addition, Fitch affirms the 'AA' implied unlimited tax general obligation (ULTGO) bond rating for the city.

The Rating Outlook is Stable.

SECURITY

The bonds are special, limited obligations, payable from a first but not exclusive lien on pledged revenues. Pledged revenues consist of the city's 1.225% SSGRT. The series 2010 bonds are further secured by pledged revenues from convention center fees and one-half of collections from a 5% lodgers' tax.

KEY RATING DRIVERS

SOLID FINANCIAL PROFILE: The SSGRT bond ratings reflect strong coverage by pledged revenues and the city's strong general credit characteristics, evidenced by a history of large financial reserves, conservative budgeting, and effective cost controls.

STABLE ECONOMIC BASE: The area economy appears well balanced despite below average wealth levels. Unemployment levels are well below state and national rates.

VOLATILE OPERATING REVENUE SOURCE: The city relies heavily on the economically sensitive gross receipts tax for operations and capital outlays.

STRONG COVERAGE LEVELS: Fiscal 2013 coverage of maximum annual debt service (MADS) on the outstanding SSGRT bonds is solid at 4.55x.

MODEST DEBT BURDEN: The city's debt profile is positive, characterized by a very low debt burden, rapid principal amortization, and limited debt plans.

RATING SENSITIVITIES

GRT REVENUE LOSSES: Large, sustained declines in GRT collections would pressure city operations, creating negative rating pressure. The Stable Rating Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

Las Cruces, with an estimated population of 101,000, is the second largest city in New Mexico and serves as the commercial center for the southern New Mexico area. Population growth trends have been strong over the past decade, with average annual growth of nearly 3%. The city is located adjacent to the White Sands Missile Range and is home to New Mexico State University.

VIBRANT REGIONAL ECONOMY

Economic stability is evidenced by unemployment rates historically lower than the state and national averages; the latest monthly rate of 4.8% (April 2014) is below the state (5.9%) and U.S. (5.9%) rates. Also, city employment registered solid 2% growth over the 12-month period ended April 2014. The area economy is diversified among the major job sectors of government, higher education, retail trade, military, and healthcare. Area wealth levels are below average and educational attainment is high, reflective of the city's large student population.

Average annual taxable value growth over the past six years has been strong at more than 4%, despite a modest decline of 1.4% for fiscal 2012. However, the certified taxable assessed value for fiscal 2014 shows a return to growth at 3.3% over 2013 due to significant commercial construction. The property tax base is somewhat concentrated as the top 10 taxpayers constitute 19% of the total; the list is led by an electric utility and two medical centers.

REVENUE CONCENTRATION EVIDENT; STRONG RESERVES

Extensive financial planning and conservative management practices have contributed to the city's solid financial operations despite its high degree of reliance on economically sensitive revenues. The city's largest revenue source is gross receipts taxes, accounting for 76% of total general fund revenues in fiscal 2013. Receipts for 2012 and 2013 were each up nearly 2% over the prior year, continuing a growth trend since 2010. A $2 million draw on operating reserves in fiscal 2013 reflects the city's planned use of fund balance for capital outlay. Management anticipates a modest general fund surplus for fiscal 2014 (ended June 30). The $85 million fiscal 2015 operating budget is structurally balanced based on assumed GRT revenue growth of 18%, inclusive of a 3/8% rate increase for replacement of hold harmless distributions from the state.

Operating reserve levels have easily exceeded both the state requirement of 1/12 of projected expenditures and the city's higher internal target of 1/6 (roughly $13 million). Fitch considers the maintenance of solid reserves to be an important offset to the city's dependence on a potentially volatile revenue stream.

Fiscal 2013 audited results show that the city maintained a $33.4 million unrestricted general fund balance, equivalent to 37% of spending.

SOLID COVERAGE LEVELS

MADS coverage on all bonds supported by SSGRTs is strong at 5.84x using audited fiscal 2013 pledged revenues. Coverage dropped modestly to 5.33x in fiscal 2014 (unaudited) due to a slight decrease in GRT collections. Using preliminary fiscal 2014 net revenue, MADS for all SSGRT bonds remains healthy at 4x under a stress scenario assuming a severe pledged revenue decline of 25%.

The state-shared gross receipts taxes are only a secondary revenue source for the series 2010 bonds, following revenues derived from convention center fees and one-half of lodging tax receipts. Revenues from these primary sources have been adequate to meet annual debt service requirements (1.39x) and MADS (1.39x) using audited fiscal 2013 pledged revenues. The city has no plans to further leverage this revenue stream.

ADEQUATE LEGAL PROTECTIONS

Legal provisions for the SSGRT bonds are satisfactory and include an overall additional bonds test (ABT) of 2x MADS as well as another, lower 1.75x ABT specifically to address further leveraging of convention center and lodgers' tax revenues. Parity and junior/subordinate lien bonds are allowed, although at this time management reports no near-term borrowing plans. Prospects for additional leverage are further limited by the city's reliance upon the revenues for general operations and pay-go capital.

The series 2005 bonds have a springing debt service reserve that remains unfunded unless coverage drops below 2x MADS. The series 2010 bonds have a cash-funded reserve funded at MADS.

FAVORABLE DEBT PROFILE

Overall debt ratios are below average at approximately $1,631 per capita and 2.7% of market value. Principal payout of total city debt obligations is above average with 65% retired in 10 years. The city's capital plan calls for pay-as-you-go financing from GRT and property taxes, and no borrowings are currently contemplated.

Employee pensions are provided through the adequately-funded state Public Employee Retirement Association. The city regularly contributes the full annual required contribution (ARC) for both pensions and other post-employment benefits (OPEB). OPEB is provided by the New Mexico Retiree Health Care Fund, a cost-sharing multiple-employer defined benefit post-employment healthcare plan administered by the New Mexico Retiree Health Care Authority. Carrying costs for debt, pensions, and other post-employment benefits is average at 17% of fiscal 2013 governmental fund spending.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from CreditScope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, and National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=843794

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