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HomeMy WebLinkAbout05/05/2020 09D March 2020 City Credit Rating to\'4\lyy tbxk ik 1 PPP +� PPP d g. A PPP+P '+l g ittYlltYlt.\ta. BUSINESS OF THE CITY COUNCIL YAKIMA, WASHINGTON AGENDA STATEMENT Item No. 9.D. For Meeting of: May 5, 2020 ITEM TITLE: March 2020 City Credit Rating SUBMITTED BY: Steve Groom, Director of Finance and Budget SUMMARY EXPLANATION: In conjunction with the bond issuance for the Convention Center Expansion, Standard & Poor's (S&P) conducted an independent analysis of the City's credit worthiness. They considered the city's economy, the city's management, budgetary performance, budgetary flexibility, liquidity, debt level, and preparedness for contingent liabilities. The current A+ credit rating was neither raised nor lowered. Standard and Poor provided a detailed explanation and analysis in their report. This is the bond rating that 1) determines the interest rate the city is able to secure on our debt and 2) more or less defines the financial reputation of our city. ITEM BUDGETED: NA STRATEGIC PRIORITY: Public Trust and Accountability APPROVED FOR SUBMITTAL BY THE CITY MANAGER RECOMMENDATION: Informational. No action required. ATTACHMENTS: Description Upload Date Type a Memo 4/13/ 0 0 r Me o 2 20 Yakima tin I e rt 4/131 0 0 backup Material 2 u. U i FINANCE TO: City Manager City Councilmembers FROM: Steve Groom, Finance Director DATE: April 10, 2020 RE: Updated City Credit Rating On March 13, 2020, Standard & Poor's ("S&P") reaffirmed the City of Yakima's A+ issuer rating, primarily with respect to the City's outstanding Limited Tax General Obligation (LTGO) bonds. The complete 8-page rating report is attached. The policy-level concerns that City Council will want to consider how to influence both in annual budget priority decisions and in month-to-month considerations are: • Raise household incomes. (p. 3) Citing a very weak underlying economy - "per capita effective buying income is 69.7% of national level." This may be our hardest challenge. The City might consider using a framework of "will this improve the environment in which citizens' household incomes can improve?" in considering and prioritizing infrastructure and service delivery decisions. • Maintain/improve Strong Management. (p. 4) S&P upgraded its view of management from "adequate" to "strong," citing several strong practices - to build on that and besides a good budget process, we can formalize our debt and fund balance policies and incorporate reporting to help council better monitor. • Maintain/improve Budgetary Flexibility/ Reserves. (p. 5) S&P expresses disbelief that the city can improve the general fund reserves in three years. They specifically cite our capital planning challenges: perpetual vehicle replacement and long-term infrastructure planning. The next opportunity to consider will be 2021 budget planning. • Cautious Use of Debt. (p. 5) S&P believe the plans to issue $20M debt for mill site development could have a negative on our debt profile. We now know we have access to $8.7 million in State funding, however we must proceed demonstrating a disciplined and logical process with a return on investment (ROI) because S&P will be reviewing the further bond issuance contemplated in this project. 3 s C�} ............................................................................................................. y • • 1 . Primary Credit Analyst: Alyssa B Farrell,Centennial(1) 303-721-4184;alyssa.farrell@spglobal.com Secondary Contact: Benjamin P Geare,San Francisco+ 1 (415) 371 5047;benjamin.geare@spglobal.com a1 1 t is Rating Action Stable Two-Year Outlook Credit Opinion Related Research MAW STANDARDANDPOORS.COM/RATINCSDERECT MARCH 13, 2020 1 4 Su ary: Credit Proffie US$15,485 mil Itd tax GO and rfdg bnds ser 2020B due 12/01/2044 Long Term Rating '; ': A+/Stable New US$10,61 mil ltd tax GO rfdg bnds ser 2020A due 12/01/2033 Long Term Rating S A+/Stable New Yakima GO(MBIA)(MBIA of Illinois) Unenhanced Rating A+(SPUR)/Stable Affirmed Rating Action S&P Global Ratings assigned its 'A+'long-term rating to Yakima,Wash.'s 2020A limited-tax general obligation (GO) refunding bonds and 2020B limited-tax GO and refunding bonds.At the same time,S&P Global Ratings affirmed its 'A+'long-term rating and underlying rating(SPUR)on the city's limited-tax GO debt outstanding.The outlook is stable. Yaldma's full faith and credit,including the city's obligation to levy ad valorem taxes subject to statutory limitations and a limitation on property tax revenue growth to 1%per year, excluding new construction, secure the 2020 bonds. The rating is equal to our view of the city's general creditworthiness, as obligor,because the limitations do not narrow the tax base or limit the fungibility of property tax revenue for different uses,in our view. The 2020A bonds will be issued in the par amount of approximately$10.6 million,and the bond proceeds will refinance the 2004 irrigation system revenue bonds, 2007 limited-tax GO bonds, 2008 limited-tax GO bonds, 2008 water and sewer revenue and refunding bonds, and 2009B limited-tax GO bonds outstanding. The 2020B bonds will be issued in the approximate par amount of$15.5 million, and proceeds will be used to refinance the 2007 bonds outstanding and to finance and reimburse the city for costs of the Yakima Convention Center improvements. Credit overview Yakima's local economy is anchored in agriculture,with fruit farms and wineries providing stability to the local employment base. Typical of agricultural economies,wealth and income indicators somewhat lag those of regional peers, although the affordability of local housing has contributed to steady population growth and new construction over the past decade.While lodging tax revenue has declined modestly in the last two years,the city has reported consistently strong budgetary performance and is working toward rebuilding its available fund balance position to very strong levels in the near term. The city's well-funded pension liabilities,which we believe will maintain stable costs, also support the city's credit stability. The ratings further reflect our view of the city's: • Very weak economy,with market value per capita of$78,160 and projected per capita effective buying income at 69.7%of the national level; )fifyi COI/=4TINGsDhET MARCH 13,2020 2 5 Summary: Yakima, Washington; General Obligation • Strong management,with good financial policies and practices under our Financial Management Assessment (FMA) methodology; • Strong budgetary performance,with balanced operating results in the general fund and an operating surplus at the total governmental fund level in fiscal 2018; • Adequate budgetary flexibility,with an available fund balance in fiscal 2018 of 11.6%of operating expenditures, as well as limited capacity to reduce expenditures; • Very strong liquidity,with total government available cash at 41.3%of total governmental fund expenditures and 6.3x governmental debt service, and access to external liquidity we consider strong; • Adequate debt and contingent liability profile,with debt service carrying charges at 6.5%of expenditures and net direct debt that is 51.9%of total governmental fund revenue,but significant medium-term debt plans; and • Adequate institutional framework score. The stable outlook reflects our view of the historically stable local tax base, as well as our expectation that financial performance will remain consistently strong throughout the next two years, supported by what we consider strong financial management policies and practices. Stable Two-Year Outlook Upside scenario Should continued tax base growth boost economic indicators to levels commensurate with those of higher-rated peers, and should the city replenish its general fund reserve to a level in compliance with its formal reserve policy and sustain its reserves at a very strong level,we could raise the ratings. Downside scenario We could lower the ratings if the city were to experience a period of sustained operational imbalance, depleting the reserves to below a level we consider strong. Credit Opinion Very weak economy We consider Yakima's economy very weak. The city,with an estimated population of 94,760,is located in Yakima County and serves as the county seat.Yakima serves as a retail,processing and transportation hub for the surrounding agricultural region. Its economic and revenue performance are tied closely to climate and agricultural growing conditions, although we understand that ongoing retail and commercial development may help the city diversify its economic and revenue base in the future. The largest employers include the health care,retail, agriculture, government sectors. Local vineyards and outdoor recreational activities drive the city's tourism industry,which management indicates has been relatively stable thus far. The city has a projected per capita effective buying income of 69.7%of the national level and per capita market value of$78,160. The county unemployment rate was 6.3%in 2018. The city's market value grew by 7.3%over the past year to$7.4 billion in 2020.We understand that there is recent and AND DrND' �E COMi=4TIVGDfECT MARCH 13,2020 3 6 Summary: Yakima, Washington; General Obligation ongoing development within the city,including two new hotels and a potential redevelopment of a large former mill site,which the city expects to be used for mixed-use development in the next five years.We anticipate continued growth in the tax base to contribute to additional gains in property values for the near term. The top 10 taxpayers account for about 4.9%of assessed value,representing a very diverse taxpayer base. Strong management We have revised our view of the city's management to strong from adequate,with good financial policies and practices under our Financial Management Assessment methodology,indicating financial practices exist in most areas,but that governance officials might not formalize or regularly monitor all of them. The revision reflects the city's prudent forecasting practices and adoption of comprehensive investment management policies. The city manager and finance director are new to the city within the last year and have been working to implement additional financial management policies and practices,which we believe will continue to strengthen our assessment. Highlights of the city's approach to financial management include: • A budget formation process that incorporates internal and external analyses of historical revenue and expenditure trends; • Monthly review of revenues and expenditures by the management team,with quarterly budget-to-actual reports to the council, and the ability to amend the budget throughout the year; • Maintenance of a five-year financial forecast,which is annually updated and presented to council during the budget adoption; • A five-year capital projects list,with funding identified for the current-year projects; • A formal investment policy that exceeds state requirements,with quarterly reports to council on investment holdings and earnings; • A basic debt management policy that specify limitations on the types, amounts, and uses of debt and investments; and • A reserve policy of maintaining 16.7%of general fund expenditures,in line with Government Finance Officers Assn. best practices,which the city is striving to rebuild its balances to meet. Strong budgetary performance Yaldma's budgetary performance is strong,in our opinion. The city had balanced operating results in the general fund of 0.5%of expenditures, and surplus results across all governmental funds of 2.0%in fiscal 2018. The city's general fund operating results have been stable over the last three years,with a result of 0.6%in 2017 and a result of 1.1%in 2016. The city's general fund revenue is composed primarily of sales tax at 26%,utility and franchise tax at 26%,property tax at 15%, and charges for services at 14%. Sales tax and franchise tax revenue make up the largest portion of revenue, each of which has grown modestly over the last three years. The city has budgeted for continued growth in the primary revenue streams in fiscal 2020 due to continued tax base growth. Unaudited actuals for fiscal 2019 indicate a slight operating surplus. The fiscal 2020 budget projects an additional AND DrND' �E COi=4TIVGDfECT MARCH 13,2020 4 7 Summary: Yakima, Washington; General Obligation surplus, and management indicated that revenues and expenditures are tracking in line with the assumptions. Revenue is expected to continue to grow at its moderate pace, outpacing the gradual growth in expenditures. However, should there be a decline in these cyclical sales tax revenues as a result of an economic downturn or a reduction in tourism, we believe that the city has sufficient capacity to absorb the potential losses. Adequate budgetary flexibility Yaldma's budgetary flexibility is adequate,in our view,with an available fund balance in fiscal 2018 of 11.6%of operating expenditures, or$7.6 million. Over the past three years,the total available fund balance has remained at a consistent level overall,totaling 11.2%of expenditures in 2017 and 11.2%in 2016. Negatively affecting budgetary flexibility,in our view,is limited capacity to reduce expenditures. The city anticipates growth in its available reserves in coming years,with the council prioritizing replenishing the fund balance to comply with its reserve policy level.However, given the modest surpluses,we do not expect significant improvement in the reserve position in the next three years. In addition,the city's capacity to cut spending further is limited,in our view,by the deferral of needed street and infrastructure improvements,recent charter amendments requiring spending on streets and parks without associated revenue, and increasing salary and benefit costs,including retirement contributions.Although we believe recent revenue and expenditure adjustments may help to stabilize performance,we note that the charter requirements could result in limited capacity to reduce these expenditures if needed in a downturn scenario. Very strong liquidity In our opinion,Yakima's liquidity is very strong,with total government available cash at 41.3%of total governmental fund expenditures and 6.3x governmental debt service in 2018. In our view,the city has strong access to external liquidity if necessary. Yaldma's liquidity is reinforced by its strong access to external liquidity,in our view,with the city having issued limited-tax GO bonds within the past 15 years, and we do not expect its access to markets will diminish. The city does not have aggressive investments, as the majority are in government investments. In 2018,the city issued privately placed limited-tax GO bonds in the par amount of$12.5 million.We have reviewed the agreements for the 2018 bonds and do not believe there to be contingent liquidity risk associated with the issuance. Adequate debt and contingent liability profile In our view,Yaldma's debt and contingent liability profile is adequate. Total governmental fund debt service is 6.5%of total governmental fund expenditures, and net direct debt is 51.9%of total governmental fund revenue. Negatively affecting our view of the city's debt profile are its significant medium-term debt plans--the city anticipates issuing approximately$20 million for an upcoming capital project--although we note that the par amount is subject to change depending on state matching and grants. Pension and other postemployment benefit(OPEB)highlights: • In our view,the city has no large pension or OPEB liabilities that are leading to credit pressure,and we believe the AND DrND' �E COMi=4TIVGD,ET MARCH 13,2020 5 8 Summary: Yakima, Washington; General Obligation actuarial assumptions that drive funding requirements will help the city continue to make timely funding progress. • While some of the city's pension plans are poorly funded, several are overfunded, creating an overall funding situation that is not likely to lead to dramatic cost escalations. This strong funding is due,in our view,to the short amortization periods employed to determine funding requirements. • The city's OPEB plan (Law Enforcement Officers and Fire Fighters [LEOFF]plan 1)provides benefits for police and fire fighters employed before 1977; given the limited scope of eligible beneficiaries,we do not believe this obligation will lead to credit pressure, despite the city's pay-as-you-go approach to funding. The city participates in the following plans funded as of June 30, 2018: • Public Employees Retirement System (PERS)plan 1: $10.3 million in net pension liability, or 63.2%funded; • PERS plan 2/3: $4.7 million in net pension liability, or 95.8%funded; • LEOFF plan 1: $4.8 million in net pension assets, or 144.4%funded; and • LEOFF plan 2: $14.4 million in net pension assets, or 118.5%funded. Yaldma's combined required pension and actual OPEB contributions totaled 6.0%of total governmental fund expenditures in 2018. Of that amount, 5.2%represented required contributions to pension obligations, and 0.8% represented OPEB payments. In 2018 and 2019,the city made its full contractually required contribution to all plans, which exceeded both static funding and minimum funding progress for PERS 2/3,indicating our view of timely progress in reducing pension liabilities. The contractually determined contributions,which are developed using the same approach as the actuarially determined contributions (ADCs), are not updated following passage into law biennially and so can diverge from the annually updated ADCs. However,because contractually required contributions determine funding requirements using an approach that approximates 10-to 15-year level percent open amortization, timely progress on reducing liabilities is still made even when ADCs increase above contractually determined contributions, so we believe costs will likely remain stable. However,the plan's 7.4%discount rate increases contribution volatility. Adequate institutional framework The institutional framework score for Washington municipalities is adequate. Related Research 2019 Update Of Institutional Framework For U.S. Local Governments Ralitt gs Dean(As of march 13,2020) Yakima GO Unenhanced Rating S A+(SPUR)/Stable Affirmed Yakima GO(AGM) Unenhanced Rating S A+(SPUR)/Stable Affirmed Yakima GO(ASSURED GTY) Unenhanced Rating S A+(SPUR)/Stable Affirmed AND DrND' �F COI i=4TIVGDhET MARCH 13,2020 6 9 Summary: Yakima, Washington; General Obligation Ratings Detail(As Of Mareli 13,2020)(eatit.) Yakima GO Long Term Rating I; At/Stable Affirmed Many issues are enhanced by bond insurance. 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