Fitch Ratings has assigned an ‘AA+’ rating to the following Vestavia Hills, AL (the city) general obligation (GO) warrants:
–$12.1 million GO warrants series 2016.
The bonds are expected to sell the week of June 27 via negotiation. Bond proceeds will primarily be used to advance refund the city’s outstanding series 2009A GO warrants for debt service savings; the remaining funds will be used to fund a portion of the acquisition cost for a high school.
In addition, Fitch affirms the following ratings at ‘AA+’:
–Issuer Default Rating (IDR);
–$57.51 million outstanding GO warrants series 2008, 2009A, 2009B, 2012, 2013-A, 2014 and 2015.
The Rating Outlook is Stable.
The full faith and credit of the city are irrevocably pledged for the payment of all general obligations. The GO warrants are non-voted, payable from all general fund revenues, with no dedicated ad valorem millage.
KEY RATING DRIVERS
The ‘AA+’ rating on the city’s GO warrants and IDR reflects its demonstrated ability to maintain healthy reserves through economic cycles, a very minimal long-term liability burden, and broad spending and revenue flexibility.
Economic Resource Base
Vestavia Hills is an affluent residential community with a population of 34,049, located approximately three miles south of Birmingham. The majority of the city is in Jefferson County with parts reaching into Shelby County.
Revenue Framework: ‘aa’ factor assessment
Organic growth prospects for revenues are solid and have improved with economic recovery. The city has limited ability to raise property taxes but flexibility in sales tax and other locally generated revenues such as licenses and fees temper risks to potential revenue declines in a moderate economic downturn scenario.
Expenditure Framework: ‘aa’ factor assessment
Expenditure needs are expected to grow along the lines of revenue growth. The state’s beneficial work force environment provides management significant control over personnel costs which the city applied through merit and hiring freezes during the recession. Fixed costs are manageable.
Long-Term Liability Burden: ‘aaa’ factor assessment
The city’s liability burden is very low. Debt, the primary driver of the burden, is not expected to increase significantly based on current capital plans.
Operating Performance: ‘aaa’ factor assessment
Fitch expects the city to display a high level of financial resilience in the event of a moderate economic decline given a stable revenue history, sizable reserves, and superior level of overall budgetary flexibility.
SHIFT IN MANAGEMENT PRACTICES: Material and prolonged deviation in the city’s financial management and operating practices could pressure the rating.
City residents benefit from the proximity to Birmingham’s deep, diverse and stable employment base built around the education and health service sectors. Income levels are high, with per capita personal income almost twice that of the state and 80% over the national median. The city’s workforce is highly educated. The city’s unemployment continues to improve and was at 3.4% in April 2016, well below both the state and nation. Population in the city is growing. From the 2000 to 2010 census population increased 10% or about 3,000 residents.
The city’s tax base is diverse and stable with median home values more than double that of the county and state. Assessed value (AV) declined a moderate 7% throughout the recession, but has recovered to equal the pre-recession peak in fiscal 2016. The city’s fiscal 2015 total residential and commercial building permits came in at record levels and have now increased for five consecutive years supporting expectations for continued growth in the tax base in the intermediate term.
City operations are predominantly funded through a mix of property and sales taxes which combine for about three-quarters of general fund revenue. Business license and permits account for an additional 20%.
In the absence of policy action general fund revenues are expected to grow at a pace ahead of inflation but below the level of U.S. economic expansion consistent with historical results. Permit activity has been solid in recent years, as noted above, with investments concentrated at two large economic development sites in the city – Highway 31 and Patchwork Farms. Residential home values recovered from the recession and are now about 6% above the 2008 peak; Zillow Group’s one year forecast is for an additional 3.3% increase.
The city’s overall legal revenue raising capacity is viewed as high relative to the low level of revenue volatility depicted in the Fitch Analytical Sensitivity Tool (FAST). The city is limited in its ability to increase property taxes, which requires voter approval and subsequent approval from the state legislature. However, other taxes and fees are more flexible – both sales tax and business tax rates are set by the council and there is no express constitutional or statutory maximum on the sales tax and business tax rate levied by the city.
Slightly over half of the city’s spending is for public safety expenditures. The city made small cuts to the number of full-time employees during the recession and otherwise matched operating expenditures to operating revenues. The city’s workers are restricted from organizing, which contributes to a high degree of expenditure flexibility and control over personnel wages and benefits.
As with most local governments, Fitch expects the city’s pace of spending will generally match or slightly exceed revenue growth.
Total carrying costs of debt service, pension required contributions and other post-employment benefits (OPEB) contributions are estimated at 19% of governmental fund spending when controlling for the large one-time capital expenditure for the city hall in fiscal 2015. Debt service is the largest component of the carrying cost metric, estimated at 14% of spending. Overall carrying costs are expected to remain stable given an absence of additional borrowing plans.
Long-Term Liability Burden
The city’s long-term liability burden is low at 4.9% of personal income. The metric includes an estimate of the city’s proportional share of the overlapping debt of Jefferson County (IDR ‘A’ by Fitch) and the net pension liability associated with its participation in the Alabama Employees’ Retirement System (ERS), an agent multiple-employer plan.
The city does not prepare a formal multi-year capital plan but reports no major infrastructure needs or debt issuance plans. Fitch does not anticipate any additional new money borrowing for general governmental purpose by the county over the intermediate term. At fiscal year-end 2015, the net pension liability for the ERS pension was $25.7 million or just 0.8% of personal income, adjusted to Fitch’s 7% investment return assumption. Under this return assumption the plan was 64% funded as of a measurement date of Sept. 30, 2014. Fitch believes that ERS’ use of a 30-year rolling amortization schedule may prolong its weak funding position; nevertheless the city’s unfunded liability is small.
The city could draw down a portion of its fund balance during a typical recession and still maintain a healthy fund balance above the safety margin needed for an ‘aaa’ financial resilience assessment given the history of low revenue volatility during economic downturns and superior inherent budget flexibility. The city’s conservative formal reserve policy sets aside 25% of prior year spending as committed for emergency purposes. Additionally, a portion of the capital project fund reserve could be available for general fund expenditure upon direction of the council.
The city has a significant history of conservative budgeting that produces operating surpluses while not deferring capital spending or pension contributions. General fund reserves were maintained at 20% of spending or higher throughout the last recession and have registered better than 30% from fiscal 2010-2015.
The fiscal 2016 budget was a 3% increase to fiscal 2015 and balanced with no use of reserves. Revenues are coming in ahead of schedule with retail sales up 9% year-to-date. The city anticipates adding $400,000 to $500,000 to general fund reserves at year-end.
In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
Dodd-Frank Rating Information Disclosure Form