Aug 21 - Fitch Ratings affirms the following Denver, CO obligations: --$942.5 million general obligation unlimited tax (GOULT) bonds at 'AAA'; --$1.04 million Board of Water Commissioners GOULT bonds at 'AAA'; $413.5 million certificates of participation (COPs) at 'AA+'. The Rating Outlook is Stable. SECURITY GOULT bonds of the city and the Board of Water Commissioners are secured by an unlimited annual property tax levy. Per the city charter, the Board of Water Commissioners has committed to pay the debt service on its GOs from net revenues of Denver Water. COPs are secured by lease revenue payments from general revenues, subject to annual appropriation. Leased asset provides additional security. KEY RATING DRIVERS LARGE ECONOMIC BASE: Denver's economy is fundamentally sound and diverse, serving as the hub of commerce for a large 10-county metropolitan area and as the seat of state government. PRESSURED BUT STABLE FINANCES: Financial performance weakened due to the recession but has since improved due to conservative revenue projections, significant budget cuts and management's use of nonrecurring measures which have kept reserves within prudent policy levels. Fitch views positively the city's upcoming ballot measure to increase its annual revenue growth flexibility which is part of the city's efforts to achieve sustainable structural balance. COMMUNITY SUPPORT: The city benefits from strong voter support for the city's large bond program and property tax levy increases for capital maintenance. REVENUE FLEXIBILITY UTILIZED: Taxing margin is available under the Taxpayer's Bill of Rights (TABOR), which the city is using to offset tax base losses in 2012. SOUND REPAYMENT SECURITY: The certificates of participation's (COPs) legal provisions are sound and provide a strong incentive to annually appropriate base rental payments. WHAT COULD TRIGGER A RATING ACTION FISCAL SUSTAINABILITY: Substantial progress in achieving structural balance is key to retaining the highest level of credit quality; failure to identify recurring solutions to budget gaps beyond 2012 will lead to negative rating pressure. CREDIT PROFILE FAVORABLE LONG-TERM PROSPECTS Denver's economic diversity benefits from its role as the hub of a 10-county MSA and the capital of Colorado. After posting job losses in 2009 - 2010 and stabilizing in 2011, recent employment gains led by professional and business services and education and health services fueled a modest 1.2% increase in employment for the 12 months ended May 31, 2012. Similarly, the MSA's unemployment rate trended up notably during the recession but declined modestly to 8.7% in May 2012, down from 9% one year earlier, but above the state and national averages of 8.2% and 7.9%, respectively. Although overall new construction activity remains modest, ongoing redevelopment throughout the city and substantial public and private investment in the downtown area, including the massive Denver Union Station project, will benefit the city's medium-term economic prospects. PRUDENT RESPONSE TO RECESSIONARY IMPACT ON LARGEST REVENUE SOURCE The city's financial profile remains sound due to management's notable efforts to curb expenditures in the wake of recent recessionary pressures on the city's largest revenue source, sales and use taxes. This revenue stream, which comprises about 50% of general fund revenues, declined by a steep 10% in 2009 and led to a $40 million draw down of the city's reserves (net of a planned use of $17 million for capital projects). As a result, the 2009 unreserved fund balance declined to $93 million, or 10.7% of spending, just above the city's 10% fund balance policy floor, from 13.1% at the end of fiscal 2008. The city's reserve required by TABOR provides another $20 million in short-term flexibility, as any use of these funds would have to be replenished the following year. The city made additional cuts totaling $100 million to balance its 2010 budget, resulting in a large $22.8 million surplus. In addition to greater than budgeted sales and use tax revenues, management reduced its payment to the old hire fire pension plan by $18 million due to the attainment of that year's required funding level. Fitch Ratings notes that the total old hire fire plan's funding level was met and the partial deferral does not have to be repaid. Along with budget cuts and revenue enhancement, management initially planned to use the 2010 surplus to help close another $100 million budget gap in the 2011 budget. However, the planned use of the 2010 surplus was not required as the city's operations were aided by greater than budgeted sales and use tax growth, continued cost controls, and another partial contribution deferral to the old hire fire pension plan. Sales and use tax receipt growth of 7.7% more than doubled the projected gain of 3.5%. Actual 2011 results yielded a large $33.4 million in net operating surplus (equal to 3.8% of spending). In addition, the implementation of GASB 54 resulted in a large $44.8 million positive adjustment to the general fund balance. As a result, the unrestricted fund balance (sum of committed, assigned, and unassigned fund balance per GASB 54) increased to a large $160 million or 18.4% of spending. To cope with continued operating pressures, management budgeted to use the 2010 surplus ($22.8 million or 2.5% of spending) in the 2012 budget. Additional budget actions, similar to the measures taken in 2011, include revenue enhancements and spending cuts (including the elimination of 95 positions). Notably, projected sales and use tax growth of 3.5% in the revised budget has been exceeded by a notable gain of 6.9% through the first half of 2012. Based on year to date results, Fitch expects the city will outperform its budget and require a smaller or zero use of fund balance. Should the city draw down the entire $22.8 million of fund balance as budgeted, the unrestricted fund balance would total a still solid estimated $136 million or 14.6% of spending. Fitch notes that one-half of the budget cuts since 2009 are temporary and believes continued attention to creating long-term structural balance is important to maintaining the current rating. The recent recommendations of a city-appointed taskforce may aid the city in minimizing recent budget gaps; however, the major revenue enhancement recommendation is dependent on voter's approval of a permanent waiver of property tax revenue limitations. Such a waiver is projected to generate an additional $44 million in property tax revenues in 2013. Fitch will monitor the management's progress in implementing the city's other recommendations which focus on cost controls, operational efficiencies, and economic growth initiatives. GROWING BUT MANAGEABLE DEBT BURDEN Despite frequent debt issuances, the city's direct debt burden remains moderate, but overall debt levels are moderately high at $6,574 per capita and 5.3% of full market value. Previously rapid, the combined principal pay out rate for GO bonds and COPs is average. The city has $60.5 million in remaining GO bond authorization from its large $550 million bond program approved by voters in Nov. 2007. Certificates of participation (COPs) comprise a manageable 25.8% of the city's debt and are secured by sound legal provisions along with a strong incentive to annually appropriate annual base rental payments. A moderate 15.8% of the city's general government debt is comprised of variable rate demand obligation COPs, all of which are hedged with swaps. The funded position of the city's pension for its non-fire and police personnel is satisfactory; similarly, the state's pension plans for fire and police personnel are adequately funded. The city's modest OPEB liability is an implicit rate subsidy, funded on a pay-as-you-go basis.