Nov 8 - Fitch Ratings has assigned an 'AA' rating to the following Santa Fe, New Mexico (the city) obligations: --$5.135 million subordinate lien gross receipts tax (GRT) improvement revenue bonds, series 2012C. The bonds are expected to price via negotiation as early as the week of Nov. 12, 2012 pending market conditions. Proceeds from the sale of the bonds will be used to refund the city for the purchase and renovation of city office space and to pay issuance costs. In addition, Fitch affirms the following: --$28.95 million general obligation (GO) bonds at 'AA+'; --$47.73 million GRT revenue bonds outstanding, series 2010A, 2012A at 'AA+'; --$9.835 million subordinate lien GRT revenue bonds outstanding, series 2010B at 'AA'. The Rating Outlook is Stable. SECURITY The revenue bonds are secured by pledged revenues comprised of the 1.225% state shared GRTs; 0.5% municipal GRT; and 0.0625% infrastructure GRT; any portion of the above-mentioned GRTs that would have been remitted to the city but previously exempted; and any other GRT received by the city pledged for payment of the bonds. The lower rating for the series 2012C bonds reflects their subordinate position in the flow of pledged revenues for bond repayment. KEY RATING DRIVERS PROMINENCE OF GROSS RECEIPTS TAXES: Given the importance of GRT revenues to general fund operations (represents 81% of general fund revenues), the credit rating for the GRT revenue bonds is inextricably tied to the city's overall financial performance and general obligation bond rating. STRONG DEBT SERVICE COVERAGE: Debt service coverage is favorable and legal covenants, particularly the additional bonds test (ABT), are strong. THINNED BUT STILL SOLID RESERVES: Despite the recent contraction in GRTs, general fund reserve levels remain favorable. Most recent monthly collections of GRTs indicate ongoing recovery in revenues but, if revenue recovery falters, modest cash transfers from the wastewater fund may be used to balance operations in the next few years. AVAILABLE TAXING MARGIN AVAILABLE: The city maintains some revenue-raising flexibility through its GRT and property tax rates. ELEVATED BUT MANAGEABLE DEBT PROFILE: Debt levels are above average, reflecting the infrastructure challenges of an older city. SOUND ECONOMY: Economic stability is provided by the large state government presence and unemployment rates remain below state and national averages. Wealth indices are also above average. WHAT COULD TRIGGER A RATING ACTION STRONG RESERVE LEVELS: The continuance of solid reserves remains integral to maintaining the city's high-grade credit quality given the heavy reliance on economically sensitive sales tax revenue. CREDIT PROFILE HEALTHY REGIONAL ECONOMY Santa Fe serves as the county seat and state capital and is located in north central New Mexico. The local economy is anchored by the large state government presence. Other important sectors include tourism and recreation, retail trade, healthcare, and some industry. In addition, the recent completion of the commuter rail line between Santa Fe and Albuquerque enhances employment and tourism opportunities for the region. Historically, Santa Fe unemployment rates have been below those of both the state and nation. However, the city was not immune to the recent economic downturn, as evidenced by a rising unemployment rate that peaked at 6.5% in 2009. The unemployment rate has trended down since then and totaled a moderate 4.8% as of August 2012, still well below the rates of the state (6.4%) and nation (8.2%). Wealth indices for the city are above the statewide average. In addition, property wealth is evident in the city's high market value per capita ratio, which is over $160,000, despite the large amount of tax-exempt values. After years of healthy annual gains in taxable assessed valuation (TAV), growth slowed over the last few years, with preliminary information for fiscal 2013 indicating another modest increase. Independent housing information points to below-average mortgage delinquencies and foreclosures, and property tax collections continue to be solid. STABALIZING REVENUES Typical of municipalities in New Mexico, the city's general fund is heavily dependent on state and local GRTs for general fund support. In fiscal 2011, combined GRTs accounted for approximately 81% of revenues. Property taxes, on the other hand, represented less than 4% of operating support. GRT collections declined by 3.2% and 6.6% in fiscal years 2009 and 2010, respectively. Audited fiscal 2011 results indicate GRT collections stabilized, growing by less than 1%. Unaudited fiscal 2012 results show improved growth of GRT collections at 3% over the prior year, which Fitch views as reasonable. Year to date GRT receipts for the first four months of fiscal 2013 have grown by 1%. RESERVE FUND DECLINES BUT BEGAN TO STABILIZE IN 2011 The city's general fund reserves have thinned due to the GRT declines but remain solid. The city posted general fund drawdowns of $5.9 million and $5.3 million in fiscal years 2009 and 2010, respectively, each equal to over 7% of spending. Aided by stabilized GRT collections, audited fiscal 2011 results were positive with a modest addition to fund balance, bringing the unrestricted fund balance (sum of assigned, unassigned, and committed per GASB 54) to $9.5 million or 13% of spending and transfers out. INCREASING REVENUES; FURTHER REDUCED EXPENDITURES IN 2012 Preliminary fiscal 2012 results indicate another modest surplus, achieved through $2 million in salary and benefit savings, $942,000 in program savings and efficiencies, and $948,000 in revenue enhancements. Fiscal 2012 revenues of $83 million were up 3% over 2011, beating the conservative budget assumes for flat revenue growth. The $75.7 million fiscal 2013 budget is balanced assuming flat revenue growth and includes a 2% salary increase for all city employees. The general fund regularly receives cost recovery from the wastewater fund for related environmental expenses. $1.7 million in transferred reimbursements for fiscal 2012 totaled 2% of revenues and transfers in. The city expects transfers to return to lower historical levels by 2013 as associated costs are planned to roll off. The city is fortunate in that it maintains some important revenue raising flexibility with the availability of an additional 1/4% on the municipal GRT rate as well as substantial property tax margin. Reportedly, the city maintains the second lowest property tax rate in the state, behind Albuquerque. However, given the current economic climate, raising the GRT or property tax rates may prove to be politically challenging. STRONG DEBT SERVICE COVERAGE Debt service coverage on senior and subordinate lien bonds and New Mexico Finance Authority loans is strong as expected given the importance of GRTs to operations. Fiscal 2011 pledged revenues provide 4.2 times (x) coverage of senior lien maximum annual debt service (MADS) and 2.4x coverage on senior and subordinate lien MADS (including debt service paid in practice from other sources but secured by subordinate GRT revenues). Legal provisions are solid. A multi-tiered additional bonds test that, among other provisions, calls for a 1x coverage requirement of senior lien MADS by municipal and infrastructure GRTS only (state shared GRTs represent the bulk of pledged revenues) and a subordinate lien bonds test of 2x combined senior and subordinate MADS. While included in some of the prior GRT debt issuances, there is no reserve fund established for the 2012C bonds. ABOVE AVERAGE DEBT BURDEN The majority of the city's outstanding tax-supported debt is secured by GRTs. GO debt outstanding, however, is limited. At 400 years old, the city's age and infrastructure needs are driving the overall debt ratios to above average levels (4.2% of taxable market value and $6,811 per capita). Given the city's stabilized GRT collections, management's goal is to return to a two-year cycle for GRT issuance. The city also plans to issue a modest $17 million in GO bonds later this year approved from a recent bond election authorizing various public improvements. Carrying costs for debt service, pensions and OPEB are elevated at 27% of general fund and debt service fund spending. Pensions and OPEB for city employees are adequately funded and provided through the state-administered Public Employees Retirement Association defined benefit plan.