April 21, 2015
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Out of Sustainable Control. North Las Vegas, which faced near insolvency, but which is barred from seeking municipal bankruptcy protection because such protection is not authorized by Nevada law, yesterday received a nod for its fiscal efforts: Fitch Ratings revised its outlook for the municipality of 222,000 to stable from negative for $414.4 million of North Las Vegas, Nev. bonds, and affirmed the rating at B—revisions affecting some $284.7 million of limited-tax general obligation water and wastewater improvement bonds and $129.7 of LTGO bonds. Fitch said the junk-rated bonds warranted a revision to a stable outlook because of “successful negotiation of labor concessions needed to balance fiscal 2015 and 2016 budgets.” The slight upgrade reflects well on the city’s fiscal efforts; last year Fitch likened the city’s fiscal plight to Detroit and Stockton. Nevertheless, one fundamental has not changed: the municipality’s ability to recover by itself—or, as Fitch notes: “The B rating continues to reflect Fitch’s view that the city has virtually no remaining budget flexibility…Given tax caps and the scope of service cuts already made, Fitch believes any meaningful solutions are outside the city’s control.” The rated municipal bonds are backed by the full faith and credit of the city, subject to Nevada’s constitutional and statutory limitations on the aggregate amount of ad valorem property taxes. In addition, the city’s bonds are backed either by an irrevocable pledge of and lien on certain consolidated tax revenues (15% of these revenues) or by water/wastewater system net revenues. In adjusting its rating, Fitch wrote the uptick reflected successful negotiation of labor concessions needed to balance fiscal 2015 and 2016 budgets; yet remarked that the B rating reflected “that the city has virtually no remaining budget flexibility. Given tax caps and the scope of service cuts already made, Fitch believes any meaningful solutions are outside the city’s control,” noting that unrestricted balances in the municipal utility fund serve as the city’s only meaningful source of liquidity and are expected to be drawn down to just adequate levels to support governmental operations over the intermediate term. The rating agency also determined the city’s and region’s economy were among the hardest hit in the U.S. by the collapse of the housing market with a combined loss of 56% of taxable assessed valuation. Fitch also found that the city’s debt is high relative to its tax base, amortization is slow, and debt service is escalating in the intermediate term. Worryingly with regard to fiscal sustainability, Fitch added that carrying costs, including debt and retiree liabilities, are expected to increase with rising debt and pension payments. Fitch omitted age—but those pension payments are most likely to be for considerably longer duration than previous generations. The rating agency noted that its rating could improve “if the city is able to develop a realistic strategy towards near-term deficit reduction as well as a medium-term plan to address the required reduction in utility transfers by fiscal 2021,” but that “the economy is fragile leaving the city ill-prepared to manage any further contractions. A down cycle in the economy from this point would likely result in further financial stress and a rating downgrade.”
Caught Between a Dry Rock and a Hard Place. Fitch believes North Las Vegas retains virtually “no additional expenditure flexibility.” The city has eliminated about 800 full-time equivalent positions (35% since the peak in 2009) through attrition and voluntary separation and layoffs. The credit rating agency added that, according to the city, the city’s current staffing level is unsustainable:
• Revenues bottomed out in fiscal 2013 at $86.95 million, a drop of 47.2% since their fiscal 2008 peak, and remain just 61% of the peak level.
• Property taxes continue to decline and are off 70% from their peak, comprising only 7.4% of revenues compared to 17% in fiscal 2009.
• Fitch estimates that carrying costs currently consume 20.7% of governmental spending. The burden approximates full funding of the actuarally required contribution to the state plan, which the state does not currently require. Fitch expects the burden to increase as both debt service and retirement benefit costs rise.