Fitch Rates Manhattan, KS ULTGO Bonds 'AA+'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AA+' rating to the following city of Manhattan, KS bond:

--$2,065,000 general obligation (GO) bonds series 2016-B.

The bonds are expected to be sold via competitive sale Nov. 15. Bond proceeds will be used to fund various city capital projects.

SECURITY

The ULTGO bonds and notes are secured by the city's full faith and credit and its ad valorem taxing power, without limitation as to rate or amount.

KEY RATING DRIVERS

The 'AA+' rating is indicative of the city's significant ability to raise revenues, adequate expenditure flexibility, manageable long-term liabilities and sound operating performance.

Economic Resource Base

Manhattan is located in northeastern Kansas in Riley and Potawatomie Counties, roughly 55 miles west of Topeka. The city serves as the economic and cultural center for the region. Fort Riley, a military base with 21,065 military personnel located 10 miles west of the city limits, and Kansas State University (KSU) with roughly 24,500 students located within the city, anchor the local economy.

Revenue Framework: 'aa' factor assessment

Property taxes and other revenues are expected to increase above the rate of inflation. The city has ample ability to raise revenues sufficient to cover a normal economic decline.

Expenditure Framework: 'aa' factor assessment

The city has an adequate ability to cut expenses, including pay-go capital, at the time of economic downturn. Carrying costs are elevated and the labor environment is manageable.

Long-Term Liability Burden: 'aa' factor assessment

Long-term liabilities are moderate when compared with the city's economic base.

Operating Performance: 'aa' factor assessment

The city's reserve levels are more than sufficient for the rating level even with a significant amount of historical revenue volatility, given significant revenue control and adequate spending flexibility. Conservative budgeting practices promote positive operating results.

RATING SENSITIVITIES

Financial Flexibility: The rating is dependent on the maintenance of financial flexibility and conservative budgeting practices.

CREDIT PROFILE

Manhattan's regional economic prospects are strong, with continued assessed valuation growth, low unemployment rates, and sustained population growth. The 2015 population, estimated at 56,308, has increased 26% since 2000 through both real gains and limited annexations. The presence of KSU's large student population skews downward the per capita personal income level, which is below state and national performance.

Taxable assessed valuation (TAV) grew 3.2% in 2015 over the prior year, which is consistent with historical performance, increasing 55% since 2006. Management estimates TAV growth of 3% for fiscal 2017. Approximately one-fifth of the city's value is tax-exempt due to KSU's notable presence in the city. While private developers have several projects in progress, the pace of development has recently tempered.

Revenue Framework

The city is heavily reliant on economically sensitive sales tax revenues, which comprise approximately 50% of general fund revenues.

Historical revenue growth is below U.S. GDP but above the rate of inflation. Sales tax revenues for 2016 are currently up 2.6% year to date, which is consistent with management expectations. While assessed values have seen significant growth, the impact of the gains on revenues has been limited as property taxes comprise a small 9% of general fund revenues.

Management currently has the unlimited ability to raise property tax revenues without seeking voter approval. However, as of January 2017 the city will be subject to property tax-lid limitations that restrict tax revenues to the five-year rolling average of the consumer price index. Property tax levies in excess of the lid require voter approval. The legislation has several property tax categories which are exempt from the tax-lid; these include bond principal and interest payments, payment of court judgments or settlements, police and fire, tax increment financing districts, and state or local emergency - including financial emergencies. Fitch believes the exemptions provide ample flexibility for the city to utilize this revenue source if required in an amount needed to offset a recessionary revenue decline.

Expenditure Framework

Public safety is one of the city's largest expenditures and is responsible for 80% of the operational budget for the Riley County Police Department, a City/Riley County consolidated law enforcement agency. The city supports public safety through both the general fund and the Riley County Police Department Fund, which is supported through a dedicated property tax rate that is controlled by the county. Combined public safety spending comprises approximately 20% of governmental expenditures.

Fitch expects the pace of spending growth to be in line with to modestly above expected revenue growth.

Carrying costs for debt, pensions, and other-post employment benefits (OPEB) are elevated at 29% of government expenditures, which may pressure the provision of essential services during an economic downturn. Approximately 91% of carrying costs are attributable to debt service expenses. Manhattan has an adequate level of flexibility to reduce main expenditure items and is committed to cutting non-essential spending, including pay-go capital in times of economic downturn.

Management has moderate control over labor expenses. While they have full control over headcount and strikes are prohibited, public employee union contracts are subject to binding arbitration. Despite this limitation, management has a positive working relationship with labor and has been able to find public safety cost savings when needed.

Long-Term Liability Burden

Overall debt plus Fitch-adjusted direct pension UAAL as a percent of personal income is moderate at approximately 15%, of which 66% is attributable to direct debt. Fitch expects the liability burden to remain level in the near term.

Employees are covered by the Kansas Public Employees Retirement System (KPERS) and Kansas Police and Firemen's Retirement System (KP&F) cost-sharing multiple-employer defined benefit pension plans. Combined, the plans report an assets-to-liabilities ratio of 65%, assuming an 8% rate of return, as of Dec. 31, 2015. Using Fitch's more conservative 7% rate of return, the estimated assets-to-liabilities ratio is 59%.

Operating Performance

The city has strong gap-closing ability and Fitch expects the city will maintain satisfactory reserves in an economic downturn despite exposure to notable revenue volatility. The city has ample unrestricted reserves in special revenue funds available for general fund use. Fitch does not fully incorporate such reserves into its analysis of general fund flexibility, as some special revenue funds have their own operating requirements. Fitch estimates available special revenue fund balances to be at least double the general fund cushion of 10% of spending in fiscal 2015.

Management maintains conservative budgeting practices including monthly sales tax revenue reporting and closely monitors expenditures. Fitch expects the city to maintain strong gap-closing capacity. The city's ample financial cushion, coupled with strong revenue and expenditure flexibility, reinforces this position.

Date of Relevant Rating Committee: May 13, 2016

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/site/re/879478

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014644

Endorsement Policy

https://www.fitchratings.com/regulatory

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Source: Fitch Ratings

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