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HomeMy WebLinkAbout09(A) - Award Sale of GO Bonds ReportSummary: Prior Lake, Minnesota; General Obligation Primary Credit Analyst: Charles Grabowski, Chicago + 1 (312) 233 7041; Charles.Grabowski@spglobal.com Secondary Contact: David H Smith, Chicago + 1 (312) 233 7029; david.smith@spglobal.com Table Of Contents Rating Action Stable Outlook Credit Opinion Related Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 10, 2021 1 Summary: Prior Lake, Minnesota; General Obligation Credit Profile US$6.995 mil GO rfdg bnds ser 2021B due 12/15/2029 Long Term Rating AA+/Stable New US$6.24 mil GO bnds ser 2021A due 12/15/2031 Long Term Rating AA+/Stable New Prior Lake GO Long Term Rating AA+/Stable Affirmed Prior Lake GO Long Term Rating AA+/Stable Affirmed Rating Action S&P Global Ratings assigned its 'AA+' long-term rating to Prior Lake, Minn.'s $6.24 million series 2021A general obligation (GO) bonds and its $6.995 million 2021B GO refunding bonds. At the same time, we affirmed our 'AA+' long-term rating on the city's GO debt outstanding. The outlook on all ratings is stable. The bonds are secured by Prior Lake's GO unlimited property tax pledge. Debt service on the 2021A bonds is also payable from special assessments, but we rate to the GO pledge, which we view as the stronger security. Other GO debt of the city that we rate is secured by additional revenue pledges, but we rate these bonds to the GO pledge because we consider the GO pledge to be the stronger security. The 2021A bonds will be used to finance street reconstruction and improvements, and to refund, on a current basis, outstanding maturities of the city's 2011B GO bonds. The series 2021B bonds will be used to refund, on a current basis, outstanding maturities of the city's 2012A and 2014A GO bonds. Credit overview Prior Lake is located about 24 miles southwest of the Twin Cities, which supports its very strong economy. Financially, the city has reported consistently positive operating results in the general fund and across total governmental funds, leading to increases in available reserve levels. While the city plans to slightly draw down these available reserves in fiscal 2021, we expect them to remain very strong. However, we consider the city's overall debt burden to be fairly large, and a credit weakness. While the city plans to issue additional new-money debt in the coming years, we do not expect this issuance to further deteriorate the city's debt profile. The rating further reflects our view of the city's: • Very strong economy, with access to a broad and diverse metropolitan statistical area (MSA); • Very strong management, with strong financial policies and practices under our Financial Management Assessment (FMA) methodology; • Strong budgetary performance, with operating results that we expect could weaken in the near term relative to fiscal WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 10, 2021 2 2020, which closed with operating surpluses in the general fund and at the total governmental fund level; • Very strong budgetary flexibility, with an available fund balance in fiscal 2020 of 89% of operating expenditures; • Very strong liquidity, with total government available cash at 130.2% of total governmental fund expenditures and 6.4x governmental debt service, and access to external liquidity we consider strong; • Weak debt and contingent liability profile, with debt service carrying charges at 20.3% of expenditures and net direct debt that is 154.9% of total governmental fund revenue, but rapid amortization, with 97.0% of debt scheduled to be retired in 10 years; and • Strong institutional framework score. Environmental, social, and governance (ESG) factors We have analyzed the city's ESG risks and determined that all are in line with our view of the sector standard. We note that the city could be susceptible to occasional flooding. However, we believe this risk is mitigated by the city's flood response policy and maintenance of very high reserve levels. Stable Outlook Upside scenario We could raise the rating if debt levels moderate and economic metrics improve, in line with higher-rated peers. Downside scenario We could lower the rating if the city experiences a budgetary imbalance, leading to a material weakening in budgetary flexibility. Credit Opinion Very strong economy The city, with an estimated population of 26,164, is located in Scott County in the Minneapolis-St. Paul-Bloomington, MN-WI MSA, which we consider to be broad and diverse. The city has a projected per capita effective buying income of 142% of the national level and per capita market value of $158,652. Overall, the city's market value grew by 7.5% over the past year, to $4.2 billion in 2020. The county unemployment rate was 2.7% in 2019, but the COVID-19 pandemic resulted in the 2020 average unemployment rate increasing to 5.9%. Major employers in the city include the Shakopee Mdewakanton Sioux Community (4,500 employees), which operates the Mystic Lake Casino; the local school district (1,195); and childcare provider Playworks (175). Market values have increased steadily during the past few years and estimates provide for additional increases in net tax capacity going forward. About 89% of the tax base is residential, which has provided the city a stable source of tax base growth in recent years. The city's top 10 taxpayers represent 5% of its tax base, which we consider very diverse. Going forward, management expects robust growth, both residentially and commercially. Based on this growth, we expect the local economy to remain very strong. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 10, 2021 3 Summary: Prior Lake, Minnesota; General Obligation Very strong management We view the city's management as very strong, with strong financial policies and practices under our FMA methodology, indicating financial practices are strong, well-embedded, and likely sustainable. Highlights of the city's management policies and practices include: • Use of two years of historical data, outside data sources, and line-item estimates when developing the budget; • Budget-to-actual results and investment holdings are reported to council quarterly; • A current-plus-10-year long-term financial plan, although council typically focuses on the upcoming five years; • A 10-year capital improvement plan that is updated regularly; • A formal investment policy, with investment holdings reported to council quarterly; • Debt management policy, which includes limitations on the issuance and amortization of debt and requires the city to maintain a debt management study, which forecasts future borrowing plans; and • Formal reserve policy of maintaining general fund reserves at a minimum of 40% to 50% of expenditures. Strong budgetary performance The city had operating surpluses of 16% of expenditures in the general fund and 6.6% across all governmental funds in fiscal 2020. While we expect Prior Lake to have at least balanced operating results going forward, we do not expect results to be as favorable as they had been in 2020. Our analysis of the city's budgetary performance reflects adjustments made for recurring transfers, one-time expenditures, the spending of bond proceeds, and adjusted debt service costs paid by water enterprise fund transfers. General fund performance and total governmental fund performance have been positive in recent years on an adjusted basis. In fiscal 2020, the city outperformed its final budget, which was structured with a $201,250 deficit. Driving this result was better-than-expected building permit revenue, increased state aid, and operating grants, as well as lower expenditures associated with decreased personnel costs, and operating supply cost savings across departments. Major general fund revenue sources in fiscal 2020 include property taxes (54.1%), intergovernmental revenue (24.8%), charges for services (6.6%), and licenses and permits (5.5%). Additionally, the city received just under $2 million in federal Coronavirus Aid, Relief, and Economic Security (CARES) Act funding in fiscal 2020. The city's fiscal 2021 budget calls for a slight deficit in the general fund after net transfers. Historically, year-end results have outperformed budgeted figures, and management reports that revenues are tracking above budgeted. Finally, the city expects to receive approximately $3.1 million in further stimulus funding in fiscal 2021. Very strong budgetary flexibility In fiscal 2020, the city had an available fund balance of 89% of operating expenditures, or $12.4 million. We expect the available fund balance to remain above 30% of expenditures for the current and next fiscal years, which we view as a positive credit factor. The available fund balance includes $10.0 million (71.8% of expenditures) in the general fund and $2.4 million (17% of expenditures) that is outside the general fund but legally available for operations with council approval. These reserves outside of the general fund include balances in the city's revolving equipment, revolving park equipment, and facility management funds. Based on our expectation that the city will maintain strong budgetary WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 10, 2021 4 Summary: Prior Lake, Minnesota; General Obligation performance during the next few years, we expect budgetary flexibility to remain very strong. Very strong liquidity In fiscal 2020, the city had total government available cash equal to 152.9% of total governmental fund expenditures and 7.5x governmental debt service. In our view, the city has strong access to external liquidity, if necessary. After adjusting restricted amounts, the city had approximately $35.9 million in available cash and investments in 2020 that were held primarily in money market funds, U.S. agency securities, certificates of deposit, and other investments that we do not consider aggressive. The city has strong access to external liquidity, in our opinion, because of its history of issuing GO debt over the past two decades. The city has a 2014 private lease-purchase agreement with approximately $1.3 million currently outstanding. Events of default are standard under the agreement and debt acceleration, in an event of default, is limited to the amounts owed in the current fiscal year, with a maximum amount of approximately $300,000. We therefore do not consider the lease-purchase agreement to be a contingent liability risk, and expect the city's liquidity to remain very strong. Weak debt and contingent liability profile Total governmental fund debt service is 20.3% of total governmental fund expenditures and net direct debt is 154.9% of total governmental fund revenue. Approximately 97.0% of the direct debt is scheduled to be repaid within 10 years, which is, in our view, a positive credit factor. The city expects to issue $9.7 million in additional debt within the next two years for capital improvements. We do not expect that these additional debt plans will weaken the city's existing debt profile. Prior Lake's combined required pension and actual other postemployment benefit (OPEB) contributions totaled 5.3% of total governmental fund expenditures in 2020. The city made its full required pension contribution in 2020. We do not believe that pension liabilities represent a medium-term credit pressure, as contributions are only a modest share of the budget, and we believe the city has the capacity to absorb higher costs without pressuring operations. Prior Lake participates in two multiple-employer, defined-benefit pension plans that have seen recent improvements in funded status, though plan statutory contributions have regularly fallen short of actuarial recommendations. Along with certain plan-specific actuarial assumptions and methods, this introduces some long-term risk of funding volatility and cost acceleration. The city participates in the following plans: • Minnesota General Employees Retirement Fund (GERF): 79.1% funded (as of June 30, 2020), with a city proportionate share of the plan's net pension liability of $4.3 million. • Minnesota Police and Fire Fund (PEPFF): 87.2% funded (June 30, 2020), with a proportionate share of $3.4 million. • A single-employer, defined-benefit OPEB plan: 0% funded, with a net OPEB liability of $865,000. Total contributions to GERF and PEPFF were 89% and 94%, respectively, of our minimum funding progress metric and were slightly above static funding in both cases. Annual contributions are based on a statutory formula that has typically produced contributions lower than the actuarially determined contribution for each plan. In our view, this WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 10, 2021 5 Summary: Prior Lake, Minnesota; General Obligation increases the risk of underfunding over time if the state legislature does not make adjustments to offset future funding shortfalls. Other key risks include a 7.5% investment rate-of-return assumption (for both plans) that indicates some exposure to cost acceleration as a result of market volatility, and an amortization method that significantly defers contributions through a lengthy, closed 30-year amortization period based on a level 3.25% payroll growth assumption. Regardless, costs remain only a modest share of total spending, and we believe they are unlikely to pressure the city's medium-term operational health. Strong institutional framework The institutional framework score for Minnesota cities with populations greater than 2,500 is strong. Related Research • Through The ESG Lens 2.0: A Deeper Dive Into U.S. Public Finance Credit Factors, April 28, 2020 Ratings Detail (As Of June 10, 2021) Prior Lake GO bnds Long Term Rating AA+/Stable Affirmed Prior Lake ICR Long Term Rating AA+/Stable Affirmed Prior Lake GO Long Term Rating AA+/Stable Affirmed Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. 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