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HomeMy WebLinkAbout09(A) - Resolution Approving the Issuance and Sale of General Obligation Bonds Series 2022A ReportSummary: Prior Lake, Minnesota; General Obligation Primary Credit Analyst: Melody W Vinje, Centennial + 1 (303) 721 4163; melody.vinje@spglobal.com Secondary Contact: Jessica Olejak, Chicago + 1 (312) 233 7068; jessica.olejak@spglobal.com Table Of Contents Credit Highlights Outlook Credit Opinion Related Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 4, 2022 1 Summary: Prior Lake, Minnesota; General Obligation Credit Profile US$2.175 mil GO imp bnds ser 2022A dtd 09/08/2022 due 12/15/2032 Long Term Rating AA+/Positive New Prior Lake GO bnds Long Term Rating AA+/Positive Outlook Revised Prior Lake ICR Long Term Rating AA+/Positive Outlook Revised Prior Lake GO Long Term Rating AA+/Positive Outlook Revised Prior Lake GO Long Term Rating AA+/Positive Outlook Revised Prior Lake GO Long Term Rating AA+/Positive Outlook Revised Credit Highlights • S&P Global Ratings revised its outlook to positive from stable and affirmed its 'AA+' long-term rating on Prior Lake, Minn.'s existing general obligation (GO) debt. • At the same time, we assigned our 'AA+' long-term rating, with a positive outlook, to the city's expected $2.2 million series GO improvement bonds. • The outlook revision reflects our view of the city's consistently very strong financial performance, coupled with a very strong economy, and well-managed fixed costs. Security The bonds are secured by the city's GO unlimited property tax pledge. Debt service on the 2022A bonds is also payable from special assessments. We rate to the unlimited-tax pledge because we have insufficient information under our rating criteria to for a credit opinion on the other revenue stream. Bond proceeds will finance a street reconstruction project in the city's downtown. Credit overview Prior Lake ended fiscal 2021 with positive net results and increased reserves, despite an amended budget calling for a large use of reserves. The city's financial performance has been consistently positive, and we think it will sustain very strong reserves in some form for the foreseeable future, notwithstanding the complexities of managing increased public safety costs and bringing fire services in house in fiscal 2023. We view the city's comprehensive long-term planning and maintenance of very strong reserves as a credit strength, providing additional cushion. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 4, 2022 2 The city is about 24 miles southwest of the Twin Cities and it experienced sustained residential growth, increasing its population about 13% in the past decade. While the local economy is very strong, we believe there is potential for weakening due to national recession risk, which S&P Global Economics currently assesses at 45% probability of occurring during the next 12 months. For more information see "U.S. Business Cycle Barometer: The Party’s Over" published July 27, 2022, on RatingsDirect. In addition, we consider the city's overall debt burden to be very large, and a credit weakness. Although the city plans to issue additional new-money debt in the next few years, we do not expect it will worsen the city's debt profile. The rating further reflects our view of the city's: • Projected incomes above the national average, growing net tax capacity and city's participation in the Minneapolis-St. Paul-Bloomington metropolitan statistical area (MSA); • Consistently strong budgetary performance, with operating surpluses supporting very strong budgetary flexibility and liquidity; • Very strong management, with strong financial policies and practices under our Financial Management Assessment (FMA) methodology, and a strong institutional framework; and • Weak debt and contingency debt profile, with future debt plans, partially offset by the city's very rapid amortization with about 99% of debt being repaid within 10 years. Environmental, social and governance We have analyzed the city's environmental, social, and governance risks relative to its economy, management, budgetary outcomes, and debt and liability profile, and view them as neutral within our credit analysis. We note that the city could be suspectable to occasional flooding. However, we believe this risk is mitigated by the city's flood-response policy and maintenance of very high reserves. Outlook The positive outlook reflects a one-in-three chance that we could raise the rating over the two-year outlook period if the city maintains adequate performance as it balances increased personnel costs of adding a full-time fire department, and inflationary pressures from a potential recession. Downside scenario We could revise the outlook to stable or lower the rating if financial performance and reserves weaken substantially, particularly if reserves fall well below the city's reserve policy without a credible plan to restore to compliance. Upside scenario We could raise the rating if the city sustains reserves comparable with fiscal 2021 levels even as it manages the complexities of transitioning to direct provision of fire services, particularly if the city's debt levels moderate and its income profile strengthens. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 4, 2022 3 Summary: Prior Lake, Minnesota; General Obligation Credit Opinion Growing population and steady residential development expected to continue Prior Lake's net tax capacity has steadily increased year over year (7% from 2021-2022) primarily from new residential development. Management reports the city has a strong housing market, with demand for single- and multifamily homes. Recently the city issued a permit for a 97-unit multifamily complex, and it reports about 400 additional multifamily homes are in various stages of the approval process. Also adding to the city's market values are "garage condominiums"; these equipment-storage units have become popular within the area for recreational use and sell for $200,000-$300,000. Located in Scott County in the Minneapolis-St. Paul-Bloomington MSA, the city benefits from participation in its larger region. 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 the city estimates provide for additional increases in net tax capacity. About 90% 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 7% of its tax base, which we consider very diverse. In the future, management expects robust growth, both residentially and commercially. Healthy financial performance expected to continue in fiscal years 2022 and 2023 We believe the city's conservative budgeting practices and comprehensive capital planning are driving the city's healthy financial performance. Our analysis includes adjustments for revenues and expenditures that we view as one-time, and adjustments for recurring transfers. After adjustments, fiscal 2021 ended with a slight surplus due to well performing revenues and reduction of expenditures due to timing and supply chains. The amended budget called for the spending of approximately $1.3 million in reserves, for various expenses such as a compensation study, police wage adjustment, and a one-time transfer of $800,000 to the facility management fund for capital projects. However, reserves actually increased at fiscal year-end due mostly to stronger-than-budgeted revenue. Prior Lake's American Rescue Plan allocation totaled $2.98 million, which the city intends to use for street reconstruction and fire station remodels. Fiscal 2022 is budgeted with a small deficit to incorporate costs of the compensation study and $275,000 of expenditures carried from fiscal 2021 to 2022 due to timing. Primary changes to the budget include increased public safety costs from the prior year by $590,000, and the council approved increase in the gas and electric-franchise-fee revenue dedicated to pavement management that is expected to generate $1 million in 2022. Fiscal 2023 is budgeted to include the costs for the city's fire department. The city applied for a federal Staffing for Adequate Fire and Emergency Response (SAFER) grant; if selected, the grant will pay up to an estimated $1.3 million of full-time fire personnel costs through fiscal 2026. Management expects city council will approve an increase in the incremental tax levy of $400,000, which will fully support a full-time fire department, with or without the grant. If the full amount of the SAFER grant is awarded to the city, the additional level funds will be used for capital funding projects until funding is needed in 2026. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 4, 2022 4 Summary: Prior Lake, Minnesota; General Obligation The city's liquidity is robust, in our view, with cash and investments of $44.5 million after adjusting for unspent proceeds; likewise, funds available to general operations are very strong, in our view, ending with $13.8 million in fiscal 2021.The available fund balance includes $10.4 million (70.6% of expenditures) in the general fund and $3.4 million (23% of expenditures) that is outside the general fund but legally and practically available for operations. These include balances in the city's revolving equipment, revolving park equipment, and facility management funds. The city has alternative financing in the form of a 2014 private lease-purchase agreement, with approximately $1 million 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 we expect the city's liquidity will remain very strong. Based on the city's conservative budgeting practices and projections for balanced budgets in fiscal 2023 and beyond we believe operations will be stable. Strong management with strong FMA We expect management will remain strong. 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 next 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%-50% of expenditures. In addition, the city enhanced its cyber security by implementing a cyber-security policy, personnel training, and firewalls. The institutional framework score for Minnesota cities with populations greater than 2,500 is strong. Substantial debt burden with elevated fixed costs, partially offset by rapid amortization The city's net direct debt is $35.9 million. About 99% of debt is scheduled to repaid within 10 years, which we view as a credit strength. The city has additional debt plans of $6.3 million in the next two years for street projects; we do not expect these additional plans will weaken the city's existing debt profile. Pension and other postemployment benefits are not a near-term pressure • 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 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 4, 2022 5 Summary: Prior Lake, Minnesota; General Obligation in funded status, although 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. • Although the city funds its other postemployment benefits (OPEB) on a pay-as-you-go basis, exposing it to cost acceleration and volatility, we expect that near-term costs will remain only a small share of total spending and therefore not a significant budgetary pressure. The city participates in the following plans: • Minnesota General Employees Retirement Fund (GERF): 87% funded (as of June 30, 2021), with a city proportionate share of the plan's net pension liability of $3.1 million. • Minnesota Police and Fire Fund (PEPFF): 94% funded (June 30, 2021), with a proportionate share of $3.4 million. • A single-employer, defined-benefit OPEB plan: 0% funded, with a net OPEB liability of $1,075,000. Total contributions to GERF and PEPFF were both above our minimum funding progress metric and static funding in both cases. Annual contributions are based on a statutory formula that has typically produced contributions lower than the actuarially determined contribution for each plan. In our view, this increases the risk of underfunding over time if the state legislature does not adjust to offset future funding shortfalls. Other key risks include a 7.5% investment rate-of-return assumption (for both plans) that indicates some exposure to cost acceleration as a result of market volatility, and an amortization method that significantly defers contributions through a lengthy, closed 30-year amortization period based on a level 3.25% and 3.00% payroll growth assumption for GERF and PEPFF, respectively. Regardless, costs remain only a modest share of total spending, and we believe they are unlikely to pressure the city's medium-term operational health. Prior Lake, Minn.--Key Credit Metrics Most recent Historical information 2021 2020 2019 Very strong economy Projected per capita EBI % of U.S.146.3 Market value per capita ($)183,750 Population 27,026 26,654 26,164 County unemployment rate(%)3.0 Market value ($000)4,966,019 4,449,577 4,150,984 Ten largest taxpayers % of taxable value 6.8 Weak budgetary performance Operating fund result % of expenditures 1.9 15.8 5.1 Total governmental fund result % of expenditures (3.0)6.6 1.1 Very strong budgetary flexibility Available reserves % of operating expenditures 92.1 88.7 76.3 Total available reserves ($000)13,802 12,414 10,114 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 4, 2022 6 Summary: Prior Lake, Minnesota; General Obligation Prior Lake, Minn.--Key Credit Metrics (cont.) Most recent Historical information 2021 2020 2019 Very strong liquidity Total government cash % of governmental fund expenditures 164.3 152.9 135.6 Total government cash % of governmental fund debt service 926.7 753.7 760.1 Very strong management Financial Management Assessment Strong Weak debt and long-term liabilities Debt service % of governmental fund expenditures 17.7 20.3 17.8 Net direct debt % of governmental fund revenue 133.6 Overall net debt % of market value 3.1 Direct debt 10-year amortization (%)99.3 Required pension contribution % of governmental fund expenditures 4.7 OPEB actual contribution % of governmental fund expenditures 0.1 Strong institutional framework Data points and ratios may reflect analytical adjustments. EBI--Effective buying income. OPEB--Other postemployment benefits. Related Research • Through The ESG Lens 3.0: The Intersection Of ESG Credit Factors And U.S. Public Finance Credit Factors, March 2, 2022 • 2020 Update Of Institutional Framework For U.S. Local Governments 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. Use the Ratings search box located in the left column. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 4, 2022 7 Summary: Prior Lake, Minnesota; General Obligation WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 4, 2022 8 STANDARD & POOR’S, S&P and RATINGSDIRECT are registered trademarks of Standard & Poor’s Financial Services LLC. S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees. 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