NEW YORK--(BUSINESS WIRE)--Fitch Ratings has taken the following rating actions on outstanding Kingman, AZ (the city) bonds:

--$1.80 million excise tax revenue bonds series 2005 affirmed at 'AA-';

In addition, Fitch affirms the city's implied general obligation (GO) rating at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The excise tax bonds are payable from a first lien on excise tax revenues including city sales and franchise taxes, licenses and permits, fines, and state-shared sales and income taxes.

KEY RATING DRIVERS

CONCENTRATED REVENUE BASE: The city is heavily reliant on economically sensitive sales and excise tax revenues to fund government operations. Collections have seen recent annual growth following a sharp multi-year decline due to recession and housing market related weakening.

SOUND FINANCIAL PROFILE: City finances are sound, reflecting active financial management, conservative budgeting, and solid fund balance levels. Maintenance of reserves at or above the city's policy minimum is a key credit strength as it mitigates the risk associated with a revenue base dependent largely on sales taxes.

MANAGEABLE DEBT AND CARRYING COSTS: The city's debt profile is characterized by moderate debt levels, rapid amortization, and manageable capital needs. Overall carrying costs, including debt service, required pension payments and other post-employment benefit (OPEB) payments are manageable.

BELOW AVERAGE ECONOMIC INDICATORS: This small but rapidly growing city's unemployment remains above average but has been decreasing. City income levels are below average.

STRONG EXCISE TAX BOND DEBT SERVICE COVERAGE: The 'AA-' rating on the excise tax revenue bonds reflects the general creditworthiness of the city and very strong coverage of maximum annual debt service (MADS) from pledged revenues. Continued robust debt service coverage from pledged revenues is expected given that excise tax revenues represent the primary source of the city's operating revenues.

CREDIT PROFILE

The city of Kingman is about 165 miles northwest of Phoenix and 85 miles southeast of Las Vegas. Population is estimated at 28,393 in 2013, which represents an increase of about 41% since 2000.

DEPENDENCE ON ECONOMICALLY SENSITIVE REVENUES

The city's revenue base is largely dependent on economically sensitive sales and excise tax revenues including local and state sales taxes and state income tax distributions. These taxes made up about 85% of estimated general fund revenues in fiscal 2014. Mirroring the local and state-wide economy, total excise tax collections grew by about 45% between fiscal years 2004 and 2007, before declining by a total of about 23% in the subsequent four years ending in fiscal 2011.

Excise taxes returned to modest growth in fiscal 2012 (1%) with higher growth in fiscal 2013 (9.8%) and estimated for fiscal 2014 (15%). Fiscal 2013 growth reflected a new restaurant and bar tax, which added $573 thousand to general fund revenues that year, but also some base growth. Fiscal 2014 increased collections reflected continued modest base growth and a 1/2% increase in the city's sales tax rate. Continued modest growth of about 2% is expected for fiscal 2015.

SOLID RESERVES CUSHION AGAINST EXCISE TAX REVENUE VOLATILITY

The city's finances are well managed, with general fund unrestricted balances maintained in excess of the city's 25% policy target providing good financial flexibility. The city has been active in managing finances, reducing costs and enhancing revenues to address operating and capital needs and preserve fund balances. The city added a 2% room tax in 2010 (about $350 thousand annually for the general fund) and a 2% restaurant and bar tax in 2012 (about $1.2 million annually split evenly between the general fund and the highway user revenue fund). In 2014, the city implemented a temporary 1/2% increase in its sales tax rate that runs through fiscal 2016. It also reduced the restaurant and bar tax to 1% from 2%, and directed these collections entirely to the highway user revenue fund.

The city currently does not levy a property tax, but it is being considered to further enhance revenues, particularly as the recent sales tax increase expires at the end of fiscal 2016. The implementation of a property tax would require voter approval. The city council could also opt to extend the temporary sales tax increase.

Following modest deficits after transfers in fiscal years 2011 and 2012 (about 3% of spending) fiscal year 2013 saw a surplus of $190 thousand (about 1%) that increased unrestricted general fund balance to $7.8 million or 33.6% of spending. Based on unaudited estimates, the city is expecting a fiscal 2014 surplus of $573 thousand to just over $1 million, driven by the sales tax increase and better than budgeted revenue performance.

The fiscal 2015 budget assumes a deficit of about $1.1 million, including a $1 million contingency spending set aside. The city currently expects that it will not need the contingency set aside and that this, combined with better than budget revenue and expenditure performance, will lead to another surplus of about $400,000 to $500,000.

STRONG EXCISE TAX BOND DEBT SERVICE COVERAGE

Pledged excise taxes provide very strong coverage of debt service. MADS coverage based on fiscal 2013 pledged revenues is about 69 times (x). Based on estimated fiscal 2014 revenues, which include the temporary sales tax rate increase, MADS coverage is about 79x, Very high MADS coverage reflects the use of pledged revenues as the city's primary operating source and also the recent maturity of excise tax bonds issued in 1997. Additional bonds may be issued if pledged revenues from the prior fiscal year equal 2.5x projected MADS. No additional issuance is anticipated in the near term.

BELOW AVERAGE ECONOMIC INDICATORS

The city of Kingman's proximity to Phoenix and Las Vegas allows it to benefit from commercial traffic between the two cities. Kingman's major employers consist of retail, healthcare, and government entities. The top two employers are Kingman Regional Medical Center (about 1,630 employees) and Mohave County (about 1,325 employees), which combined represent about 26% of total 2013 employment.

Though the rate has been declining, city unemployment remains above average. Following a decline in 2012 (-1.7%), employment was essentially flat in 2013 (-0.6%). Year-to-date figures through August 2014 show growth of 1.7% from a year prior. The city's August 2014 unemployment rate (8.1%) is down from 10.4% a year prior, but remains higher than comparable state (7.3%) and national (6.3%) rates. Income levels are below average. City per capita income is about 80% of the national average and 88% of the state average.

City taxable assessed values have declined annually in recent years, though declines have been moderating. The city currently does not levy a property tax. Management expects that values will stabilize and return to modest growth in the near term reflecting recent and planned new development. Recent indicators for building permits issued and home values show positive trends that support near-term stabilization.

MANAGEABLE DEBT AND CARRYING COSTS

Overall debt levels are moderate at $1,242 per capita and 2% of full value. Amortization is rapid with over 90% retired in 10 years. Debt service as percentage of governmental spending is mid-range at about 8% for fiscal 2013. Near term capital plans focus on transportation, public safety, and drainage projects and are expected to be funded with a combination of tax collections, fees, and third party sources.

The city participates in the Arizona State Retirement System (ASRS), a cost sharing multiple employer (CSME) plan governed by the state, and two agent multiple employer (AME) plans for public safety and fire officials, the Public Safety Personnel Retirement System (PSPRS). Funded ratios for ASRS and the PSPRS public safety and fire plans were 75.4%. 63.3% and 70.4%, respectively, as of June 30, 2013, or an estimated 68.0%, 55.6% and 61.9%, respectively, using Fitch's more conservative 7% rate of return estimate. The city funds OPEB on a pay-go basis.

Kingman consistently funds 100% of the pension actuarial required contribution (ARC) for the three plans in which it participates but funding levels are below average. While required contribution costs have been increasing as a result, the city's total carrying costs, including debt service, pension and OPEB contributions, remain moderate at about 16% of fiscal 2013 governmental expenditures.

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=929435

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