Summary: Mound, MInnesota; General Obligation Primary Credit Analyst: Cora Bruemmer, Chicago (312) 233-7099; cora.bruemmer@spglobal.com Secondary Contact: Caroline E West, Chicago (1) 312-233-7047; caroline.west@spglobal.com Table Of Contents Rationale Outlook Related Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 7, 2016 1
Summary: Mound, MInnesota; General Obligation Credit Profile US$6.075 mil GO bnds ser 2016A dtd 12/01/2016 due 02/01/2037 Long Term Rating AA/Stable New US$2.925 mil GO rfdg bnds ser 2016B dtd 12/01/2016 due 02/01/2028 Long Term Rating AA/Stable New Mound GO Rationale S&P Global Ratings assigned its 'AA' long-term rating to Mound, Minn.'s series 2016A general obligation (GO) bonds and series 2016B GO refunding bonds. At the same time, we affirmed our 'AA' long-term rating on the city's existing GO debt. The outlook is stable. A pledge of the city's full-faith-credit-and-resources and an agreement to levy ad valorem property taxes without limitation as to rate or amount secure both series of bonds. The city also pledges special assessment revenues and the net revenues of the utility systems for both series, but we rate to the GO pledge. Proceeds for the series 2016A bonds will finance street reconstruction and utility improvement projects and the purchase of a fire truck. The series 2016B bonds will current refund the series 2006B, 2007B, and 2008B bonds for interest cost savings. The long-term rating reflects our assessment of the following factors for the city, specifically its: Very strong economy, with access to a broad and diverse metropolitan statistical area (MSA); Strong management, with "good" financial policies and practices under our Financial Management Assessment (FMA) methodology; Strong budgetary performance, with operating surpluses in the general fund and at the total governmental fund level in fiscal 2015; Very strong budgetary flexibility, with an available fund balance in fiscal 2015 of 54% of operating expenditures; Very strong liquidity, with total government available cash at 142.3% of total governmental fund expenditures and 4.3x governmental debt service, and access to external liquidity we consider strong; Weak debt and contingent liability position, with debt service carrying charges at 33.3% of expenditures and net direct debt that is 544.6% of total governmental fund revenue, but rapid amortization, with 71.1% of debt scheduled to be retired in 10 years; and Strong institutional framework score. Very strong economy We consider Mound's economy very strong. The city, with an estimated population of 9,372, covers 3.18 square miles on the western shores of Lake Minnetonka about 20 miles west of Minneapolis-St. Paul in Hennepin County. It is in the WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 7, 2016 2
Summary: Mound, MInnesota; General Obligation Minneapolis-St. Paul-Bloomington MSA, which we consider to be broad and diverse. The city has a projected per capita effective buying income of 150% of the national level and per capita market value of $127,953. Overall, market value grew by 4.2% over the past year to $1.2 billion in 2016. The county unemployment rate was 3.3% in 2015. The city serves as the downtown for the neighboring city of Minnetrista and has a limited, but stable, employment base: the local school district (275 employees) and a private golf club (65) are the largest employers. Given its location, residents can commute to, and around, the greater Minneapolis-St. Paul MSA for employment opportunities. The city is fully built-out, so all new development is redevelopment of existing properties. Management reports several senior and affordable housing redevelopment projects scheduled to begin next year, while commercial development remains limited. Officials expect the net tax capacity to continue to have moderate increases over the next few years. Strong management We view the city's management as strong, with "good" financial policies and practices under our FMA methodology, indicating financial practices exist in most areas, but that governance officials might not formalize or monitor all of them on a regular basis. The city performs a line by line approach for its budgetary process with each department and uses the prior three years of historical information to assist. The budget can be amended if needed, but the city rarely has to amend. The council is updated monthly on a budget-to-actual result. The city doesn't have a formal long-term financial plan that is updated annually. It has a five-year capital plan, which is updated and shared with the council annually and identifies sources and uses of funds. The city has an investment policy and reports monthly to its council members the holdings and performance. It does not have a debt management policy but adheres to state guidelines. The city has a formal reserve policy, which states that it has a general guideline to maintain an unassigned general fund balance of not less than 20% of budgeted operating expenditures, which was derived for cash flow purposes. Strong budgetary performance Mound's budgetary performance is strong, in our opinion. The city had operating surpluses of 5.9% of expenditures in the general fund and 6.2% across all governmental funds in fiscal 2015. Our assessment accounts for the fact that we expect budgetary results could deteriorate somewhat from 2015 results in the near term. General fund operating results of the city have been stable over the last three years, with results of 4.6% in 2014 and 4.6% in 2013. The city has budgeted for a deficit of $122,000 or 2.3% in the general fund for fiscal 2016, but officials are currently projecting a $100,000 surplus. The city typically budgets for small deficits and closes the year better than budget due to conservative budgeting. In fiscal years 2015 and 2016, its tax, license, and permit revenues were higher than expected. Additionally, in fiscal 2016, the city budgeted for both the public works director and city manager positions, but these have been consolidated into one position. The preliminary fiscal 2017 budget calls for a $144,000 deficit, but we expect results will likely be similar to prior years and budgetary performance will remain strong. Very strong budgetary flexibility Mound's budgetary flexibility is very strong, in our view, with an available fund balance in fiscal 2015 of 54% of operating expenditures, or $2.7 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. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 7, 2016 3
Summary: Mound, MInnesota; General Obligation The city has held reserves in excess of 40% of general fund operating expenditures and transfers out for the past three fiscal years. Despite the budgeted deficits for fiscal years 2016 and 2017, we expect the city's budgetary flexibility to remain very strong as we have seen better-than-budgeted results for the city the past three years. We expect reserves to remain above 40% of operating expenses and transfers out. Very strong liquidity In our opinion, Mound's liquidity is very strong, with total government available cash at 142.3% of total governmental fund expenditures and 4.3x governmental debt service in 2015. In our view, the city has strong access to external liquidity if necessary. The city has been issuing GO debt for the past ten years and is a frequent issuer. We do not expect its cash position to change much over the next two years as a percentage of total government expenditures and debt service. The city's investments are held in CDs and money market accounts, so we don't view its use of investments as aggressive. Weak debt and contingent liability profile In our view, Mound's debt and contingent liability profile is weak. Total governmental fund debt service is 33.3% of total governmental fund expenditures, and net direct debt is 544.6% of total governmental fund revenue. Approximately 71.1% of the direct debt is scheduled to be repaid within 10 years, which is, in our view, a positive credit factor. We have excluded from the city's direct debt the portion of its GO-backed debt that is self-supporting with revenue from its utility funds. The city plans to issue approximately $6 million of debt in 2017 for street reconstruction projects. We do not expect the additional issuance to materially affect the debt profile. Mound's combined required pension and actual other postemployment benefit (OPEB) contributions totaled 1.9% of total governmental fund expenditures in 2015. Of that amount, 1.4% represented required contributions to pension obligations, and 0.5% represented OPEB payments. The city made its full annual required pension contribution in 2015. The city participates in cost-sharing multiemployer defined-benefit pension plans administered by the Public Employees Retirement Association of Minnesota (PERA). PERA administers the General Employees Retirement Fund (GERF) and the Public Employees Police and Fire Fund (PEPFF). The city's annual required pension contribution to both GERF and PEPFF is determined by state statute and based on a percentage of payroll. The funded ratios of the plans were 76.3% for GERF and 83.6% for PEPFF in fiscal 2015. The city has not adopted the updated reporting standards in accordance with Governmental Accounting Standard Board (GASB) Statement Nos. 67 and 68. The city provides limited OPEBs. At the close of fiscal 2015, there were five retirees receiving benefits. Current and new employees are not eligible for explicit benefits. The city contributes to the plan on a pay-as-you-go basis, and contributed $55,637 in fiscal 2015. Strong institutional framework The institutional framework score for Minnesota cities with a population greater than 2,500 is strong. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 7, 2016 4
Summary: Mound, MInnesota; General Obligation Outlook The stable outlook reflects our view that Mound will maintain its very strong budget flexibility, liquidity and economic profile. We do not expect to revise the rating within the two-year outlook period. Upside scenario If the debt profile of the city materially improves to a level that we would consider adequate, we could raise the rating, but, in our view, this is unlikely during the two-year outlook period. Downside scenario We could lower the rating if the city's budgetary performance deteriorates, resulting in less-than-very strong budgetary flexibility or liquidity, although we do not expect this to occur during the outlook period. Related Research S&P Public Finance Local GO Criteria: How We Adjust Data For Analytic Consistency, Sept. 12, 2013 Ratings Detail (As Of November 7, 2016) Mound taxable Go bnds ser 2013B dtd 05/02/2013 due 02/01/2014-2024 Mound GO Mound GO bnds ser 2012A dtd 07/12/2012 due 02/01/2014-2027 2029 2031 2033 Mound GO rfdg bnds ser 2012B dtd 07/12/2012 due 02/01/2013-2025 Mound GO util & imp bnds ser 2013A dtd 05/02/2013 due 02/01/2015-2034 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.globalcreditportal.com. All ratings affected by this rating action can be found on the S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 7, 2016 5
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