Fitch Downgrades North Las Vegas, NV's GO Bonds to 'B'; Outlook Negative

Fitch Ratings has downgraded to 'B' from 'BB+' the following North Las Vegas, NV (the city) obligations:

--$365,000 limited tax general obligation (LTGO) bond series 2002B;

--$131 million LTGO bonds (additionally secured by consolidated tax pledged revenues);

--$290.7 million LTGO water and wastewater improvement bonds (additionally secured by water and wastewater system pledged revenues).

The Rating Outlook is Negative.

SECURITY

The bonds are secured by the full faith and credit of the city, subject to Nevada's constitutional and statutory limitations on the aggregate amount of ad valorem property taxes. Additional security is provided to $131 million of the bonds by an irrevocable pledge of and lien on certain consolidated tax revenues (15% of these revenues) and to $290.7 million of the bonds by pledged water/wastewater system net revenues.

KEY RATING DRIVERS

CONTINUED STRUCTURAL IMBALANCE: The downgrade reflects the city's continued fiscal distress, as evidenced by the sizeable and increasing budgetary imbalance. The city has no significant prospects for revenue recovery and virtually no additional expenditure flexibility.

UNFAVORABLE LAWSUIT RULING: The Negative Outlook reflects the limited options remaining to the city to balance its fiscal 2015 budget given the Jan. 21 court decision against the city's use of state of emergency resolutions. The state statue permitting the declaration does not include a fiscal emergency, though the city had contended that in the wake of failed concessions, offsetting layoffs would have created a public safety emergency.

WEAK AND CONCENTRATED ECONOMY: The city and region's economy were among the hardest hit in the U.S. by the collapse of the housing market, resulting in a combined taxable assessed valuation (TAV) decline in the city of 52% over the last four years. The regional economy is dominated by tourism and gaming which experienced significant revenue and employment declines but appear to be stabilizing.

GROWING LONG-TERM LIABILITIES: Debt is high relative to the tax base with limited additional debt expected. Amortization is slow and debt service is inclining in the intermediate term. Carrying costs, including debt and retiree liabilities, are moderate but expected to increase with rising pension payments.

NO ENHANCEMENT FOR ADDITIONAL PLEDGES: Fitch does not believe the additional pledges of consolidated tax and water/wastewater revenues provide sufficient additional strength to the warrant higher ratings than the level of the LTGO.

RATING SENSITIVITIES

INABILITY TO PRODUCE BALANCED FY 2015 BUDGET: The court ruling calls into question the city's ability to balance its fiscal 2015 budget. Without the emergency resolution, the city forecasts an $18 million (12.7% of projected fiscal 2015 spending) deficit, driven largely by closed public safety contracts with salary increases.

FURTHER FINANCIAL IMPACT OF LEGAL RULING: If the ruling is not stayed or overturned on appeal, the city could owe an estimated $41 million (34% of budgeted fiscal 2014 spending) in back wages and cumulative increases that were suspended by the emergency resolutions. Its ability to make a payment of this size is highly questionable.

FURTHER ECONOMIC DECLINE: Given continued revenue declines, any additional weakening of the city's economic indicators from currently anticipated trends would likely result in negative rating pressure.

CREDIT PROFILE

North Las Vegas encompasses approximately 100 square miles in Clark County with a population of 227,585. The city is approximately 43% built out with a large quantity of undeveloped land. The city has nearly doubled in population since 2000 but growth has more recently slowed with the housing and economic downturn.

GROWING STRUCTURAL IMBALANCE

The downgrade reflects the city's ongoing fiscal distress evidenced by its recently released seven-year forecast. It indicates a large and growing structural deficit with negative general fund balances beginning in fiscal 2015 increasing to $142 million by fiscal 2021 (87.8% of that year's forecasted spending) assuming only small revenue increases as well as annual $32 million transfers from the utility fund. Such transfers have had a negative impact on the utility funds, whose cash balances, which stood at $83.5 million at fiscal-year end 2012, are projected to decrease to $3.5 million by fiscal 2018.

The city's financial position has weakened as a result of many years of large net deficits. Fiscal 2013 ended about as expected with an unrestricted general fund balance of $8.9 million equal to 7.5% of spending.

General fund fiscal 2013 year-end cash was just $2.3 million, or 0.4x liabilities and has declined significantly from an average of $15.5 million from 2006 to 2009. An attempt to refinance $6.855 million in general obligation bonds in April 2013 to provide liquidity was unsuccessful. Fitch views this as both an indication of, and a contributor to, the city's financial stress.

UNFAVORABLE COURT RULING

The court ruled on Jan. 21 that the state of emergency resolutions adopted by the city in fiscals 2013 and 2104 under Nevada Revised Statue (NRS) 288.15 do not provide the city with a legal basis to suspend certain portions of its collective bargaining agreements. The city plans to file a motion to stay the ruling and pursue options at the appellate level. The city's exposure if it loses on appeal is about $41 million in back pay and cumulative increases. It is unclear how the city would absorb such a cost, and given the lower court's ruling against the city, its negotiating position is weakened. Even if the ruling is stayed, it appears unlikely that the city will be able to use a third consecutive state of emergency resolution to close the fiscal year 2015 budget gap, estimated at $18 million. The city does not appear to have many other options for doing so, and is required to file a balanced budget. As such, the city would likely face insolvency or state receivership.

STATE OF EMERGENCY RESOLUTIONS IN FYS 2013 and 2014

The state of emergency resolutions allowed the city to close large deficits - $33 million in fiscal 2013 and $18.8 million in fiscal 2014 - after it was unable to come to agreement with its four unions to extend concessions under temporary MOUs related to multi-year labor contracts expiring in fiscal 2014 and 2015. As a result, city council approved $17 million of public safety layoffs, and $3.9 million in other ongoing and one-time solutions.

The state of emergency permits the one year suspension of labor contracts in 'situations of emergency such as a riot, military action, natural disaster or civil disorder.' The resolutions stated that the 'mass layoffs of public safety personnel that would otherwise be required to balance the budget would result in a public safety emergency.' Pursuant to NRS 288.15, the city would not be required to pay back suspended wages. The emergency declaration resulted in about $22 million in fiscal 2013 and 2014 savings.

STEEP REVENUE DECLINES; NO REMAINING EXPENDITURE FLEXIBILITY

General fund revenues declined for the fifth consecutive year in fiscal 2013 to $86.95 million not including utility transfers, a drop of 47.2% since peaking in fiscal 2008. Property taxes continue to decline and now make up only 8.7% of revenues compared to 18% in fiscal 2010. The city retains about 30 cents in flexibility under the statutory tax rate cap of $3.64 per $100 of assessed value. However, Fitch believes the city council's decision not to increase the rate despite adopting two state of emergency resolutions supports management's assertion that an increase is politically infeasible.

Given the level of cuts made prior to the emergency resolutions, including eliminating about 800 full-time equivalent positions (35% since the peak in 2009) through attrition and voluntary separation and layoffs, the city retains virtually no additional expenditure flexibility beyond layoffs.

STATE INVOLVEMENT LIMITED

State law authorizes the Department of Taxation (Taxation) to take over the management of a local government if the entity is not able to successfully address budget shortfalls. Taxation's powers include approving all expenditures, negotiating with creditors, negotiating contracts and collective bargaining agreements, and increasing the ad valorem tax rate available to pay local government obligations.

According to city management, thus far Taxation has requested monthly updates on financial status and has not indicated any intention of significant additional steps, including taking control of the city's financial management.

ELEVATED LONG-TERM LIABILITIES

In part due to the steep decline in TAV, overall debt levels including the water and wastewater GO bonds are high at 7.4% of market value. In addition, amortization is slow with an ascending debt service schedule in the intermediate term.

Carrying costs are currently in the moderate range at 17% of governmental spending. However, Fitch believes this ratio will increase as both debt service and post-retirement benefit costs rise.

STRESSED ECONOMY

The city's tax base grew rapidly through fiscal 2008 before declining 58% between 2009 and 2013. It ticked up 1.4% in fiscal 2014. The city's housing market continues to experience high foreclosure rates as, despite recent increases, home prices are still 50% below their 2006 peak.

The city and regional economies are concentrated in gaming; most major employers and taxpayers are hotel/casinos. The city's unemployment rate of 10% as of November 2013 was well above the county (8.6%), state (8.5%), and nation (6.6%). Median household income is 6% above the state and 14% above the nation, but per capita income is 20% below both state and national average.

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

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

--'Revenue-Supported Rating Criteria (June 3, 2013);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (Aug 3, 2012);

--'2014 Water and Sewer Medians' (Dec. 4, 2012);

--'2014 Water and Sewer Sector Outlook' (Dec. 4, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

2014 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724358

2014 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724357

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=816981

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