Fitch Saddles Las Vegas With Negative Outlook, Affirms AA

Fitch Ratings revised its outlook for Las Vegas to negative on Monday, affecting $500 million of outstanding bonds and a $19.9 million limited-tax general obligation sale planned for April 20.

Analysts gave the bonds a negative outlook based on projections that city leaders will have to draw down reserves over the next several years to cover police costs, but affirmed its AA rating based on the city's current reserve level, according to Stephen Walsh, a director in Fitch's San Francisco office.

Fitch also gave a AA to the city's planned sale of $7.5 million of limited-tax medium-term GO bonds for street repairs, as well as $8.3 million of limited-tax GO taxable refunding bonds, Series 2012, and $4.1 million of limited-tax GO taxable refunding bonds, Series 2012C.

The bonds will be sold competitively, with proceeds used to fund the F Street project.

They are expected to sell at a premium to net an effective 3% interest rate, said Jace Radke, a spokesman for the city.

The refundings are anticipated to achieve $830,000 and $160,000 savings, respectively, he said.

Las Vegas officials don't expect the negative outlook to alter the expected interest rates, Radke said.

The negative outlook means the city is in danger of being downgraded if certain conditions do not improve.

Despite the volatility of the city's main economic drivers — gambling and tourism — and the fact that Nevada, hammered by the housing crisis, has consistently had the nation's highest unemployment rate since the economy blew up, the city has maintained its double-A ratings.

Standard & Poor's and Moody's Investors Service are expected to issue their own reports at the end of the week and have told officials they plan to affirm the city's stable outlook and double-A ratings, Radke said.

According to Walsh, up until now, officials have maintained a large reserve fund to counter the ups and downs of Las Vegas' volatile economy.

But the city's projections indicate it plans to draw on reserves to deal with deficits anticipated through 2016. Expected deficit levels have worsened since Fitch's last rating report in November 2011, Walsh said.

"The city is projecting it is going to run deficits for several years," Walsh said. "If things happen the way the city has described, the city's reserves will be reduced to 10% within five years."

Las Vegas had a 29% reserve on the $137 million fiscal 2011 budget.

In fiscal 2014, Las Vegas' contributions toward the Metropolitan Police Department, an expense shared with Clark County, will rise to $132.8 million from current levels of $119.8 million, according to the city's budget projections.

Las Vegas officials expect reserves to fall to $55.8 million from $132.4 million that year.

Fitch recognizes that projections may diverge from the actual results, Walsh said, but the current lack of a clear plan for restoring budgetary balance raises concerns .

"It is premature to assume how the budget forecast will play out," Radke said. "After all, the city doesn't have a fiscal 2014 budget forecast from the Las Vegas Metropolitan Police Department and the revenue picture for Las Vegas continues to improve, although modestly."

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