Rio Rancho, NM - s3-us-west-2.amazonaws.com · Rio Rancho, NM New Issue ... (PERA), a cost sharing plan ... The remaining $2.5 million will refund Series 2006 bonds (maturities 2016

U.S. PUBLIC FINANCE

CREDIT OPINION16 May 2016

New Issue

Contacts

Heather Correia 214-979-6868Associate [email protected]

Gera M. McGuire 214-979-6850VP-Sr Credit Officer/[email protected]

Rio Rancho, NMNew Issue - Moody's Assigns Aa2 to Rio Rancho, NM's $11.5Min GOULT, Ser. 2016

Summary Rating RationaleMoody's Investors Services has assigned an Aa2 to Rio Rancho, NM's $11.5 million in GeneralObligation Improvement and Refunding Bonds, Series 2016. We have maintained the Aa2on $13.9 million in outstanding obligations. The city has an additional $720,000 outstandingnot rated by Moody's.

The Aa2 rating reflects the city's sizeable tax base, which is favorably located north ofAlbuquerque, improving financial position, and manageable debt burden.

Credit Strengths

» Sizeable and stable tax base

» Healthy reserves

» Manageable debt burden with rapid payout

Credit Challenges

» Elevated pension liability

» Enterprise risk from Event Center

Rating OutlookMoody's generally does not assign outlooks to local government credits with this amount ofdebt outstanding.

Factors that Could Lead to an Upgrade

» Significant tax base expansion

» Substantial increase in reserves

Factors that Could Lead to a Downgrade

» Substantial tax base contraction

» Structural imbalance resulting in deterioration of financial reserves

» Pressure on operations resulting from increases in required employer pensioncontribution

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MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 16 May 2016 Rio Rancho, NM: New Issue - Moody's Assigns Aa2 to Rio Rancho, NM's $11.5M in GOULT, Ser. 2016

Key Indicators

Exhibit 1

Source: Rio Rancho, NM; Moody's Investors Service

Detailed Rating ConsiderationsEconomy and Tax Base: Sizeable Tax Base North of AlbuquerqueThe city's tax base is expected to modestly expand over the mid-term as development in the healthcare and retail sectors continue. RioRancho is 17 miles north of Albuquerque, and benefits not only from proximity to the state's economic hub, but institutional presenceprovided by UNM, Sandia National Labs and Kirtland Airforce Base. The city's fiscal 2016 assessed value (AV) is large at $6.1 billion, amodest increase of 0.1% over prior year. Due to contractions during the recession, five year average annual growth is still a negative2%; however, since fiscal 2014, the city has realized modest annual expansion.

The local economy continues to rebound, driven by commercial development, specifically expansion of Presbyterian Rust Medical,which has encouraged both retail and residential development in nearby proximity. Several companies, such as Alliance Data Systems,Bank of America and Convergys Corporation, are adding hundreds of jobs during 2016. Officials report that Intel has not announcedlayoffs in the Rio Rancho office. However, since 2013, the workforce has whittled from 3,300 to 1,900. Officials are hopeful thatfurther reductions will be offset by additional jobs created elsewhere in the economy.

Rio Rancho's economy is supported by above average wealth indices, with median family income of 107.2% per the 2012 AmericanCommunity Survey. The tax base is not concentrated in minerals or taxpayers. February 2016 unemployment levels of 5.8% arefavorable compared to the state's 6.3%, but remain slightly elevated compared to the nation's 5.2%.

Financial Operations and Reserves: Stable Financial PositionWe expect the city's finances will remain stable over the near-term given conservative financial management. After two sizeabledeficits in fiscal 2013 and fiscal 2014, the city reported a $1.6 million surplus, increasing General Fund balance to $15.3 million, or26.1% of revenues. The surplus was driven by a healthy uptick in municipal gross receipt taxes, which saw a $3.7 million increase year-over-year.

The city is reliant on economically-sensitive revenues, which comprise 48.9% of the operating budget. As Rio Rancho's economycontinues to diversify and expand, we anticipate GRT collections will trend upwards; however, gains will be increasingly offset bythe phase-out of hold harmless revenues. In fiscal 2017, for instance, the city will forfeit $500,000. Management has authority to



implement up to three-eights Hold Harmless GRT without voter approval, with each one-eight generating $1.2 million per year.Officials have no plans to implement a Hold Harmless tax at this time.

For fiscal 2016, the city's budget reflects a $1.6 million deficit due to capital spending. However, due to GRT collections being 9%higher than expected, management believes the year will be balanced. The fiscal 2017 budget will be balanced with use of $1 millionin reserves. The city is again budgeting GRT collections conservatively, assuming a 4% increase year-over-year, which may offset thedraw.

The city makes annual transfers of approximately $1 million to the Event Center, a city-owned enterprise. Management reports thatthe Center was never meant to be self-supporting; however, it does attract people to the city, which benefits GRT revenues. The cityworks closely with Center management to develop a budget that minimizes General Fund support. Future reviews will focus on thecity's ability to make the transfer and meet all General Fund obligations without use of reserves.

LIQUIDITY

The city's cash position is stable. Fiscal 2015 year-end General Fund cash was $10.1 million, or a healthy 17.2% of revenues.

Debt and Pensions: Manageable Debt Burden; Elevated Pension BurdenThe city's debt profile will remain manageable over the mid-term given rapid principal amortization. At 0.8% of fiscal 2016 AV, thecity's debt burden is in line with state and national medians. Included in the city's profile are approximately $13 million in GRT revenuebonds. Principal amortization is above average with 100% retired in ten years. Officials anticipate approaching voters in 2018, 2020and 2022 to authorize $9 million (per election) for various capital needs and infrastructure improvements.

DEBT STRUCTURE

All the city's debt is fixed rate, and is fully amortized by fiscal 2028.

DEBT-RELATED DERIVATIVES

The city does not have any variable-rate demand obligations and is not a party to any interest rate swaps or other derivativeagreements.

PENSIONS AND OPEB

The city has an above-average employee pension burden, based on unfunded liabilities for its share of the Public Employees RetirementAssociation (PERA), a cost sharing plan administered by the state. Rio Rancho's annual contributions into the plan have been at thestatutorily required amount, which is well below the actuarially required amounts and has driven the large unfunded liability. Moody'sfiscal 2014 adjusted net pension liability (ANPL) for the city, under our methodology for adjusting reported pension data, is $191.3million, or an elevated 3.12 times operating revenues. The three year average of the city's ANPL to operating revenues is very highat 4.52 times, while the three-year average of ANPL to full value is high at 4.59%. Rio Rancho has a large ANPL relative to its peersand rating category, which could present budgetary challenges and financial pressures over the long term. Increases in employercontributions could stress the city if they occur in conjunction with an increase in debt burden and/or decline in cash reserves.

Moody's ANPL reflects certain adjustments we make to improve comparability of reported pension liabilities. The adjustments arenot intended to replace the city's reported liability information, but to improve comparability with other rated entities. For moreinformation on Moody's insights on employee pensions and the related credit impact on companies, government, and other entitiesacross the globe, please visit Moody's on Pensions at www.moodys.com/pensions.

Management and GovernanceNew Mexico cities have an institutional framework score of ‘A,’ or moderate. Cities receive the majority of their revenues through grossreceipt and property taxes and both remain moderately predictable. About 64% of New Mexico cities are at the O&M levy cap andtherefore are considered to have a moderate level of ability to raise revenues. Expenditures are moderately stable and mainly consist ofsalaries and public safety. Expenditure reduction ability for cities is somewhat constrained by high fixed costs, but is considered to bemoderate.

Specific to Rio Rancho, the city operates under a Council-Manager form of government. The six council members and the Mayor areelected for staggered four-year terms. Positively, the city has a target General Fund cash balance of 15% of operating expenditures,which they have satisfied since fiscal 2011.



Legal SecurityThe Bonds are secured by the City’s full faith and credit and are general obligations of the City payable from ad valorem taxes to belevied, without limitation as to rate or amount, against all taxable property within the City.

Use of ProceedsOf the $11.5 million being issued, $9 million will be used for various road improvements. The remaining $2.5 million will refund Series2006 bonds (maturities 2016 through 2018) for net present value savings of $75,000 or 3.2%.

Obligor ProfileRio Rancho is located directly northwest of Albuquerque in Sandoval County. Estimated 2016 population is 95,070.

MethodologyThe principal methodology used in this rating was US Local Government General Obligation Debt published in January 2014. Please seethe Ratings Methodologies page on www.moodys.com for a copy of this methodology.

Ratings

Exhibit 2

Rio Rancho (City of) NMIssue RatingGeneral Obligation Improvement and RefundingBonds, Series 2016

Aa2

Rating Type Underlying LTSale Amount $11,500,000Expected Sale Date 05/25/2016Rating Description General Obligation

Source: Moody's Investors Service



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REPORT NUMBER 1026231



Contacts

Heather Correia 214-979-6868Associate [email protected]

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

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Documents

Rio Rancho, NM - s3-us-west-2.amazonaws.com · Rio Rancho, NM New Issue ... (PERA), a cost sharing plan ... The remaining $2.5 million will refund Series 2006 bonds (maturities 2016