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Moody's Investors Services TO: The Honorable Mayor and City Council Members FROM: Michael C. Van Milligen, City Manager SUBJECT: Moody's Bond Ratings DATE: October 26, 2012 Finance Director Ken TeKippe is transmitting the Moody's Investors Service bond ratings and detailed comments for five current bond issues: Series 2012E, 2012F, 2012G, 2012H and 20121. The City retained it Aa1 rating for all the bond issues. The City rating for these bonds is the second highest available by Moody's and reflects very positively on the City. Michael C. Van Milligen MCVM:jh Attachment cc: Barry Lindahl, City Attorney Cindy Steinhauser, Assistant City Manager Teri Goodmann, Assistant City Manager Ken TeKippe, Finance Director THE CITY OF Dui Masterpiece on the Mississippi TO: Mike Van Milligen, City Manager FROM: Ken TeKippe, Finance Director DATE: October 26, 2012 SUBJECT: Moody's Bond Ratings Dubuque kit AU- America City 11 1111 2007 INTRODUCTION Attached are the Moody's Investors Service bond ratings and detailed comments for five current bond issues: Series 2012E, 2012F, 2012G, 2012H and 20121. The City retained its Aa1 rating for all the bond issues. The true interest rate of the 2012G refunding bond issue sold October 15, 2012 was .667842 %. The four other bond issues will be sold on November 5,2012. The City rating for these bonds is the second highest available by Moody's and reflects very positively on the City. The ratings affect the interest rates on bonds. Prepared by: KT /eml Enclosure MOODY'S INVESTORS SERVICE October 15, 2012 Mr. Ken Tekippe City of Dubuque City Hall 50 W. 13th St. Dubuque, IA 52001 -4864 Dear Mr. Tekippe: We wish to inform you that on October 12, 2012, Moody's Investors Service reviewed and assigned a rating of Aal to DUBUQUE (CITY OF) IA, General Obligation Refunding Bonds, Sereis 2012G Aal to DUBUQUE (CITY OF) IA, General Obligation Bonds, Series 2012E Aal to DUBUQUE (CITY OF) IA, Taxable General Obligation Bonds, Series 2012F • Aal to DUBUQUE (CITY OF) IA, General Obligation Urban Renewal Bonds, Series 2012H • Aal to DUBUQUE (CITY OF) IA, Taxable General Obligation Refunding Bonds. Series 20121 Rachel Cortez Vice President / Sr. Analyst Moody's Investors Service 100 N. Riverside Plaza, Suite 2220 Chicago, IL 60606 312.706.9956 tel 312.706.9999 fax rachel.cortez@moodys.com www.moodys.com In order for us to maintain the currency of our ratings, we request that you provide ongoing disclosure of current financial and statistical information. Moody's will monitor this rating and reserves the right, at its sole discretion, to revise or withdraw this rating at any time in the future. The rating, as well as any revisions or withdrawals thereof, will be publicly disseminated by Moody's through normal print and electronic media and in response to verbal requests to Moody's Rating Desk. In accordance with our usual policy, assigned ratings are subject to revision or withdrawal by Moody's at any time, without notice, in the sole discretion of Moody's. For the most current rating, please visit www.moodys.com. Should you have any questions regarding the above, please do not hesitate to contact me or the analyst assigned to this transaction, Andrea Stenhoff at 312 - 706 -9958. Sincerely, Rachel Cortez CC: Mr Tim Oswald Piper Jaffray & Co. MOODY'S INVESTORS SERVICE New Issue: Moody's assigns Aa1 rating to City of Dubuque's (IA) $15.5 million of GO Bonds Series 2012E through 20121 Global Credit Research -12 Oct 2012 Aal rating applies to $95.5 million of post -sale GOULT debt DUBUQUE (CITY OF) IA Cities (including Towns, Villages and Townships) IA Moodys Rating ISSUE RATING General Obligation Urban Renewal Bonds, Series 2012H Aa1 Sale Amount $2,420,000 Expected Sale Date 11/05/12 Rating Description General Obligation Taxable General Obligation Refunding Bonds, Series 20121 Aal Sale Amount $7,340,000 Expected Sale Date 11/05/12 Rating Description General Obligation Taxable General Obligation Bonds, Series 2012F Sale Amount $1,050,000 Expected Sale Date 10/15/12, Rating Description General Obligation Aa1 General Obligation Bonds, Series 2012E Aa1 Sale Amount $3,695,000 Expected Sale Date 10/15/12 Rating Description General Obligation General Obligation Refunding Bonds, Sereis 2012G Aa1 Sale Amount $965,000 Expected Sale Date 10/15/12 Rating Description General Obligation Moodys Outlook Opinion NEW YORK, October 12, 2012 —Moody's Investors Service has assigned a Aa1 rating to the City of Dubuque's (IA) $3.7 million General Obligation Bonds, Series 2012E; $1.1 million Taxable General Obligation Bonds, Series 2012F; $965,000 General Obligation Refunding Bonds, Series 2012G; $2.4 million General Obligation Bonds, Series 2012H; and $7.3 million Taxable General Obligation Refunding Bonds, Series 20121. Moody's maintains a Aa1 rating on the city's outstanding general obligation debt. Post -sale, the city will have $95.5 million of general obligation unlimited tax debt. SUMMARY RATINGS RATIONALE All series of bonds are secured by the city's general obligation unlimited tax pledge. Proceeds of the Series 2012E bonds will be used for various capital improvements. Proceeds of the Series 2012F and 2012H bonds will support urban renewal projects in the city's downtown and industrial park urban renewal areas. Proceeds of the Series 2012G bonds will refund for expected interest savings the city's General Obligation bonds Series 2002C. Proceeds of the Series 20121 bonds will refund for expected interest savings the city's General Obligation bonds Series 2005C, 2006B, 2006C and 2007B. Assignment of the Aa1 rating reflects the city's role as a regional service and retail provider in northeastern Iowa (issuer rating Aaa /stable outlook) and neighboring states; satisfactory reserves despite recent cash funding of capital projects; and an above average debt burden supported by altemate non -levy revenue sources. STRENGTHS - Growing economy bolstered by role as a regional economic and service center for northeast Iowa and surrounding states - Revenue - raising flexibility through access to multiple property tax levies and franchise fees CHALLENGES - Plans to continue to spend down financial reserves through fiscal 2013 for capital projects - Reliance on volatile gaming revenues for a significant percentage of general operations - General Fund supported unbudgeted mid -year transfers to Worker's Compensation Fund and Health Insurance Fund in fiscals 2011 and 2012 DETAILED CREDIT DISCUSSION LARGE AND DIVERSIFIED TAX BASE EXPERIENCING ONGOING EXPANSION We expect the city's sizeable tax base, valued at $3.6 billion in levy year 2011, to continue to exhibit a favorable rate of growth due to ongoing expansion of both the city's residential and business sectors. Located in northeast Iowa across the Mississippi River from Wisconsin (Aa2/stable outlook) and Illinois (A2/stable outlook), Dubuque serves as the trade and service center for a large tri -state region. The city also benefits from its role as the Dubuque County seat and is home to two small universities and one small college with a combined enrollment of nearly 5,000. Dubuque benefits from strong ties to agricultural machinery production, with its John Deere (senior unsecured debt rated A2/stable outlook) Dubuque Works plant, the city's largest employer with 2,250 employees, embarking on a $44 million expansion starting in 2012 that is expected to lead to 200 additional jobs. In 2009, IBM (senior unsecured debt rated Aa3 /stable outlook) moved into a previously vacant building downtown, adding a new technology support center that has generated 1,300 jobs and has improved the economic diversity of the city. Development in the historic downtown Millwork area is ongoing with plans for $200 million in public and private investment over the next five years, including additional retail and multi - family residential development. Positive trends in building permits also reinforce a recent pattern of growth in development occurring within the city. The city's unemployment rate increased only modestly during the recession, peaking at about 6% in 2009 and 2010. The rate has since fallen to 4.8% in June 2012, comparing favorably to the state's 5.2% rate and the nation's 8.4% rate for the same time period. The city's population has remained stable in the last two censuses, remaining just under 60,000 between 1990 and 2010. The city's median family income is 86.3% of the nation and 88.0% of the state according to 2006 -2010 American Community Survey, though modest wealth levels are offset somewhat by a low cost of living that is estimated at 89% of the national average. SATISFACTORY RESERVES DESPITE DRAWS ON FUND BALANCE TO SUPPORT WORKERS' COMPENSATION AND HEALTH INSURANCE FUNDS; REVENUE RAISING FLEXIBILITY REMAINS The city's financial position is expected to remain satisfactory due to favorable revenue raising flexibility and a commitment to maintain a minimum reserve level, despite a planned use of reserves through fiscal 2013. The city had built up its reserves to $22.3 million, or 41.3% of revenues, in fiscal 2007 by accumulating gaming revenues and given grant awards for capital projects. It then spent down reserves through fiscal 2010 for various capital projects, including library renovations, riverfront redevelopment, improvements to parks and recreation areas, building improvements and equipment purchases. In fiscal 2011, the city budgeted to use $1 million of fund balance for both capital projects and mid -year transfers to the health insurance and worker's compensation funds. However, the city received grants for several capital projects that it had not budgeted for and instead realized a $2 million increase in the General Fund balance, which ended fiscal 2011 at $15.9 million, or a satisfactory 26.9% of revenues. According to the city's unaudited financial results, in fiscal 2012, the city spent down General Fund reserves by an estimated $3.5 million to $12.4 million, or a still adequate 20.9% of fiscal 2011 revenues. Approximately $2 million of reserves were used for capital projects and an additional $1 million was transferred to the Health Insurance fund to cover unusually high claims costs. The city has budgeted to use $1 million of General Fund reserves for capital improvement projects in fiscal 2013. The city's informal policy is to maintain a minimum of 10% of expenditures (or approximately $5 million) in its reserves, though management expects to institute a higher fund balance policy over the near term. The city additionally expects to gradually increase its General Fund reserves over time following the expected drawdown in fiscal 2013. We note that should the city continue to spend down its reserves to a level that approaches its current fund balance policy, the city's reserves would be lower than many of its peers at the Aa1 rating category. Favorably, revenue raising flexibility remains available to enhance operations. While the city levies the $8.10/$1,000 tax cap for operations, officials report that $5.7 million of items levied under the cap could be moved to the city's employee benefits or trust and agency levy. Additionally, the city is not utilizing its emergency levy, which would generate an estimated $569,000 if fully utilized. Other flexibility comes from the ability to increase the electric franchise fee, which is currently at 3% and can be raised up to 5 %; however, this would require a special election and council approval as the 3% cap was set by resolution. The majority of the funds that the city has spent from General Fund reserves over the last five years had accumulated over time from gaming revenues. Dubuque has two casinos, the city-owned Mystique and the Diamond Jo Casino, which represented 2.7% of the tax base in 2011. The city receives 50% of the city-owned Mystique casino's profits, along with other revenues from leases and taxes. While the city received between $10 million and $13 million in revenues annually from Mystique between fiscals 2004 and 2008, in recent years, revenues have declined to just under $8 million, a level expected to be maintained going forward. The decline is due largely to a reduction in Mystique's market share and concurrent growth in the Diamond Jo casino's market share following Diamond Jo's $80 million expansion in 2008 that included a transition from river -based to land - based operations. The city receives a much more modest share of Diamond Jo's income, with its annual revenues ranging between $1 million and $1.5 million in recent years. The city's gaming income is dedicated to both capital projects and tax relief, with 100% of the city's 50% share of profits from Mystique (or $1.4 million in fiscal 2012) and 10% of all other gaming revenues from both casinos ($767,000) going towards the Five Year Capital Improvement Program and the remaining 90% of other gaming revenues ($6.9 million) going towards General Fund property tax relief. The city's Worker's Compensation Fund has seen declines in reserves in recent years, drawing down its cash position to approximately $33,000 at the end of 2011 with a deficit fund balance of $954,000. City officials report that the city has increased contributions to the fund by 16.6% for fiscal 2012 and will increased contributions an additional 16% for fiscal 2013. In conjunction with a $100,000 transfer of land sale proceeds from outside the General Fund in fiscal 2012, the rate increases have restored the Workers Compensation reserves to an estimated $455,746 as of September 2012. The Health Insurance Fund has also experienced declines in reserves in recent years due to higher than budgeted claims costs. These high claims costs have led to General Fund transfers in order to maintain an actuarially sound reserve amount. In fiscal 2012, the city transferred $1 million from the General Fund, as had been budgeted, and transferred an additional $1.1 million of land sale proceeds from outside the General Fund, elevating the fund's reserves as of September 2012 to $2.0 million, a level in excess of the actuarially recommended reserve level of $1 million. Further, in order to restore structural balance to the fund, the city increased contributions by 9% for fiscal 2012 and by 10% for fiscal 2013. Officials note that no future transfers are expected for either fund. We will continue to monitor the health of these funds and note that, should additional General Fund transfers be required, leading to additional declines in General Fund reserves, the city's long -term credit quality could be impacted. MANAGEABLE DEBT BURDEN WITH ANNUAL BORROWING EXPECTED TO CONTINUE The city's debt burden is above average, with a direct debt burden at 2.6% of full value and an overall debt burden of 3.0% (both net of $26.7 million of utility- supported GO debt). The city's debt burden includes $22.4 million of tax increment financing (TIF) revenue bonds issued for construction of a new public parking ramp at Diamond Jo casino. The TIF revenue bonds are supported by revenues from the city's tax increment districts and backed by a minimum assessment agreement with the developer. Net of these bonds, the city's overall debt burden would be reduced to 2.4% of full value. The city typically issues bonds annually to fund a portion of its capital improvement plan. Principal amortization on GO and TIF debt is below average, with 55.8% of principal repaid within ten years. All of the city's debt is fixed rate and the city does not have exposure to any interest rate swap agreements. WHAT COULD MAKE THE RATING GO - UP - Considerable strengthening of tax base and demographic profile WHAT COULD MAKE THE RATING GO - DOWN - Continued declines in General Fund balance to levels that are not commensurate with the city's Aa1 rating - Continued reliance on General Fund transfers to Worker's Compensation and /or Health Insurance Funds - Substantial deterioration of tax base KEY STATISTICS: 2010 Population: 57,637 (0.1% decline since 2000) 2011 Full valuation: $3.6 billion (4.1% average annual increase since 2006) 2011 Full value per capita: $63,040 Dubuque unemployment rate (June 2012): 4.8% 2006 -2010 Median Family Income: 86.3% of the nation and 88.0% of state Fiscal 2011 General Fund Balance: $15.9 million (26.9% of General Fund revenues) Overall debt burden: 3.1 % (2.7% direct and 2.4% net of TIF revenue bonds) Retirement of principal (10 years): 55.8% Post -sale general obligation unlimited tax debt outstanding: $95.5 million PRINCIPAL METHODOLOGY The principal methodology used in this rating was General Obligation Bonds Issued by U.S. Local Governments published in October 2009. 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