OREANDA-NEWS. Fitch Ratings has assigned an 'AA+' rating to the following city of Manhattan, Kansas bonds:

--$19,845,000 general obligation (GO) bonds series 2016-A.

The bonds and notes are expected to be sold via competitive sale May. 17. Bond proceeds will be used to redeem previously issued debt that funded various city capital projects.

In addition, Fitch affirms the following ratings:
--Approximately $111.9 million outstanding ULTGO bonds at 'AA+';
--$5,075,000 temporary notes, series 2014-05 at 'AA+';
--Long-Term Issuer Default Rating at 'AA+'.

Fitch upgrades the following ratings to 'AA' from 'AA-':
--$5,400,000 sales tax special obligation revenue (STAR) bonds, series 2009-1;
--$25,230,000 taxable STAR bonds, series 2009-2';
--$18,190,000 senior lien special obligation revenue (TIF) bonds, series 2009A;
--$5,115,000 transportation development district (TDD) sales tax bonds, series 2010.

The upgrade of the STAR, TIF, and TDD bonds reflects Fitch's application of its revised criteria for U.S. state and local government credits, which was released April 18, 2016. The revised criteria include more focused consideration of project factors in ratings for appropriation-backed debt. The STAR, TIF, and TDD bonds do not carry any of the additional risk features that Fitch identifies for rating more than one notch below the IDR.

SECURITY
The ULTGO bonds and notes are secured by the city's full faith and credit and its ad valorem taxing power, without limitation as to rate or amount.

The TDD, STAR, and TIF bonds are secured by the city's pledge of any legally available funds, subject to annual appropriation, as well as a cash-funded debt service reserve for each series. The bonds are also secured by the following, which in each case are the intended sources of repayment:

The TDD bonds are special limited obligations secured by a pledge of, and lien upon, a 0.5% sales tax levied within the TDD (coterminous with a development known as the north project area).

The STAR bonds are special limited obligations secured by a pledge of the state sales tax (6.5%, up from 6.15% as of July 1, 2015) collected within the north project area (coterminous with the TDD), and state, city (1%) and local (0.306%) sales tax collected within another development known as the south project area.

The TIF bonds are special limited obligations secured by a pledge of city and local sales tax collected within the north project area along with an incremental property tax collected within the north and south project areas. Local sales tax revenues from the south project area are also available if the STAR bonds are fully repaid prior to final maturity.

KEY RATING DRIVERS

The 'AA+' rating is indicative of the city's significant ability to raise revenues, solid expenditure flexibility, manageable long-term liabilities and sound operating performance.

Economic Resource Base: Manhattan is located in northeastern Kansas in Riley and Potawatomie Counties, roughly 55 miles west of Topeka. The city serves as the economic and cultural center for the region. Fort Riley, a military base with 21,065 military personnel located 10 miles west of the city limits, and KSU with roughly 24,500 students located within the city, anchor the local economy.

Revenue Framework: 'aa' factor assessment
Property taxes and other revenues are expected to increase above the rate of inflation. The city has the ability to raise revenues sufficient to cover a normal economic decline.

Expenditure Framework: 'aa' factor assessment
The city has an adequate ability to cut expenses, including pay-go capital, at the time of economic downturn. Carrying costs the labor environment are manageable.

Long-Term Liability Burden: 'aa' factor assessment
Long-term liabilities are moderate when compared with the city's economic base.

Operating Performance: 'aa' factor assessment
The city's reserve levels are more than sufficient for the rating level even with a significant amount of historical revenue volatility, given significant revenue control and spending flexibility. Conservative budgeting practices promote positive operating results.

RATING SENSITIVITIES
Financial Flexibility: The rating is dependent on the maintenance of financial flexibility and conservative budgeting practices.

CREDIT PROFILE

Manhattan is located in northeastern Kansas in Riley and Potawatomie Counties, roughly 55 miles west of Topeka. The 2014 population, estimated at 56,078, has increased 25% since 2000 through both real gains and limited annexations. The city serves as the economic and cultural center for the region. Fort Riley, a military base with 21,065 military personnel located 10 miles west of the city limits, and KSU with roughly 24,500 students located within the city, anchor the local economy. Regional economic prospects are strong, with continued assessed valuation growth, low unemployment rates, and sustained population growth. The city's large student population skews downward the per capita personal income level, which is 75% of the state and 73% of the nation.

Revenue Framework
The city is heavily reliant on economically sensitive sales tax revenues, which comprise approximately 50% of general fund revenues.

Historical revenue growth is below U.S. GDP but above the rate of inflation. Sales tax revenues grew 2.3% in 2015. While assessed values have grown 24% since 2010, the impact of the gains on revenues has been limited as property taxes comprise a small 9% of general fund revenues. The city has limited flexibility to raise sales taxes and must seek voter approval for all levies. Charges for fees and services may be raised without legal restriction.

Management currently has the unlimited ability to raise property tax revenues without seeking voter approval. However, as of January 2017 the city will be subject to property tax-lid limitations that restrict tax revenues to the five-year rolling average of the consumer price index. Property tax levies in excess of the lid require voter approval. The legislation has several property tax categories which are exempt from the tax-lid; these include bond principal and interest payments, payment of court judgments or settlements, police and fire, tax increment financing districts, and state or local emergency - including financial emergencies. Fitch believes the exemptions provide ample flexibility for the city to utilize this revenue source if required in an amount needed to offset a recessionary revenue decline.

Expenditure Framework
Public safety is one of the city's largest expenditures and is responsible for 80% of the operational budget for the Riley County Police Department, a City/Riley County consolidated law enforcement agency. The city supports public safety through both the general fund and the Riley County Police Department Fund, which is supported through a dedicated property tax rate that is controlled by the county. Combined public safety spending comprises approximately 20% of governmental expenditures.

Fitch expects the pace of spending growth to be in line with to modestly above expected revenue growth.

Manhattan has an adequate level of flexibility to reduce main expenditure items and is committed to cutting non-essential spending, including pay-go capital, in times of economic downturn. Carrying costs for debt, pensions, and other-post employment benefits (OPEB) are elevated at 25% of government expenditures, which may pressure the provision of essential services during an economic downturn. Management has moderate control over labor expenses. While they have full control over headcount and strikes are prohibited, public employee union contracts are subject to binding arbitration. Despite this limitation, management has a positive working relationship with labor and has been able to find public safety cost savings when needed.

Long-Term Liability Burden
Overall debt plus Fitch-adjusted direct pension UAAL as a percent of personal income is moderate at 17.9%. Fitch expects the liability burden to remain level in the near term.

Appropriation-backed debt has additional pledges of sales tax and tax increment revenues, but has not been consistently supported by those tax revenues. Pledged revenues for STAR and TDD bonds failed to fully cover debt service in 2014 and 2015, respectively. TIF bonds are self-supporting, maintaining 1.3x debt service coverage in 2015. The city has appropriated funds for debt service when needed and Fitch's ratings on the STAR, TIF, and TDD bonds are based on this appropriation support rather than coverage by pledged revenues.

Employees are covered by the Kansas Public Employees Retirement System (KPERS) and Kansas Police and Firemen's Retirement System (KP&F) cost-sharing multiple-employer defined benefit pension plans. Combined, the plans report an assets-to-liabilities ratio of 60%, assuming an 8% rate of return, as of Dec. 31, 2014. Using Fitch's more conservative 7% rate of return, the estimated assets-to-liabilities ratio is 54%.

Operating Performance
The city has strong gap-closing ability and Fitch expects the city will maintain satisfactory reserves in an economic downturn despite exposure to notable revenue volatility. In addition, city has ample unrestricted reserves in special revenue funds available for general fund use. Fitch does not fully incorporate such reserves into its analysis of general fund flexibility, as some special revenue funds have their own operating requirements. Fitch estimates available special revenue fund balances to be at least double the general fund cushion of 10% of spending in fiscal 2015.

Management maintains conservative budgeting practices including monthly sales tax revenue reporting and closely monitors expenditures. Fitch expects the city to maintain positive operating performance. The city's ample financial cushion, coupled with strong revenue and expenditure flexibility, reinforces this position.