OREANDA-NEWS. Fitch Ratings has affirmed the following Denver, CO obligations:

--Issuer Default Rating (IDR) at 'AAA';

--$816 million unlimited tax bonds at 'AAA';

--$397 million certificates of participation (COPs) at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The ULT bonds are payable from an unlimited property tax levy on all taxable property within the city. The COPs are payable from lease revenue payments from general revenues, subject to annual appropriation.

KEY RATING DRIVERS

The 'AAA' IDR and ULT ratings reflect Denver's strong gap-closing ability, moderate carrying costs and long-term debt liability, and demonstrated financial resiliency during economic downturns. The 'AA+' COP rating reflects annual appropriation risk. Management's prudent budgeting of its expansive resource base and solid expenditure flexibility benefits the city's prospects for maintaining structural balance through economic cycles.

Economic Resource Base

Denver, with an estimated 2015 population of 682,545, serves as the hub of commerce for a large 10-county metropolitan area and as the seat of state government.

Revenue Framework: 'aaa' factor assessment

The property and sales tax revenues that support Denver's operations are likely to continue at a strong pace of growth given rapid population gains and robust economic expansion. The city's independent legal ability to raise property tax revenues was enhanced by voters in 2012, providing ample flexibility.

Expenditure Framework: 'aa' factor assessment

Denver's solid expenditure flexibility is derived from management's prudent budgeting and a moderate fixed cost burden. The city has demonstrated its ability to cut spending at times of economic and revenue decline.

Long-Term Liability Burden: 'aa' factor assessment

Future redevelopment projects may increase the liability burden but Fitch expects it to remain moderate. The city's unfunded pension liability is moderate and consistent funding of pensions at actuarially determined levels should keep it at this level.

Operating Performance: 'aaa' factor assessment

The combination of expenditure cutting flexibility, revenue raising authority, and established reserves should allow the city to handily weather cyclical downturns.

RATING SENSITIVITIES

The IDR and ULT ratings are sensitive to material change in the city's strong revenue-raising and expenditure flexibility and solid financial position, which Fitch expects the city to maintain throughout economic cycles.

CREDIT PROFILE

The local economy continues to expand rapidly, with continued sector development in professional and business services, education and healthcare, and tourism. The expansive employment base remains resilient in the face of low oil prices and stalled exploration activity within the Front Range. The city's unemployment rate declined to a low 3.3% in May 2016 from 4.1% a year prior, aided by a large 2.9% gain in employment during the same period (led by the construction sector). A young population and highly educated workforce are expected to support healthy economic growth over the medium and long-term per IHS. The city's 2015 per capita personal income of almost $66,000 is 138% of the U. S. average.

Rapid home price appreciation fueled a large 26% gain in assessed value in 2016 and expected additional price increases will likely lead to additional reassessment gains in 2018. Per Zillow, Denver's median home value increased to $342,000 in June 2016, a 10% gain over the prior year. An estimated $2.5 billion in new construction that is either underway or planned in the resurgent downtown area will also benefit the city's tax and employment base.

Revenue Framework

Sales tax revenues comprise one-half of total general fund revenues, followed by charges for services (16%), and property taxes (9%).

Historical revenue growth has exceeded the level of inflation and U. S. GDP growth, aided by steady sales tax gains and moderate assessed value (AV) growth. Fitch expects the revenues to continue this trend given the rapidly expanding employment base and strong demographic trends. AV increased by a large 26% in 2016 due mostly to reappraisal gains, and year-to-date sales tax receipts are on track to meet the budgeted 5% gain.

Voters approved the waiver of property tax revenue limitations in 2012, providing the city with 5.1 mills in remaining taxing capacity for O&M, equal to 45% of the current rate of 11.3 mills. Within the remaining millage capacity, annual property tax revenue gains are limited to 6% (on existing properties) plus new construction--contributing to the city's overall ample revenue flexibility.

Expenditure Framework

Public safety accounts for about 50% of total spending and will climb moderately as reforms within the sheriff's department address staffing shortfalls at its two jails.

The pace of spending growth absent policy actions is likely to be generally in line with revenue growth, but pressured by an expanding population and growing service delivery needs.

The county's fixed cost burden is moderate, with carrying costs for debt, pension, and other post-employment benefits (OPEB) equaling 14% of governmental spending. Expenditure flexibility is aided by the county's practice of making annual transfers to the capital projects fund, including a $105 million transfer in 2015 (equal to 10% of spending).

A substantial 40% of the city's workforce (all within the police, sheriffs, and fire department) is represented by a union. Labor contracts are typically negotiated with three year terms and expire in 2017 for police and sheriff's departments and 2018 for fire fighters. Labor negotiations have been generally positive, but the framework does require binding arbitration in the event negotiations stall (although any awards must take into account financial/economic conditions). The administration retains strong control over headcount.

Long-Term Liability Burden

The long-term liability burden, including unlimited tax bonds, COPs, excise tax bonds and unfunded pension liabilities, is moderate at about 13% of personal income. The 10-year principal amortization rate for all direct debt is rapid at 64%. Overall debt levels have risen mostly from substantial debt issuances by overlapping jurisdictions, which include Denver School District No. 1 (GO bonds rated 'AA+', Stable Outlook) and the Regional Transportation District (sales tax revenue bonds rated 'AA+', Stable Outlook). Continued overlapping debt issuance is likely to be accompanied by steady gains in personal income, which should keep the county's long-term liability burden moderate.

The city is assessing its capital needs in preparation for a GO bond referendum in 2017. Additionally, the city currently anticipates issuing approximately $374 million in voter-approved excise tax revenue bonds by 2020 for the National Western Center campus and the Colorado Convention Center.

City employees participate in one of six pension plans, comprised of four cost-sharing multiple employer (CSME) plans and two agent multiple-employer (AME) plans. Based on Fitch's 7% rate of return assumption, the city's combined pension assets to liability ratio is 70.5%. Under GASB 68, the city's aggregate net pension liability (NPL) totals $1.1 billion but is moderate relative to personal income at 2.2%. The city's practice to fully fund the actuarially determined contribution should keep its NPL stable.

Operating Performance

The city's exceptionally strong financial resilience is derived from a combination of expenditure flexibility and established reserve levels. The city has posted annual operating surpluses since 2010. The 2015 audit posted a healthy net general fund operating surplus of $30.2 million (2.6% of spending) despite a large transfer ($105 million) for capital projects. The 2016 budget was adopted with a $51 million (4% of spending) drawdown, driven by $60 million in transfers for capital projects. Annual vacancy savings and the budgeting of contingency appropriations (equal to $20 million or 2% of spending) will likely allow the city to outperform projections.

A multiyear budgeting strategy during the last downturn relied on departmental cuts to close annual budget gaps averaging $108 million or 10% of spending from 2009-2013. Conservative revenue projections, a voter-approved waiver of revenue restrictions, and non-recurring measures all enabled the city to post annual surpluses during the economic recovery.