OREANDA-NEWS. Fitch Ratings has assigned an 'AA-' rating to the following Tacoma, Washington (the city) bonds:

--$22.2 million solid waste revenue refunding bonds, series 2016A;
--$15.4 million solid waste revenue refunding bonds, series 2016B.

The bonds will price via negotiated sale during the weeks of May 2, 2016 and May 16, 2016. Proceeds will be used to partially refund outstanding revenue bonds, series 2006A and 2006B.

In addition, Fitch affirms its 'AA-' rating on the following outstanding (pre-refunding) bonds:

--$74.6 million solid waste utility revenue and refunding bonds series 2006A, 2006B, 2008, 2015.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by net revenues of the city's solid waste system and a cash-funded debt service reserve fund.

KEY RATING DRIVERS

STABLE FINANCES: The system's financial operations have held steady due to a predominantly fixed-rate structure, based primarily on varying container fees on a combined utility bill and not on volume flow, and generally consistent and moderate rate hikes. System liquidity remains good.

SATISFACTORY DEBT SERVICE COVERAGE: Debt levels and amortization are moderate and will likely remain so given no plans for additional issuance. Minimum debt service coverage (DSC) of about 2x is projected in 2016 and 2017, with stronger coverage afterwards following two years of peak debt service.

ADEQUATE BOND COVENANTS: Additional bonds test and rate covenant requirements of 1.25x DSC, with rate covenant provisions allowing for some use of rate stabilization fund moneys, are adequate. These are strengthened by a policy minimum of 1.7x DSC.

EXCLUSIVE SOLID WASTE PROVIDER: The city is the exclusive provider of collection and disposal service for all residential and commercial refuse in the city, resulting in stability for its municipal solid waste operating revenues and minimal exposure to private haulers.

LIMITED SCOPE OF OPERATIONS: The city's operating risk profile is reduced as a result of the system's recent closure of its landfill. The utility collects solid waste and has an extendable contract in place through 2020 for the delivery of its municipal waste to a private landfill.

RATING SENSITIVITIES

STABLE FINANCES AND OPERATIONS: The rating is sensitive to shifts in fundamental credit characteristics including stable financial operations and operating profile, with solid debt service coverage levels above policy minimums. Continued operating stability, with post-refunding maintenance of stronger debt service coverage levels, could result in positive pressure on the rating.

CREDIT PROFILE

The city (ULTGOs rated 'A+'/Positive Outlook) is located about 33 miles south of Seattle in Pierce County and is the second largest city in the Puget Sound region. The city's solid waste system is owned and operated by the city, providing collection services for all residential and commercial customers within city limits. The city owns the entire collection fleet which delivers waste to a private landfill site in the county.

STABLE FINANCIAL OPERATIONS; HEALTHY CASH POSITION

The system's financial performance has been sound despite variability in waste collections in recent years. Revenues have benefitted from consistent and moderate rate hikes and from fixed rates that are based on container size instead of actual volume. As a result, total operating revenues have been stable to modestly growing. Revenue growth of 3.5% in 2015 (preliminary estimates) and 4.7% budgeted growth for 2016 reflect increased tonnage and 3.8% average annual rate increases. Continued revenue growth is expected moving forward based on projected annual rate hikes ranging from 3% to 5% through 2020.

Expenditures increased significantly in recent years due to the system's transition from using its relatively inexpensive municipal landfill to a private landfill. Moving forward, projected revenue growth is roughly in line with projected expenditure growth, which reflects typical inflationary pressures.

Liquidity is sound with 2015 (preliminary, unaudited) operating cash at $18.7 million and $6 million in the rate stabilization fund (more than 180 days cash on hand). Preliminary estimates for 2016 indicate similar cash levels. Management is targeting the rate stabilization fund to equal at least 10% of revenues or about $6 million, based on preliminary 2015 results.

The system has contracts in place for long-haul garbage, yard waste (both expiring in 2020 with renewal options), and recycling (expiring in 2016). Renewal of the recycling contract is currently being negotiated, with a three-to-five-year extension expected.

SOUND DSC SUPPORTED BY REFUNDING MATURITY EXTENSION

Based on preliminary, unaudited 2015 figures, and the current debt refunding, annual DSC is at or just below 2x in 2015 through 2017. Coverage of 2016 maximum annual debt service (MADS) is 1.98x. Coverage levels are expected to improve to over 3x in 2018 after debt service drops off to lower levels.

Without the refunding's extension of debt maturities, or any other offsetting revenue or expenditure-related actions, DSC was expected to fall below the minimum policy target of 1.7x. While Fitch generally views refunding transactions that significantly extend debt maturity for financial relief negatively, mitigating factors for the system include no additional debt plans, debt-funded asset life within the extended term of the debt, and access to other viable options to address DSC, including further rate increases and available rate stabilization fund moneys. Management has indicated that use of the refunding, recognizing the long-term nature of the assets financed, better fit their goal of a trend of slow and steady rate increases.

DSC calculations do not take into account required revenue transfers to the city's general fund. The transfer is established by city charter at a maximum rate of 8% of solid waste revenues. The city transfers the maximum percentage allowed and a change to the charter would require voter approval. Payment of the transfer is subordinate to debt service payment. Estimated DSC of 1.94x in 2015 would fall to a low 1.36x adjusting for the transfer.

MODERATE DEBT AND LIMITED CAPITAL NEEDS

Debt levels and amortization are moderate. Capital needs over the next five years are about $42 million and are chiefly for vehicle and equipment costs. Over 60% is funded via pay-go spending, with the remainder covered by prior debt issuance.

SOLID WASTE FEES CHARGED ON COMBINED BILL

The system's solid waste fees are charged on a combined bill with water, sewer, and power. Revenues are balanced between residential customers (43% in 2015) and commercial customers (43%), with private trips to the city's transfer station for drop-off making up 12% of revenues. The system contains little revenue concentration, with the top 10 payers accounting for only 6.4% of operating revenues. Rates remain comparable with other regional system rates.