OREANDA-NEWS. Fitch Ratings assigns an 'AAA' rating to the following Bernalillo County, NM (the county) bonds:

--\$17.3 million general obligation (GO) bonds, series 2015;
--\$12.7 million GO refunding bonds, series 2015A.

The bonds are expected to sell competitively during the week of Feb. 16.

In addition, Fitch affirms the following Bernalillo County ratings:

--\$112.9 million in outstanding GO bonds at 'AAA';
--\$137.2 million in outstanding gross receipts tax (GRT) revenue bonds at 'AA+'.

The Rating Outlook is Stable.

SECURITY:

The GO bonds are payable from an unlimited property tax levy on all taxable property within the county. The GRT bonds are secured by the county's first 1/8th GRT for general purposes and the county's second 1/8th GRT for general purposes, excepting \$1 million annually (at the rate of \$83,333 per month) for indigent care.

KEY RATING DRIVERS:

FINANCES PRESSURED BUT STILL SOUND: The county's financial position is under spending pressure, particularly in public safety, but remains solid. Financial reserves remain large despite three consecutive years of sizable draw downs (including projected fiscal 2015 results). Ample revenue flexibility and stabilized detention center spending should allow the county to restore structural balance in fiscal 2016 as planned.

SOLID GRT COVERAGE: Debt service coverage of the county's GRT revenue bonds remains solid; furthermore, legal and practical limitations on further leverage are strong.

FAVORABLE DEBT PROFILE: The county's debt profile remains positive, as evidenced by moderate debt levels, a rapid GO bond principal payout rate, low carrying costs, and modest capital plans.

BROAD ECONOMY: The county's economic base is broad but has been slow to recover from recessionary employment losses. The unemployment rate remains moderate. The county's recent development into a technology hub may aid its recovery while further enhancing economic diversity.

RATING SENSITIVITES:

CONTINUED DRAWS ON FUND BALANCE: Failure to maintain ample reserves due to unabated spending pressure or revenue declines could lead to negative rating pressure.

LARGE DEFENSE INSTALLATIONS POSE VULNERABILITY: The large presence of military and defense installations exposes the city's economic base to potential future military downsizing. Any resulting financial impact on the city's revenue base without offsetting actions could lead to downward rating pressure.

CREDIT PROFILE:

As the state's largest county, population grew a notable 19% from 2000-2010 and currently exceeds 670,000; the increase was spurred in part by the area's recent development as a technology hub. The city of Albuquerque comprises about 80% of the county's population.

LARGE RESERVES WEATHER SPENDING PRESSURES

The county's financial profile remain solid, characterized by large reserves that typically exceed the state-required three-month (25%) minimum fund balance. Although spending pressure is evident, substantial reserves ranging from 49%-87% of spending have allowed the county to accommodate sizeable hikes in public safety spending (the county's largest expenditure category) and capital outlays. Due also to other one-time expenditures, the county is on track to post its third consecutive large drawdown in fiscal 2015. Improved prisoner processing at the metropolitan detention center (MDC) and resulting increased capacity and stabilization of related expenditures suggest a return to balanced operations in fiscal 2016. A continued trend in large drawdowns would generate negative rating pressure.

In fiscal 2014, the county funded \$20 million (7.2% of spending) in additional MDC related expenditures, such as the use of out-of-county jail space, jail staffing mandates, and pre-trial initiatives. Combined with pay-go capital outlays, one-time expenditures, and additional portfolio restructuring losses, the fiscal 2014 audit posted a large drawdown totaling \$41 million (15% of spending). The year-end financial cushion (comprised of its unrestricted fund balance and the three-month reserve), totaled a still strong \$134.6 million or 48.7% of spending. Liquidity also declined as expected, but still covered current liabilities by an ample 6.4x.

The fiscal 2015 budget, adopted as part of the fiscal 2015-2016 biennial budget, included a \$55 million (19% of spending) drawdown mostly for one-time expenditures. The amended budget projects a moderately smaller \$42.3 million (14.9% of spending) use of fund balance primarily for pay-go capital outlays, additional MDC initiatives, and one-time expenditures. These outlays are expected to reduce year-end reserves to \$96.8 million or 34% of spending, which Fitch still considers healthy. The amended budget assumes GRT growth of 4.1%, modestly below year-to-date growth of 4.9% for the first five months. GRT revenues account for 40% of general fund revenues, exposing the county to economically volatile taxes; this risk is mitigated by the county's healthy fund balances.

The county plans to return to balanced operations in fiscal 2016. The forecast assumes no new revenue sources and level GRT collections in fiscal 2016 followed by 3% annual gains, which Fitch considers reasonable. The preliminary fiscal 2016 budget also includes \$12 million in pay-go capital outlays, which can be reduced or delayed and provide a source of spending flexibility. Jail related spending in fiscal 2016 should also decline. Management reports jail capacity has been restored, precluding the need for out-of-county jail space and overtime. The current jail population totals 1,540 inmates, below the MDC's capacity of 1,950 and last year's peak population of 2,800.

AMPLE REVENUE FLEXIBILITY

Fitch notes that the county retains significant revenue flexibility. An estimated \$15.5 million (5.6% of fiscal 2014 spending) in additional property tax revenue is available under the non-residential mill cap. Remaining authority in four different local option GRTs would generate \$144 million (52% of spending), although only \$57 million (21% of spending) could be imposed without an election. A portion of this GRT will be considered by the county commission in coming weeks and would generate \$20 million (\$7.2% of fiscal 2014 spending) in revenues in fiscal 2016 if adopted.

LIQUIDITY CRUNCH RESOLVED, RESERVES AFFECTED

The administration took various actions in fiscal 2014 to restore ample liquidity to its large fund balance reserves. In February 2014, Fitch placed the county on Rating Watch Negative due to a deviation from past investment practices by the current and past county treasurers that led to increased investments in long-term securities. Such practices resulted in a very long average maturity of over 11 years despite reliance on those funds for operations.

The resulting liquidity crunch led the county to sell a portion of its investments before maturity, resulting in \$12.8 million (5% of spending) in unrealized losses in fiscal year 2013. Realized losses rose to \$17 million on a portfolio of \$277 million in fiscal 2014 as the county restructured its entire investment portfolio with the aid of an independent investment advisor. All of the county's funds are now in short-term securities and no additional restructuring will be required.

As part of its reform efforts, the board of county commissioners and the county treasurer approved a new investment policy that requires a new board subcommittee to review and approve all security purchases recommended by the county's elected treasurer, restricts average maturity to three years, and mandates that ample monthly cash balances (equal to 15% of annual appropriations) be available with maturities limited to 30 days. The new policy also requires investments be laddered to match the county's cash needs. Subsequently, Fitch revised its Outlook to Stable in April 2014. Fitch expects such reforms will help mitigate the operational risks associated with an independent elected treasurer.

STATE AUDIT COMPLETED

A special audit of the county's treasurer's office was ordered by the New Mexico state auditor. The special audit, conducted by an independent audit firm, cited various material weakness and deficiencies with the county treasurer's internal controls and management related to investment transactions. Fitch considers management's response to the audit findings satisfactory, as detailed in its new investment policy.

SLUGGISH GRT RECOVERY

The GRT is imposed on businesses upon the sale of goods or services, subject to certain exemptions, making it broader than the typical sales tax. Recessionary pressures and the completion of major construction projects caused collections to fall by 3%-4% annually in fiscal years 2008-2011. GRT receipts remained sluggish through fiscal 2014 but year-to-date receipts are up by a moderate 4.8% for the first five months of fiscal 2015.

STRONG DEBT SERVICE COVERAGE OF GRT BONDS

Debt service coverage of the county's GRT revenue bonds remains solid at nearly 3 times (x) maximum annual debt service (MADS), based on audited fiscal 2014 revenues. The GRT bonds' debt service reserve requirement is standard, although its additional bonds test is strong--requiring pledged revenues to equal 2x MADS of existing and proposed GRT-secured debt. The county does not plan to further leverage this revenue source, as it relies on residual revenue after debt service for operations.

MODEST FUTURE DEBT PLANS

The county maintains a formal capital improvement plan, the local portion of which has been historically financed with voter-approved GO bond authorizations every two years. County voters approved a \$27.5 million authorization in November 2014 by a wide margin. The combined GO and GRT bonds payout rate is very rapid at 78% in 10 years. The county's revised debt policy reduces the final maturity of bonds to 15 years from 20 years as part of its long-term goal to achieve level principal payments, which Fitch views favorably. Including GO bonds and GRT obligations, overall debt levels are a moderate \$2,124 per capita and 2.6% of full market value.

SLOW EMPLOYMENT RECOVERY

MSA employment has been slow to recover from recessionary declines. MSA employment remained flat through 2014 after posting moderate declines during the recession. Concurrent annual modest declines in the labor force have caused the unemployment rate to trend downward. The county's November 2014 unemployment rate remained moderate at 6.2%, on par with the state but above the U.S. average (5.5%).

Any federal efforts to downsize the country's military operations could have a significant impact on the area's large federal installations. The combined workforce of Kirtland Air Force Base, Sandia National Labs, and the U.S. Forest Service exceeds 26,000, equal to 7% of the MSA's 2014 employment base. However, the magnitude of cuts to the military installations may be tempered given their unique role in maintaining the country's nuclear assets.

IMPROVED PENSION FUNDING

Full-time county employees participate in the Public Employee's Retirement Association (PERA) of New Mexico, a cost-sharing multiple-employer defined benefit retirement plan. The county fully funds its annual required contribution. PERA reforms effective in 2013 increased contribution rates and established a new tier of benefits for new hires, which Fitch considers prudent.

These and other reforms, along with positive investment returns, increased PERA's funded position to 75.8% as of June 30, 2014 from 65% two years prior. Using Fitch's adjustment to reflect a 7% rate or return, the 2014 funded position is lower at approximately 70%.

Other post-employment benefits (OPEB) are provided through the New Mexico Retiree Healthcare Authority on a pay-as-you-go basis from employer and employee contributions. The carrying costs of GO and GRT bonds plus pension and OPEB contributions totaled a moderate 12.3% of governmental spending in fiscal 2014.