OREANDA-NEWS. Fitch Ratings assigns an 'AA' to the following Matanuska-Susitna Borough, Alaska (the borough) bonds:

--\$61.2 million general obligation (GO) school bonds, 2015 series B;
--\$1.6 million general obligation (GO) transportation system bonds, 2015 series C.


The bonds are scheduled to be sold via negotiation on or about March 19, 2015.

In addition, Fitch affirms the following ratings:

--\$299.8 million outstanding GO bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by an unlimited ad valorem property tax levied against all property within the borough.

KEY RATING DRIVERS

STRONG FINANCIAL PERFORMANCE: The borough's financial performance is strong with generally positive operating results and healthy reserves.

LIMITED POPULATION AND ECONOMY: The borough's economy is inherently constrained by a relatively small population base and the seasonality of some local economic activity. The economy has gradually expanded and diversified, but it remains the key factor limiting the rating.

HEALTHY DEBT PROFILE: The debt burden is moderate and most of the debt qualifies for state-reimbursement, limiting pressure on the local tax base. Pension and other post-employment liabilities are limited by significant state support for retiree costs.

SOLID MANAGEMENT PRACTICES: The borough benefits from healthy financial management practices, including conservative budgeting and a strong fund balance policy.

RATING SENSITIVITIES

EROSION OF GENERAL FUND BALANCE: Unrestricted fund balance draws below policy levels could trigger negative rating action, as a robust financial cushion mitigates credit concerns surrounding the inherently constrained nature of the borough's economy.

CREDIT PROFILE

The borough is located in south-central Alaska, approximately 40 miles northeast of the business district of Anchorage. The borough covers 25,265 square miles and has the fastest growing population in the state.

ONGOING ECONOMIC DIVERSIFICATION

The borough is now the third most populous Alaska municipality with 95,192 residents. The local economy and population has expanded rapidly since the early 1990s when increasing numbers of Anchorage workers began moving to the southern area of the rural borough due to the lure of affordable housing and large lots. About a third of borough workers commute to Anchorage, while about 12% commute outside of the region to work in the Alaska oil fields and elsewhere.

The economy remains small and more isolated than the average U.S. community, albeit with strong growth trends and increasing diversification. The borough is the largest agricultural producer in Alaska though it has diversified with the expansion of tourism, construction, health care, governmental and retail sectors. The borough continues to develop and diversify its economy with the development of Port MacKenzie and expansion of tourism infrastructure in addition to natural growth due to in-migration.

The borough's socio-economic characteristics are sound with median household income at 134% of the national level and inline with the state median. The individual poverty rate of 9.9% equals the state rate and remains noticeably lower than the national rate (15.4%).

STRONG RECENT PERFORMANCE

The borough experienced a relatively muted version of the recent national economic downturn with no declines in taxable assessed values (TAV), continuing population growth and less pronounced increases in joblessness. The borough's jobless rate has averaged 7.2% over the 12 months ended December 2014. Annual average unemployment rates tend to be higher than the national average because of the seasonality of work in Alaska.

Tax base growth has slowed in recent years, but did not experience declines common in most of the country during the recession. TAV increased 3.5% in 2015 to \$9 billion with growth averaging 3.1% since 2010. Recent growth is down significantly from the double digit expansions of the last decade due to slowing in both residential and commercial development. Taxpayer concentration is not a concern with the top 10 payers representing only 4.2% of TAV and including a healthy variety of retail, health care, tourism, utility, and energy related concerns.

ENERGY INDUSTRY

The borough's economy is less dependent on the state's large oil industry than many other Alaska municipalities, but it is not completely immune to the pressures associated with sharply declining oil prices. While no energy producers are among the borough's top tax payers or employers, the borough benefits from oil industry employment of residents who commute to oil fields and Anchorage for work.

The borough also benefits from significant state aid that is funded with oil severance tax receipts that have fallen sharply in recent months. The rating could come under pressure if the state resolves its budget imbalance by cutting aid to local governments and the borough fails to make offsetting budget adjustments. Fitch believes this is unlikely due to the borough's ability to raise taxes significantly for debt service (and somewhat for operations), long track record of making budget adjustments as necessary to maintain robust performance, and solid financial policy framework.

STRONG FINANCIAL PERFORMANCE

Financial performance has been significantly stronger than policy requirements or the typical U.S. municipality, offsetting the limitations of the gradually diversifying economy. The borough's general fund balance grew in eight of the past nine fiscal years through June 30, 2014. The borough used about \$11 million in unrestricted fund balance for planned capital spending in fiscal 2012, but began to build fund balance again in fiscal 2013. Unrestricted fund balance (the sum of committed assigned and unassigned under GASB 54) rose \$1.1 million to a very strong \$58.9 million, or 47.4% of expenditures and transfers out in fiscal 2014.

SOLID MANAGEMENT PRACTICES

Financial management practices are solid with consistently conservative budgeting and a healthy fund balance policy. The borough must maintain a general fund reserve of at least 22.5% of all budgeted operating expenditures (excluding school district spending) by borough policy. The borough assembly reduced the policy limit from 25% recently, but the level of the policy target remains healthy. The borough has a long history of outperforming the fund balance policy. Financial decision making appears efficient, with budgets delivered on time and in compliance with policies. Failure to maintain a strong financial cushion and adhere to reserve policies would place pressure on the borough's GO bond rating.

MANAGEABLE LONG TERM LIABILITIES

Total net debt including overlapping jurisdictions is moderate at \$3,962 per capita or 3.8% of TAV. Amortization is healthy with 61% of bonds repaid in 10 years and all bonds repaid in 20 years. The borough has \$4.8 million of additional school bond and \$14.4 million of road bond authorization currently approved by voters and no immediate plans to request more GO authorization.

Pension obligations and other post-employment benefits (OPEB) are a significant but manageable expense. The borough routinely makes its full annually required contributions to the Alaska Public Employees Retirement System, the Supplemental Benefits System, and the Alaska Teachers Retirement System. The state is constitutionally responsible for any actuarially required contributions in excess of 22% of payroll.

Carrying costs for debt service, pension and OPEB are moderate at 10.7% of governmental funds spending and are low at 6.7% after taking into account state debt service reimbursements. Debt service accounts for the bulk of carrying costs, and the state of Alaska reimburses the borough for about 60% of debt service via reimbursement for eligible school bond debt service.