Fitch Affirms Tacoma, Washington's LTGOs at 'AA-'; Outlook Stable

The 'AA-' rating reflects the city's still sound financial profile, low direct debt burden, and diverse revenues, as well as the city's reduced fund balance levels, and below average socioeconomic indicators, including unemployment rates which trend above regional and state levels. The economic slowdown is pressuring the city's financial operations; however, Fitch expects management to make the required budget adjustments to return the general fund to structural balance and maintain its unreserved fund balance above its minimum policy level of 5% of expenditures. The drawdown of fund balances beyond what city officials currently expect could result in negative credit pressure.

After large job losses in 2000 and 2001, Tacoma's employment recovered well, showing good growth from 2002-2008. However, beginning in late 2008, job growth reversed and the city's job base declined 2.2% from September 2008 to September 2009, resulting in an unemployment rate in September 2009 of 8.9%. In the Seattle-Tacoma-Bellevue metropolitan statistical area (MSA), year over year job losses were led by the construction (down 14%), professional and business services (down 7%) and manufacturing (down 8%) sectors. Assessed valuation gains had been robust, increasing 16% on average from 2004-2007, but slowed to 4.5% in 2008 and 2% in 2009 before declining 5.6% in 2010. Socioeconomic indicators continue to lag the state and regional averages. Median home prices in the MSA did not climb as steeply as in other areas, but have declined about 15% since the second quarter of 2006. Data available to Fitch indicates Tacoma's foreclosure activity is above the MSA's average but below the national average. Modestly above-average levels of sub-prime and negative amortization loans may pressure local home prices in the near term.

While facing declining revenues, the city's financial position remains adequate and is characterized by diverse revenues (four sources contribute 20%-22% each), pressured financial operations and still sound reserve levels. From 2002 through 2007, financial operations generated large surpluses, enabling the city to more than double its unreserved fund balance from $21.5 million (14% of spending) to $46.3 million (23.5% of spending). However, revenue flattened in 2008 and spending increased as budgeted. The city ended 2008 with an $11 million deficit, reducing the unreserved fund balance to $27.5 million, or 12.7% of spending.

Going forward, the state's permanent property tax growth cap will limit the city's ability to raise revenues, leaving most of the budget adjustments to the spending side. Current year to date sales and business and operations taxes are 12% and 5% below budget, respectively. In October, the city council adopted a plan to close $30 million of a $38 million biennial budget gap. Current expectations are for the city to end the 2009-2010 biennium with about $16 million in unreserved fund balance, which is about 7% of expenditures, and to adopt a balanced budget for the 2011-2012 biennium.

Tacoma's direct debt burden is low, as a result of significant pay-as-you-go capital spending. Real estate excise taxes are restricted to capital spending, both providing an ongoing basis for pay-as-you-go capital investment and reducing operating budget reliance on these volatile revenues. Overall debt including overlapping taxing entities is moderate at about $3,200 per capita and 3.1% of market value. The city's debt amortization is average with 44% of principal repaid in 10 years.

Considerations for Taxable/Build America Bonds Investors

The following sector credit profile is provided as background for investors new to the municipal market.

Local Government General Obligation Bonds:

The unlimited taxing power of most local government general obligation pledges is the broadest security a U.S. local government can provide to the repayment of its long-term borrowing, and therefore is the best indicator of its overall credit quality. The average local government general obligation rating is 'AA-'with approximately 56% rated at or above AA- and 7% rated BBB+ or below. The relatively high ratings reflect local governments' inherent strengths: the authority to levy property taxes, nonpayment of which can result in property foreclosures; additional taxing power that can include sales, utility, and income taxes; and essentiality of and lack of competition for services provided by local governments. Those with low investment-grade or below-investment-grade ratings generally have a combination of a limited or highly volatile economic base, high levels of long-term liabilities including debt and post-employment benefits, and/or unusually limited financial flexibility. For additional information on these ratings, see U.S. Local Government General Obligation Rating Guidelines dated March 22, 2007.

Additional information is available at www.fitchratings.com.

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Fitch Ratings, San Francisco
Karen A. Ribble, +1-415-732-1756
Robert Sakai, +1-415-732-5628
or
Cindy Stoller, +1-212-908-0526
(Media Relations, New York)
cindy.stoller@fitchratings.com