Fitch Downgrades Manhattan, Kansas' GOs to 'AA'; Outlook Stable

The downgrade from 'AA+' to 'AA' reflects the city's growing debt burden as the result of the proposed debt issuance related to a long-planned large downtown development project, which will nearly double the city's direct debt. The project includes the construction of the Discovery Museum, an agricultural attraction; retail establishments such as various big box retail chains and restaurants; and mixed use development to eventually incorporate condominiums, conference center areas, parking, and theatres. The city's school district has also issued a sizeable amount of GO debt, and together, these issuances boost the city's overall debt figures to a moderately high level.

Credit strengths continue to be the city's stable economy, anchored by Fort Riley and Kansas State University (KSU), solid general fund reserve levels, and strong financial management. The city's robust employment base has sustained low unemployment rates and the continued expansion of the nearby military base has contributed to economic growth through the region. Nonetheless, growth in the city's tax base has slowed dramatically as has gains in sales tax receipts. Financial results are positive and expected to remain so in the future.

Manhattan is located in northeast Kansas, approximately 55 miles west of Topeka. With a 2008 estimated population of 52,000 residents, the city's population has grown modestly through real gains and through limited annexation. Tax base growth historically has been relatively rapid, but assessed values are only expected to grow 1-2% in fiscal 2009. The city's stable employment picture is driven by the Fort Riley military base, one of the nation's largest military installations, located about 10 miles outside the city, which provides nearly 16,000 military and over 9,000 civilian jobs for the region. The city is also home to Kansas State University (KSU), with a current enrollment of over 25,000 students. The significant student population diminishes the city's per capita money income levels, which equaled 77% of the state and 72% of the national levels in 2007. The city's unemployment rate was a low 3.7% in August 2009, significantly below the state and national averages of 7.1% and 9.6%, respectively, but above the city's August 2008 unemployment rate of 3.2%.

The city's stable economy and prudent financial management produced consistently balanced financial results. Fiscal 2008 produced a $1.9 million surplus, bringing the city's unreserved general fund balance to about 18.9% of expenditures and transfers out. Fiscal 2009 is also expected to produce a sizeable surplus despite projected flat growth in sales tax relative to 2008. The fiscal 2010 budget, which will be approved in November 2009, incorporates slowed sales tax growth, moderate increases in spending, and a slight addition to general fund reserves. The city typically projects breakeven results and achieves moderate surpluses due to strong budgetary management and conservative budget assumptions. Nonetheless, Fitch expects the city will face reduced tax revenue growth due to modest tax base gains and weaker consumer spending.

The city's overall debt ratios are moderately high on a per capita basis and high relative to taxable market value, in part reflecting the sizeable presence of KSU which exempts about one-fifth of city land area from taxation. Overall debt, including about $70 million in issuance for the downtown development project, stands at $5,357 per capita and 9.4% of the city's full value of taxable property. Even considering new issuance, the city's debt retires at an above average 60% of principal repaid within 10 years. The city uses a variety of alternative revenue sources, including tax-increment financing, economic development bonds, and special assessments to finance capital improvement projects.

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