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Moody's RatingMOODY'S Investors Service July 12, 2013 Mr. Rodney Franz City of Salina 300 W. Ash City Hall Salina, KS 67402 Dear Mr. Franz: Henrietta Chang Vice President Sr. Credit Officer 100 N. Riverside Plaza Suite 2220 \ Chicago, IL 60606 312.706.9960 tel 312.706.9999 fax henrietta.chang@moodys.com w .moodys.com We wish to inform you that on June 30, 2013, Moody's Investors Service reviewed and assigned a rating of MIG 1 to SALINA (CITY OF) KS, General Obligation Temporary Notes, Series 2013 -1 and Aa3 General Obligation Internal Improvement Bonds, Series 2013 -B. In assigning such rating, Moody's has relied upon the truth, accuracy and completeness of the information supplied by you or on your behalf to Moody's. Moody's expects that you will, on an ongoing basis, continue to provide Moody's with updated information necessary for the purposes of monitoring the rating, including current financial and statistical information. Moody's will monitor this rating and reserves the right, at its sole discretion, to revise or withdraw this rating at any time in the future. The rating, as well as any revisions or withdrawals thereof, will be publicly disseminated by Moody's through normal print and electronic media and in response to verbal requests to Moody's Rating Desk. In accordance with our usual policy, assigned ratings are subject to revision or withdrawal by Moody's at any time, without notice, in the sole discretion of Moody's. For the most current rating, please visit www.moodys.com. This letter is strictly confidential and you may not disclose it to any other person except: (i) to your legal counsel acting in their capacity as such; (ii) to your other authorized agents, acting in their capacity as such, (iii) as required by the law or regulation; or (iv) with the prior written consent of Moody's, in which case Moody's reserves the right to impose conditions upon such consent such as requiring that you only disclose this letter in its entirety and /or requiring any third party to sign a confidentiality and /or non - reliance agreement. Should you have any questions regarding the above, please do not hesitate to contact me or the analyst assigned to this transaction, Thomas Aaron at 312 - 706 -9967. Sincerely, Henrietta Chang CC: Mr. David Arteberry George K. Baum & Co. 'Ac MOODY'S INVESTORS SERVICE New Issue: Moody's downgrades Salina's (KS) GO to Aa3; Assigns Aa3 to GO Bonds Bonds, Series 2013 -B and MIG 1 to GO Temporary Notes, Series 2013 -1 Global Credit Research - 30 Jun 2013 Aa3 rating applies to $62.9 million of post -sale longterm general obligation debt outstanding SALINA (CITY OF) KS Cities (including Towns, Villages and Townships) KS Moody's Rating ISSUE RATING General Obligation Internal Improvement Bonds, Series 2013 -B Aa3 Sale Amount Expected Sale Date Rating Description $4,330,000 07/05/13 General Obligation General Obligation Temporary Notes, Series 2013 -1 MIG 1 Sale Amount $3,800,000 Expected Sale Date Rating Description Moody's Outlook NOO Opinion 07/05/13 Note: Bond Anticipation NEW YORK, June 30, 2013 — Moody's Investors Service has downgraded to Aa3 from Aa2 the rating on the City of Salina's (KS) outstanding long -term general obligation debt. Concurrently, Moody's has assigned a Aa3 rating to the city's $4.3 million General Obligation Internal Improvement Bonds, Series 2013 -8 and a MIG 1 rating to the city' s$3.8 million General Obligation Temporary Notes, Series 2013 -1. Post -sale, the city will have $62.9 million of long -term general obligation debt outstanding. SUMMARY RATINGS RATIONALE Both the long -term bonds and short-term notes are secured by the city's general obligation unlimited tax pledge. Proceeds of the Series 2013 -B bonds will provide long -term takeout financing for the city's General Obligation Temporary Series 2012 -1 Notes, which mature on August 1, 2013. The Series 2013 -B bonds will finance a number of street projects and downtown street lighting. The downgrade of the city's long -term general obligation rating primarily reflects the city's financial profile, which has stabilized following consecutive reserve declines, but with reserves expected to remain at a level that better aligns with the Aa3 rating over the long -term. The Aa3 rating also incorporates the city's moderately -sized tax base and manageable, although above average, debt burden. The MIG 1 rating is based on expected market access for the takeout financing, as well as the long -term credit fundamentals inherent in the city's Aa3 rating. STRENGTHS -Lack of levy limits provides significant revenue raising flexibility -Focus by management on maintaining and rebuilding General Fund reserves CHALLENGES -Multi -year Vend of operating shortfalls led to reduced reserve and liquidity levels - Dependence on an economically sensitive sales tax revenues for General Fund operations DETAILED CREDIT DISCUSSION EXPECTED MARKET ACCESS FOR REFINANCING The city's demonstrated ability to access the market includes multiple issues of bonds and notes borrowing in the last several years. The city expects to either repay the notes with an issuance of long -term bonds or roll over the notes for another year. City management is expected to make adequate provisions to address potential market disruptions at the time of the takeout financing, by planning to take out debt well in advance of final maturity and considering alternate back up plans if necessary. MODERATELY SIZED TAX BASE SERVES AS REGIONAL ECONOMIC CENTER We believe that due to its position as a regional retail hub, Salina should continue to enjoy relative economic stability. Located in Saline County 95 miles north of Wichita (GO rated Aa1 /stable outlook), the City of Salina's $2.9 billion tax base has experienced declines in recent years associated with the broader economic downturn, as well as the state's exemption of machinery and new equipment from valuations. Despite the declines, the full value has remained relatively flat over the past five years, with an average annual increase of 0.3% from 2007 to 2012. Located at the intersecfion of 1 -70 and 1 -135, the city serves as a regional retail, commercial, industrial, and medical hub for the largely agricultural communities of north central Kansas (long -term rated Aa1 /negative outlook). Residential income indices track slightly below state and national benchmarks, with 2006 - 2010 median family income at 87.3% and 86.5% of state and national levels for the same time period, respectively. At 5.2% in April 2013, the city's unemployment rate tracked at the state rate (5.3 %) but below the national rate (7.1 %) for the same time period. STABILIZED FINANCIAL OPERATIONS FOLLOWING RESERVE DECLINES The city's restoration of positive operations in fiscal 2011 and balanced (not yet audited) operating results for fiscal 2012 points to the continuation of stable financial operations. The city's General Fund balance declined steadily from fiscal 2007 to fiscal 2010 due to budgetary pressures in a variety of areas, including increased fuel costs, increased salary and benefit costs, and declines in economically sensitive sales tax revenues in fiscal 2010. Another factor in the General Fund balance decline was reduced property tax revenues due to state legislation that increased property tax exemptions for new machinery and equipment. From $7.3 million in fiscal 2007, the city's General Fund reserves fell to $3.6 million at the end of fiscal 2010. Favorably, as a result of a multi -year implementation of cost reductions such as a reduction in positions, changes to overtime policies and increased service fees, the city achieved a modest $63,000 operating surplus in fiscal 2011. The increase, combined with a fund balance restatement, increased reserves to $3.8 million, or a satisfactory 10.8% of revenues. Included in the positive fiscal 2011 results, the city executed a purchase of eight police vehicles due to available cost savings. As a result, the city did not need to purchase additional police vehicles in fiscal 2012 or in fiscal 2013. While audited results are not yet available, a draft version of the city's audit shows that fiscal 2012 ended with balanced operations. While the city had targeted additional improvement to reserve levels, sales tax revenues did not increase at the level expected. However, management reports that expenditure controls put in place prevented the city from drawing down reserves. The city has implemented additional cost savings measure such as contracting out the operations of its Bicentennial Center arena in an effort to reduce the facility's reliance on General Fund support. The city has identified a General Fund reserve target of $5.0 million, approximately $1.2 million above current reserve levels. For the current fiscal year 2013, city management expects to achieve an approximate $600,000 General Fund surplus, moving the city toward its reserve goal. Typical of Kansas cities, sales tax receipts represent the city's primary operating revenue source, comprising 33% of fiscal 2011 General Fund revenues. Several different sales taxes are collected, including a 1% Countywide Local Option Sales Tax and a 0.5% Citywide Local Option Sales Tax, which do not sunset. In addition, the city passed a 0.4% local sales tax effective April 1, 2009 that replaced an expiring .25% local sales tax. This sales tax sunsets in 2019. Like all Kansas cities, Salina also benefits from the revenue raising flexibility due to the lack of levy limits. Future credit reviews will continue to focus on the city's financial operations as a key credit factor. We believe that the Aa3 rating appropriately reflects not only recent trends, but the city's stated goal of increasing General Fund reserves incrementally over the next several years to approximately $5 million. ABOVE AVERAGE DEBT BURDEN EXPECTED TO REMAIN MANAGEABLE The city's debt burden is expected to remain manageable given average principal amortization and moderate future borrowing plans. At 2.3% of full value (4.4% overall), the city's direct debt burden is somewhat above average. Principal amortization is average, with 77.2% of general obligation debt retired in ten years. The city generally issues long term and short term debt once or twice per year to fund projects outlined in its Capital Improvement Plan. Looking further ahead, the city expects to continue to issue debt annually to finance its capital plan, as well as revenue debt associated with the replacement of its wastewater treatment plant in approximately five years and the city's portion of a contamination cleanup that will be financed by revenues of the city's water enterprise. All of the city's debt is fixed rate, and the city is not a party to any interest rate swap agreements. The city participates in two statewide cost- sharing plans, and also has a small single employer public safety pension plan that is closed. Budgetary pressure generated by Salina's exposure to two statewide cost - sharing pension plans, the Kansas Public Employees Retirement System (KPERS) and Kansas Police and Firemen's Retirement System (KP &F), is expected to increase, although remain manageable in the near term. Both plans are administered under KPERS, and the city has consistently made its required contributions to both plans in accordance with statutory requirements. Total city pension contributions in fiscal 2011 amounted to $2.8 million, and contributions to KPERS are expected to increase by at least 0.6% of payroll and up to 1.2% of payroll annually through fiscal 2017. Approximately 90% of the city's pension contributions are related to the General Fund, with its enterprise funds covering approximately 10% of pension expenses. Fiscal 2011 General Fund pension contributions represented approximately 6.0% of operating revenues, inclusive of the General Fund and Debt Service fund. Moody's adjusted net pension liability (ANPL) for the city, under our methodology for adjusting reported pension data, is $69 million, or 1.67 times operating revenues, including the General Fund and Debt Service fund, compared to approximately 1.0 times on average for local governments. Moody's AN PL reflects certain adjustments we make to improve comparability of reported pension liabilities. The adjustments are not intended to replace Salina's reported pension information, but to improve comparability with other rated entities. We determined the city's share of liability for the cast- sharing plans administered under KPERS in proportion to its contributions to the plan. We expect that the city will adequately incorporate rising pension costs into its budget, although we note that these increased costs represent an additional challenge for the city in attaining its stated goal to increase reserves. ILr6f_1%[K91114RX610.faV Eel :111111.IQNp\1GfeMIZ - Substantial growth in the city's tax base and residential income indices - Substantial improvement in General Fund reserves and liquidity to levels more consistent with higher rating categories I r i rG Fd 10161111 D Z y; LL Led a L' 1:1 R_\ 1 I. EM � 1 1 9 1 r d I - Further reductions to reserve levels due to operating deficits - Erosion of the city's tax base KEY STATISTICS 2010 Population: 47,707 (4.4% increase since 2000) 2012 Full value: $2.9 billion 2006 - 2010 Per capita income: 89.8% of state / 85.1% of nation 2006 - 2010 Median family income: 87.3% of state / 86.5% of nation City of Salina unemployment rate (April 2013): 5.2% Fiscal 2011 General Fund balance: $3.8 million (10.8% of General Fund revenues) Fiscal 2012 General Fund balance (draft audit): $3.8 million (10.6% of General Fund revenues) Direct debt burden: 2.3% (4.4% overall) Payout (10 Years): 77.2% Moody's Adjusted Net Pension Liability (ANPL): $69.0 million (1.67x operating revenues, including General Fund and Debt Service Fund) Post -sale long term general obligation debt outstanding: $62.9 million Post -sale short-term general obligation debt outstanding: $3.8 million PRINCIPAL METHODOLOGY The principal methodology used in the long term rating was General Obligation Bonds Issued by US Local Governments published in April 2013. The principal methodology used in the short term rating was Bond Anticipation Notes and Other Short-Terre Capital Financings published in May 2007. Please see the Credit Policy page on www.moodys.com for a copy of this methodology. REGULATORY DISCLOSURES For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. 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