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Hoover, Alabama; General Obligation Primary Credit Analyst: Scott Sagen, New York (212) 438-5126; [EMAIL REDACTED] Secondary Credit Analyst: Brian J Marshall, Dallas [PHONE REDACTED]; [EMAIL REDACTED] Table Of Contents Rationale Outlook Economy: The Affluent Suburb Serves As A Retail Hub Related Criteria And Research October 19, 2010 www.standardandpoors.com/ratingsdirect 1 826708 I 301279465 ---PAGE BREAK--- Hoover, Alabama; General Obligation Credit Profile US$56.445 mil GO warrants ser 2010 dtd 11/01/2010 due 03/01/2022 Long Term Rating AA+/Stable New Hoover GO Long Term Rating AA+/Stable Affirmed Hoover GO Unenhanced Rating AA+(SPUR)/Stable Affirmed Many issues are enhanced by bond insurance. Rationale Standard & Poor's Ratings Services assigned its 'AA+' long-term rating, and stable outlook, to Hoover, Ala.'s series 2010 general obligation (GO) warrants and affirmed its 'AA+' long-term rating and underlying rating (SPUR), with a stable outlook, on the city's parity GO debt. The rating reflects our opinion of the city's: • Favorable location in the Birmingham metropolitan statistical area, supporting its role as one of the state's retail hubs; • Very strong income and property wealth levels; and • Strong financial position, evidenced by its historical maintenance of very strong reserves. Our opinion of the city' reliance on, and concentration in, sales and use tax revenues compared to total general government revenues offsets, in part, these The city's full faith and credit pledge secures the series 2010 warrants. Officials plan to use warrant proceeds to refund the city's series 2003 GO warrants outstanding. Due to the prominence of Hoover's retail sector, sales and use taxes accounted for a large 74% of all tax revenues in fiscal 2009. Merchandise retail, a level that has been stable over time, generates roughly 70% of sales tax revenues. The city is not dependent on any of its principal sales tax generators: The 10 leading taxpayers accounted for about 27% of sales tax revenues in 2009. City management transferred an annual contribution of $2 million to the school system during fiscal 2010; this type of transfer is at the city's discretion. City officials plan to make the same transfer again in fiscal 2011. The city's financial condition remains a strength. The $30.9 million unreserved, undesignated general fund balance for fiscal 2009 equaled a strong 37% of expenditures, which also exceeded the city's reserve policy. Management expects to end fiscal 2010 with a $31.4 million fund balance after transferring roughly $4.0 million into the capital fund, and it is projecting a break-even fiscal 2011 budget. Officials believe sales tax revenues have bottomed out after declining by 6% in fiscal 2009, and they are projecting actual sales tax revenues to be $2.5 million above budgeted fiscal 2010 levels. Standard & Poor's deems Hoover's financial management practices "good" under its Financial Management Standard & Poors I RatingsDirect on the Global Credit Portal I October 19, 2010 2 826708 I 301279465 ---PAGE BREAK--- Assessment (FMA) methodology, indicating financial practices exist in most areas but that governance officials might not formalize or regularly monitor all of them. Key management practices include regular monitoring and reporting of budgeted figures compared with actual results and year-to-date performance with special attention paid to sales and use tax revenues. In addition, the city maintains a five-year capital improvement program that fully delineates funding sources; management has historically followed its strong policy of maintaining reserves equal to 30% of revenues. After accounting for partial self-support from the sewer system for roughly 21% of GO debt, the city's overall net debt burden is a moderate 3.5% of the estimated $11.1 billion market value. Management, however, attributes most of this to overlapping debt from Hoover City Board of Education and Jefferson County. Direct debt burden has remained constant at between 0.8% and 2.5% of market value. The sewer system does not fully self-support all allocable GO debt, but net sewer revenues in fiscal 2009 totaled $1.75 million and provided 0.81x coverage of all GO debt allocable to the sewer system. Annual debt service for all GO debt allocable to the sewer system is roughly $2.1 million in fiscal 2011, or roughly 19% of total annual GO debt service. We consider debt amortization above average with officials planning to retire 68% of GO debt principal over 10 years. Of the current $50 million five-year capital plan, management indicates it will likely use pay-as-you-go financing to fund $10 million of identified projects. City officials are preliminarily considering issuing $40 million of debt for a new performing arts and convention center within five years. Management, however, does not have current additional debt issuance plans. Outlook The stable outlook reflects Standard & Poor's expectation that the city will likely maintain its strong financial condition, including very strong reserves, to help mitigate the inherent risks in its dependence on sales tax revenues, which are susceptible to economic cycle fluctuations. Economy: The Affluent Suburb Serves As A Retail Hub Hoover is one of Birmingham, Ala.'s largest and most affluent suburbs, centrally located near U.S. highways 280 and 31 and State Highway 150. City population, which grew by 23% between 2002 and 2009, is now about 81,610. While the city is home to a diverse employer mix, and while it has perennially low unemployment, its most prominent role is that of the state's retail hub with a strong and growing retail base. City unemployment of 6.1% in August 2010 remained well below the nation's rate. City wealth and income levels are very strong: Median household effective buying income is 181% of the state's average and 144% of the nation's average. Per capita retail sales were 179% of the nation's 2009 average. Management attributes continued growth to Riverchase Galleria, the state's largest and most frequented mall. Additional retail base growth remains ongoing. Recently completed developments include a large retail center with a Target Corp. supercenter as its anchor, and the Renaissance Birmingham Ross Bridge Golf Resort attracts visitors and supports retail activity with its 248 guest rooms. In addition, the galleria's developers are continuing their efforts to ensure its draw and popularity remain high. Market value, often used as an indicator of relative wealth, is also extremely strong at roughly $136,194 per capita. Taxable assessed valuation (AV) grew by 43% over the past five years to $1.7 billion in fiscal 2009. The city does not depend on any of its principal property taxpayers with the www.standardandpoors.com/ratingsdirect 3 826708 I 301279465 Hoover, Alabama; General Obligation ---PAGE BREAK--- 10 leading taxpayers accounting for just 12% of total AV. Related Criteria And Research USPF Criteria: GO Debt, Oct. 12, 2006 Hoover, Alabama Economic statistics Population 81,616 Median household EBI, % of U.S. 144.0 Per capita EBI, % of U.S. 162.0 Total market value per capita 136,194 Net direct debt ($000s) 89,020 Net direct debt per capita Net direct debt, % of market value 0.8 Assessed value ($000s) 1,729,714 Market value ($000s) 11,115,616 EBI Effective buying income. Population and income Source: Claritas. Financial statistics (fiscal year-end) 9/30/2009 9/30/2008 9/30/2007 General fund balance ($000s) 31,300 31,202 31,100 General fund balance, % of general fund expenditures 38.4 35.2 36.6 Unreserved fund balance ($000s) 30,937 30,775 30,453 Unreserved fund balance, % of general fund expenditures 38.0 34.7 35.9 Total general fund expenditures ($000s) 81,472 88,649 84,909 Total general fund expenditures one-year change (8.1) 4.4 3.8 Total general fund revenues ($000s) 87,731 95,697 96,390 Total general fund revenues one-year change (8.3) (0.7) 2.6 Standard & Poors I RatingsDirect on the Global Credit Portal I October 19, 2010 4 826708 I 301279465 Hoover, Alabama; General Obligation ---PAGE BREAK--- S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. 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