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June 9, 2022Summary: Prattville, Alabama; Appropriations; General Obligation Primary Credit Analyst: Katy Vazquez, New York (1) 212-438-1047; katy.vazquez@spglobal.com Secondary Contact: Joyce Jung, Centennial + 1 (212) 4380629; joyce.jung@spglobal.com Table Of Contents Rating Action Stable Outlook Credit Opinion Related Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 9, 2022 1 Summary: Prattville, Alabama; Appropriations; General Obligation Credit Profile US$9.715 mil GO warrants ser 2022-A due 06/01/2052 Long Term Rating AA-/Stable New US$3.08 mil GO warrants ser 2022-B due 06/01/2030 Long Term Rating AA-/Stable New Prattville GO Long Term Rating AA-/Stable Affirmed Historic Prattville Redev Auth, Alabama Prattville, Alabama Historic Prattville Redev Auth (Prattville) redev bnds Long Term Rating AA-/Stable Affirmed Rating Action S&P Global Ratings assigned its 'AA-' rating and stable outlook to Prattville, Ala.'s roughly $9.715 million series 2022A general obligation (GO) warrants and roughly $3.08 million series 2022B federally taxable GO warrants and affirmed its 'AA-' rating, with a stable outlook, on the city's existing GO debt. The warrants are a GO of the city, the payment of which Prattville irrevocably pledges its full-faith-and-credit-and-taxing power. The property tax pledge in Alabama is limited; the state has statutory tax limitations that include debt-service levies. While the tax is technically limited, our analysis focuses on the strength of the full-faith-and-credit pledge, which we view as an equal credit quality to an unlimited-tax GO pledge. Lease payments made to the authority by the city secure series 2016 Historic Prattville Redevelopment Authority redevelopment bonds. We rate the on parity with the city's GO debt because lease payments are not subject to appropriation and the city's obligation to make these payments is absolute and unconditional. Officials intend to use series 2022A and 2022B warrant proceeds to fund various improvements citywide. Credit overview Prattville, in central Alabama, is about 15 miles from Montgomery, the state capital, and Maxwell Air Force Base. Access to Montgomery has contributed to Prattville's growth, which has been steady during the past several years, including a strong commercial and retail base and ongoing residential developments. The city has, what we consider, very strong reserves due largely to management's conservative budgeting and sales taxes, the city's leading revenue generator, outperforming projections as a positive effect of people shopping locally during COVID-19. A credit negative is the city's debt profile with significant medium-term debt plans, as well as most of its debt being privately WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 9, 2022 2 placed with, what we consider, unusual provisions in the event of default, including cross-default and acceleration, that, if it did occur, would pressure liquidity significantly. The rating reflects our opinion of Prattville's: • Stable economy with access to a broad, diverse metropolitan statistical area (MSA) and ongoing developments, leading to property tax base increases; • Strong financial management with good financial-management policies and practices under our Financial Management Assessment (FMA) methodology and a strong Institutional Framework; • Very strong reserves and liquidity, which default provisions could pressure; • Weak debt profile with additional planned issuances but manageable pension costs; and • Significant privately placed debt that could pose a liquidity risk if default provisions are triggered. Environmental, social, and governance The rating incorporates our view of environmental, social, and governance (ESG) risks relative to Prattville's economy, management, financial measures, and debt-and-liability profile and have determined all are neutral in our analysis. We note tornadoes and severe weather pose the greatest environmental threats to the city, which typically has one or more severe storms a year. The city maintains very strong reserves to provide interim financing before Federal Emergency Management Agency reimbursement to help mitigate financial effects. Stable Outlook Upside scenario We could raise the rating if the city's overall debt profile were to improve, including a reduced presence of private placements with permissive provisions, and if economic expansion were to improve per capita effective buying income compared with higher-rated peers. Downside scenario We could lower the rating if an event of default on any of the city's many private placements were to trigger an acceleration provision as a default remedy, requiring immediate payments on one or all, pressuring liquidity, or if significant debt issuances were to increase already elevated carrying costs materially. Credit Opinion A very diverse tax base in the Montgomery MSA, experiencing modest assessed value (AV) increases Prattville, in Autauga and Elmore counties, provides residents direct access to employment opportunities in the broad, diverse Montgomery MSA. The city had traditionally been a bedroom suburb of Montgomery, the state's capital; however, more recently, there has been a significant commercial presence that, despite experiencing hardships at the beginning of COVID-19, has rebounded and expanded. In particular, local grocery stores and home-improvement stores have been flourishing. AV has increased by 11% in three fiscal years to $510 million in fiscal 2022 from $457 million in fiscal 2020. Management largely attributes this to a strong housing market, including increases in building WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 9, 2022 3 Summary: Prattville, Alabama; Appropriations; General Obligation permits and a new apartment complex, as well as the downtown revitalization, including a significant retail sector. We expect Prattville to continue to benefit from its location within the Montgomery MSA, and we expect the tax base will likely grow modestly due to ongoing development. However, we do not expect material changes to economic fundamentals during the next two years. A solid management team with good financial-management policies, practices under our FMA Highlights include management's: • Revenue and expenditure assumptions based on three years to five years of historical data, and projecting sales tax growth below historical actual results; • Monthly budget-to-actual reports to the city council--The governing body can make amendments, if needed; • Adherence to a formal investment-management policy with monthly reports to the governing body; • Adoption of a debt-management policy that sets basic guidelines for debt issuance; and • Formal reserve policy that seeks to maintain general fund cash-based reserves equal to or exceeding the greater of $6 million, or 20% of the previous year's audited general fund revenue, as well as an unrestricted general fund balance not less than 25% of the previous year's audited general fund revenue. Prattville lacks a capital-improvement plan, and it does not currently perform long-term financial forecasting. We note the city takes measures to mitigate cybersecurity risk. Very strong reserves, but many private placements pose liquidity risk Our assessment of operating performance includes adjustments for recurring interfund transfers and expenditure adjustments to reflect debt-funded capital expenditures and debt defeasance. Prattville had positive operating performance in fiscal 2020 due to conservative budgeting and decreased expenditures as a mitigating measure surrounding COVID-19 uncertainty, as well as sales tax revenue, exceeding expectations during COVID-19. A significant reliance on sales tax revenue makes operations sensitive to national business cycles; however, sales tax growth has recently been strong. Following a fiscal 2020 operating surplus, Prattville had another positive variance in fiscal 2021, including defeasing multiple bond series, due partially to a significant increase in sales tax revenue $2.8 million overbudget. In fiscal 2021, sales taxes generated 62% of general fund revenue while licenses and permits accounted for 13% and intergovernmental revenue generated 7%. The city balanced the fiscal 2022 general fund budget after transfers; the budget is an 8% increase over fiscal 2021, including a 9% increase in salaries and 7% increase in general fund revenue. At this point in fiscal 2022, Prattville is tracking the budget. Prattville received about $1.7 million in CARES Act funding, which it used for COVID-19-related expenses, including fire department salary reimbursements. The city's American Rescue Plan Act of 2021 allocation is $8.5 million, which it will use for playground equipment and other one-time items. The city is working on a development agreement for job creation and economic stimulus, for which it would pay cash, totaling roughly $1.7 million. Other than that, Prattville does not currently plan to spend down reserves. Therefore, we do not expect results to weaken materially because Prattville is committed to maintaining very strong fund balance, even with the potential drawdown. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 9, 2022 4 Summary: Prattville, Alabama; Appropriations; General Obligation Most of Prattville's debt (72%) is direct-purchase debt, including privately placed warrants, loans, capital leases, and multiple lines of credit; almost all of these contain bond provisions that include events of default we view as permissive, and acceleration is an available remedy. Direct debt outstanding, totaling $19.65 million, is subject to acceleration. As of fiscal year-end 2021, Prattville had total governmental available cash and cash equivalents of $23.4 million. We view this as a contingent-liability risk because this could pressure liquidity if any events of default were to occur. However, since most private placements with risky provisions are with state agencies--Alabama Water Pollution Control Authority and Alabama Department of Environmental Management--we view it as unlikely to enforce those provisions. Weak debt that should weaken further with significant additional debt plans Postissuance, Prattville will have approximately $67.6 million in direct debt outstanding, not including self-supported debt by its wastewater and sanitation funds. Significant medium-term debt plans negatively affect our view of the debt profile. There are plans for a $1.4 million stormwater-and-wastewater project and several infrastructure projects totaling roughly $21 million. Prattville could issue another $37.5 million of debt should it not receive grant funding through the Infrastructure Investment & Jobs Act of 2021; however, this amount would likely eventually be self-supporting. Due to medium-term plans, we expect debt will likely remain weak. Pensions and other postemployment benefits (OPEB) are not an immediate credit pressure We do not view pension obligations as a credit pressure for Prattville because it represents a low percent of the city's total carrying costs. As of Sept. 30, 2020, Prattville participates in Alabama Employees' Retirement System (AERS)--an agency multi-employer, defined-benefit pension plan--which is 72.5% funded, with a net pension liability of $19.5 million. Actuarial assumptions include a 7.7% discount, which we view as aggressive, representing market risk and resulting in contribution volatility if AERS fails to meet assumed investment targets. City contributions have met our static-funding metric but not our minimum-funding-progress metric. Prattville also provides retiree health benefits through a single-employer health-insurance plan. The city recorded a net OPEB liability of $4 million at fiscal year-end 2021. Prattville funds OPEB on a pay-as-you-go basis. Strong Institutional Framework The Institutional Framework score for Alabama cities and towns is strong. Prattville, Alabama Select Key Credit Metrics Most recent --Historical information-- 2021 2020 2019 Strong economy Projected per capita effective buying income as a % of U.S.83.1 Market value per capita ($)105,309 Population 34,334 34,257 County unemployment rate(%)2.8 Market value ($000)3,615,695 3,401,506 3,140,782 10 leading taxpayers as a % of taxable value 9.8 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 9, 2022 5 Summary: Prattville, Alabama; Appropriations; General Obligation Prattville, Alabama Select Key Credit Metrics (cont.) Most recent --Historical information-- 2021 2020 2019 Strong budgetary performance Operating fund result as a % of expenditures 21.0 13.4 (0.3) Total governmental fund result as a % of expenditures 30.0 13.7 (0.5) Very strong budgetary flexibility Available reserves as a % of operating expenditures 41.5 32.4 26.5 Total available reserves ($000)17,454 12,395 11,022 Very strong liquidity Total government cash as a % of governmental fund expenditures 66.3 63.0 44.4 Total government cash as a % of governmental fund debt service 595.6 634.7 268.6 Strong management Financial Management Assessment Good Weak debt and long-term liabilities Debt service as a % of governmental fund expenditures 11.1 9.9 16.5 Net direct debt as a % of governmental fund revenue 66.0 Overall net debt as a % of market value 1.6 Direct debt 10-year amortization (%)40.6 Required pension contribution as a % of governmental fund expenditures 4.2 Other postemployment benefits actual contribution as a % of governmental fund expenditures 0 Strong Institutional Framework Data points and ratios may reflect analytical adjustments. Related Research • S&P Public Finance Local GO Criteria: How We Adjust Data For Analytic Consistency, Sept. 12, 2013 • Incorporating GASB 67 And 68: Evaluating Pension/OPEB Obligations Under Standard & Poor's U.S. Local Government GO Criteria, Sept. 2, 2015 • Criteria Guidance: Assessing U.S. Public Finance Pension And Other Postemployment Obligations For GO Debt, Local Government GO Ratings, And State Ratings, Oct. 7, 2019 • 2021 Update Of Institutional Framework For U.S. Local Governments • Through The ESG Lens 3.0: The Intersection Of ESG Credit Factors And U.S. Public Finance Credit Factors, March 2, 2022 Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. 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