Salina Airport Authority

MOODY'S ASSIGNS Aa3 RATING TO SALINA AIRPORT AUTHORITY'S (KS) $2.0 MILLION GO BONDS, SERIES 2009-A, AND $6.1 MILLION TAXABLE GO BONDS, SERIES 2009-B

Aa3 RATING APPLIES TO $21.8 MILLION OF GO DEBT, INCLUDING CURRENT ISSUES

Moody's Investors Service has assigned a Aa3 rating to the Salina Airport Authority's (KS) $2.0 million General Obligation Bonds, Series 2009-A, and $6.1 million Taxable General Obligation Bonds, Series 2009-B. Concurrently, Moody's has affirmed the Aa3 rating on the authority's outstanding general obligation debt. The authority has $21.8 million of outstanding general obligation debt, including the current offerings. The bonds are secured by the authority's general obligation unlimited tax pledge. Proceeds of the current issues will provide funding for capital improvements at the Salina Airport and the Airport Industrial Center, including the construction of a helipad and public viewing area; pavement rehabilitation; installation of security fencing; environmental remediation projects; and improvements to airport buildings. A portion of the bond proceeds will redeem of a portion of the outstanding Series 2007- Temporary Notes, which provided temporary financing for these projects. Assignment and affirmation of the Aa3 rating reflect the authority's role as a regional economic center; satisfactory financial operations despite recent revenue pressures and narrow cash reserves; and debt levels that are expected to increase but remain manageable.

AUTHORITY SERVES AS REGIONAL ECONOMIC CENTER

Located in Saline County 95 miles north of Wichita (general obligation rated Aa2/stable outlook), the Salina Airport Authority's taxing boundaries are coterminous with those of the City of Salina (Aa3). The city's medium-sized $2.9 billion tax base continues to grow, although Moody’s notes that the pace of growth has slowed in recent years, from a 7.5% full value increase in 2006, to 4.2% in 2007, to 2.7% in 2008. City of Salina officials expect future tax base growth to be weak as the impact of the national economic condition is felt locally. However, no significant foreclosure or property tax delinquency issues have arisen, and Moody’s expects the Salina economy to continue to benefit from several stabilizing factors. Located at the intersection of I-70 and I-135, the city serves as a regional retail, commercial, industrial, and medical hub for the largely agricultural communities of north central Kansas. The city's population has increased moderately in recent decades: the 2000 census population was 8% greater than the 1990 census population, and the 2007 estimated population of 46,458 was 1.7% greater than the 2000 census population. Income levels are below state and national medians and have declined relative to those medians during the past four decades.

The Salina Airport Authority is located on the former site of the Schilling Air Force Base, which was closed by the U.S. Department of Defense in 1964. In 1965, the Airport Authority was created on 2,900 acres of the closed base. By statute, the Salina City Commission appoints a five-member authority board of directors, but the authority approves its own budget (subject to city consent for any operating tax levy) and is responsible for repaying its own debt. The authority has two primary functions, one of which is to manage airport operations. With a 12,300 foot runway (one of the longest in North America) and with its central geographic location, the airport sees a variety of aviation use. Daily commercial service to Kansas City and Denver is provided, and the airport is available for corporate, military, air freight, and flight training activity. Popular as a mid-continent fuel stop, the authority benefits from a fuel surcharge collected on each gallon of fuel purchased from two providers, Flower Aviation and America Jet.

The authority's second role is to act as a landlord and a facilitator of economic growth at the Salina Airport Industrial Center. The Industrial Center is home to 80 organizations, with more than 4,200 employees. Although the Industrial Center enjoyed occupancy rates as high as 96% several years ago, officials report that vacancies have increased slightly in recent years. The authority’s top tenant, the Kansas Military Board, accounts for nearly 14% of total revenues (based on 2008 unaudited figures). Favorably, the airport should benefit from a planned employment expansion of the Kansas National Guard in Salina. The authority’s second largest tenant, Hawker Beechcraft, accounted for more than 8% of total revenues in 2008. Due to declines in the aviation manufacturing industry, Hawker Beechraft recently cut its workforce at the authority from 485 to 283 employees. Airport officials do not expect the layoffs to adversely impact the authority’s lease revenues. The authority leases land and buildings, and it also acquires, develops, and sells land. Officials report that significant future development will occur on 100 acres of authority-owned land that is slated for the development of an aviation service center. Future economic growth is expected to be driven by aircraft maintenance and related technology services. Moody's believes the tax base will continue to grow at a moderate pace, as the authority's role as a regional economic center provides a level of stability to the greater region.

SATISFACTORY FINANCIAL OPERATIONS DESPITE RECENT REVENUE PRESSURES AND NARROW CASH RESERVES

With strong management, Moody's expects the Salina Airport Authority's financial operations to remain satisfactory, despite narrow unrestricted cash reserves. As the authority has used cash on hand to finance capital improvements, unrestricted cash levels have decreased in recent years, from $3.5 million in fiscal 2002 to $386,000 in fiscal 2007. Management intends to increase the unrestricted cash balance to between $1.3 million and $1.5 million by fiscal 2013. To that end, airport officials report that the unrestricted cash balance increased in 2008 to $460,000, and it is budgeted to further increase to $625,000 in fiscal 2009. The authority's largest revenue source is building and land rent (representing 39% of fiscal 2007 total revenues). This revenue source decreased in 2007 due to an increase in vacancies, but officials project this revenue stream will increase significantly in the long run as additional land is developed and leased. Moody's notes that the authority’s lease rental revenue exhibits a notable degree of concentration, with the top ten tenants accounting for 50% of total revenues in fiscal 2008 (based on a draft of the 2008 audited financial statements). The authority's second largest revenue stream is property taxes (comprising 31% of fiscal 2007 revenues). The authority can levy up to 3 mills for operations, subject to approval by the city. The authority currently levies 2.877 mills, and officials report that they may seek authorization to increase this limit in the future, if necessary. The authority can also levy an additional one mill to match grants; this levy is not used at this time. These limits do not apply to the authority's ability to levy unlimited taxes for the repayment of its general obligation debt. The authority’s third largest source of income is fuel fees and hangar rent. Officials report that fuel fees are projected to equal just 60% of budgeted figures for 2009, but management plans to offset this decrease with expenditure cuts in several non-essential areas.

The authority (along with the City of Salina, Saline County Unified School District No. 305, and Kansas State University at Salina) is currently estimating costs associated with the environmental cleanup of contamination on airport grounds. Cost estimates for the project have not yet been finalized, but the four local government entities may collectively be responsible for $2 million to $3 million per year for the next 30 years. The four local government entities are currently in talks with the federal government and hope that federal funding will be secured to support these clean-up expenses. Despite this potential expense, and despite concentration in the revenue stream, Moody's believes that the authority will be able to increase cash reserves to adequate levels over the long term. However, continued decreases in cash reserves may factor into future credit reviews.

DEBT LEVELS EXPECTED TO INCREASE BUT REMAIN MANAGEABLE

Over the next several years, Moody's expects the authority's debt levels to increase but remain manageable. Historically, Kansas statutes limited the authority's aggregate general obligation debt issuance to 3% of the City of Salina's total assessed valuation. In 2007, the authority sought and gained approval to increase the limit to 10% of assessed valuation. The limit was increased to allow the authority to issue debt for various projects that officials hope will further stimulate economic activity at the Airport Industrial Center. The increased debt limit will permit the authority to issue an additional $20.2 million in general obligation debt. The authority currently has $21.8 million of total general obligation debt outstanding. Officials plan to issue all or part of the additional permitted debt within the next several years. At 0.8%, the authority's current direct debt position is very affordable. The authority's overall debt burden of 3.7% is above average and is largely due to borrowing of the City of Salina and the Saline County Unified School District 305 (A1). Principal amortization of the authority's general obligation debt is somewhat slower than average, with 54% of debt retired in ten years. All of the authority’s outstanding debt is in fixed rate mode, and the authority is not a party to any interest rate swap agreements. Debt management will be a key focus of future credit analysis, though given the authority's strong management and rapid principal repayment, Moody's believes it will remain manageable.

KEY STATISTICS                                                                                              

2000 census population: 45,679 (8.0% increase from 1990)

2007 estimated population: 46,458 (1.7% increase from 2000)

2008 full value: $2.9 billion

1999 per capita income: $18,593 (86% of US)

1999 median family income: $45,433 (91% of US)

1999 median home value: $83,900 (70% of US)

City of Salina unemployment rate (February 2009): 5.5%

Fiscal 2007 net assets: $25.4 million

Fiscal 2007 unrestricted cash: $386,000 (29% of operating revenues)

Direct debt position: 0.8%

Overall debt burden: 3.7%

Principal amortization (10 years): 54%

Post-sale general obligation debt outstanding: $21.8 million

RATING METHODOLOGIES AND LAST RATING ACTION

The principal methodology used in rating the current issue was "Local Government General Obligation and Related Ratings," which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Index of Special Reports - U.S. Public Finance. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Credit Policy & Methodologies directory.

The last rating action for the Salina Airport Authority was on December 3, 2007, when the Aa3 general obligation rating was affirmed.