Fitch Rates Tempe, Arizona $66MM GOs 'AAA'

AUSTIN, Texas--(BUSINESS WIRE)--Fitch has assigned a 'AAA' rating to the $66.365 million general obligation (GO) bonds, series 2008A of Tempe, Arizona. In addition, Fitch affirms the 'AAA' rating on the city's $359.8 million in GO bonds outstanding. The bonds are scheduled to sell competitively on June 5. The Rating Outlook is Stable.

Repayment security is provided from an unlimited ad valorem tax levied on all taxable property within the city. Proceeds of the bonds will be used to finance water and wastewater system, streets, public safety, and parks and community services improvements, and to pay issuance costs.

The 'AAA' rating reflects the city's sound financial position, strong financial stewardship, moderate debt burden, and the diversity of Tempe's economy. Sizable cash reserves and prudent financial management and policies are important characteristics of the city's high credit quality. Both the general and water and wastewater funds have large available reserves, providing a substantial cushion to counter difficult economic cycles or unexpected operating needs. These reserves, along with the city's sound management practices, will be important factors as the city navigates the current economic slowdown.

With an estimated population of 166,000, Tempe is located in Maricopa County, the economic hub and population center of the state. The city is home to several major employers, including Arizona State University (ASU), US Airways, and numerous computer technology manufacturing concerns. While government employment is significant, the services and trade sectors dominate.

For fiscal 2007, the general fund posted an operating surplus of more than $4 million, led by a healthy 12% jump in sales tax revenues. This gain contributed to an increase in the unreserved general fund balance to nearly $97 million, or more than 55% of expenditures and transfers out. The city's formal financial policies require an undesignated general fund balance of 25% of anticipated revenues. Current projections for fiscal 2008 point to a smaller surplus of roughly $1.5 million due to a decline in sales tax revenues. City officials expect receipts to total $80 million for fiscal 2008, down from nearly $87 million in fiscal 2007 and roughly $5 million below original budget projections.

Tempe officials anticipate additional fiscal stress for fiscal 2009, with the softening local and regional economies pressuring various revenue sources. In response to an initial projection of a $12 million general fund shortfall, staff has prepared a budget balancing plan for fiscal 2009 that includes both revenue enhancements and spending reductions. Proposed cutbacks include a hiring freeze and a six-month delay in any market salary adjustments. The plan also includes the application of roughly $2 million of the $8 million general fund rainy day reserve.

Of the city's approximately $360 million in GO bonds outstanding, nearly 70% are supported by revenues from the water and wastewater fund. The city's five-year capital plan appears manageable at roughly $520 million. Of this total, roughly two-thirds are expected to be funded with bonds. However, nearly 50% of this additional debt is expected to be self-supporting from the city's water and wastewater utility. GO debt is amortized at an above-average rate, with about 60% retired in 10 years. Including $222 million in excise tax debt, both direct and overall debt ratios are slightly above average.

Tax base growth, as measured by secondary assessed value (SAV) has been solid at more than 9% annually over the past five fiscal years. However, the impact from the current residential slowdown has yet to show up in SAV totals. While the single family residential market in Tempe is relatively mature, condominium construction has been very active in recent years. According to city officials, the slowdown has caused the developers of several condominium projects to switch to the student housing/rental market. Several hundred condo units reportedly are on the market in Tempe presently.

A possible merger between US Airways and United Airlines could affect local employment levels; US Airways is one of Tempe's largest employers with roughly 3,900 workers. Despite the current slowdown, employment totals in Tempe have continued to trend upward and the local unemployment rate of 3% for March 2008 was below regional, state and national averages. Construction continues on the light rail system that is projected to begin service in December 2008 from downtown Phoenix to Tempe and ASU. ASU is the largest university in Arizona, with a fall 2007 enrollment of more than 64,000. Fitch has noted during past recessions that large universities serve as a stabilizing influence on a local economy; ASU likely will serve in this capacity for Tempe during the current economic downturn.

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