Fitch Affirms Prescott Valley MPC, Arizona's Excise Tax Revs; Revises Outlook to Stable

AUSTIN, Texas--(BUSINESS WIRE)--During the course of routine surveillance, Fitch Ratings affirms its 'A+' rating on Prescott Valley Municipal Property Corporation, Arizona's $36.7 million outstanding municipal facility revenue bonds. The Rating Outlook is revised to Stable from Negative.

The 'A+' rating reflects the town's sizable general fund reserves and manageable debt profile, as well as the financial pressures generated by declining sales tax and other economically sensitive revenues. The Outlook revision results from cost control measures taken by town officials over the past 18 months in response to the weakening local economy that should maintain operating reserves at or near current healthy levels. Further, Fitch believes the town can manage sales tax revenue contributions for debt service on a recently constructed events center in Prescott Valley without impairing its financial condition. Maintenance of adequate reserve levels through continued spending control efforts will be key to preserving the current rating level.

Prescott Valley is located roughly 90 miles northwest of Phoenix. The town has experienced explosive population growth in the past decade, increasing from less than 9,000 in 1990 to an estimated 37,000 this year. The primary economic sectors of the town include tourism, trade, services, and construction; however, a segment of the population commutes to nearby Prescott to work in its government, mining, and ranching economy. The housing industry collapse in Arizona has affected Prescott Valley, with residential values in many neighborhoods off more than 30% from recent highs. However, Prescott Valley does not levy a property tax, minimizing any direct impact from falling property values on the town's finances.

The town is heavily reliant on sales tax and other economically sensitive revenues for its operations, and the ongoing recession has pressured various revenue sources. Local sales tax revenues dipped more than 15% in fiscal 2008 and an additional 11% in fiscal 2009, while state shared sales tax revenues declined roughly 14% over this two-year period. Despite these revenue losses, the town's operating reserves remain very healthy; the unreserved general fund balance at fiscal 2008 year-end was more than 50% of spending after excluding nearly $16 million in proceeds from a recent borrowing.

Preliminary fiscal 2009 totals indicate essentially break-even general fund results (net of the affect of spending the proceeds of debt mentioned above), despite the weaker revenue picture. General fund reserves are expected to remain solid at around $23 million or 60% of spending. The fiscal 2010 budget includes a 10% projected increase in sales tax revenues, reflecting the opening of two new 'big box' retailers in Prescott Valley toward the end of fiscal 2009 that will contribute to the anticipated increase for fiscal 2010. Operating reserves are projected to be largely unchanged at fiscal 2010 year-end.

Fitch had noted previously that additional financial pressure was created by the town's contractual obligation to contribute certain sales tax revenues from a designated commercial area to support debt payments on the Yavapai County Industrial Development Authority's series 2005 excise tax revenue bonds, which financed the construction of an events facility in Prescott Valley. The town payments are required in the event net income from the facility and other pledged revenues are insufficient to make debt service payments on the bonds, and the financial operating history of the facility and projections of both facility operations and retail activity in and around the facility suggest the town will be contributing sales tax revenues from this designated area for the foreseeable future. However, Fitch believes the commitment is manageable and will not negatively affect the town's financial profile.

The town was named as a defendant (along with other parties) in several lawsuits related to the authority's 2005 financing. Fitch cannot predict the outcome of these legal proceedings and their financial impact on the town at this time. (Please see 'Fitch Downgrades Yavapai County IDA Excise Tax Bonds to 'D',' dated Oct. 23, 2009 at 'www.fitchratings.com'.)

Additional information is available at 'www.fitchratings.com'.

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