Fitch Rates Casa Grande, AZ's Series 2012 Excise Tax Rev Rfdg Bonds 'AA'; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA' rating to the following Casa Grande, Arizona (the city) excise tax debt:

--Approximately $8.0 million excise tax revenue refunding obligations, series 2012.

The bonds are scheduled for a negotiated sale the week of

Feb. 6th. Proceeds will be used to refund various outstanding obligations for savings and to pay related costs of issuance.

In addition, Fitch affirms the following ratings for Casa Grande, Arizona (the city):

--$25.1 million in outstanding general obligation (GO) bonds at 'AA';

--$32.7 million in outstanding excise tax revenue bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY: The excise tax bonds are secured by a first lien on the city's excise tax revenues, on par with the outstanding excise tax bonds. The GO bonds are secured by an unlimited ad valorem tax levied on all taxable property in the city.

KEY RATING DRIVERS

GO AND EXCISE TAX BOND RATINGS ON PAR: Fitch rates these separate securities on par as the credit fundamentals of both securities are similarly affected by the economically sensitive nature of the excise taxes; the city relies substantially on the broad-based excise taxes to fund general services.

SOLID COVERAGE MAINTAINED: Although debt service coverage has declined in conjunction with weaker excise tax revenue streams since fiscal 2009, it remains healthy at more than 4 times (x). Sound legal provisions include a rate covenant that requires 3x coverage.

ECONOMY REMAINS WEAK: The area economy continues to demonstrate weaknesses, characterized by sluggish development and spending trends. Unemployment remains elevated, above state and national averages. Fitch anticipates a continued, slow pace of economic recovery that may not return to pre-recessionary levels over the near term.

SOLID RESERVE LEVELS PRESERVE FINANCIAL FLEXIBILITY: Despite recent draws on fund balance, management expects to maintain a large financial cushion of $20 million or 50% of general operations in reserve as a minimum according to policy. Use of very high reserve levels above that floor in conjunction with spending cuts has allowed the city to withstand the economic downturn and subsequent revenue declines.

EXCISE TAX REVENUE DECLINES: The cumulative 34.8% decline in city excise taxes over fiscal years 2009 - 2011 was a more timely reflection of economic recession than property taxes. For 2012, management projects roughly 6% growth in its excise taxes due largely to an expected increase in state-shared revenues.

MULTI-YEAR TAX BASE DECLINES: Historically large annual gains in the tax base reversed in fiscal 2011 with a significant 12% secondary assessed valuation (SAV) decline; a slightly lower 9% loss was registered in fiscal 2012. Taxpayer concentration is moderate. For fiscal 2013, preliminary expectations are for a third, comparable year of SAV decline.

MODERATELY HIGH DEBT PROFILE LIKELY SUSTAINED: The city's overall debt levels are moderately high at 4.2% of market value. Despite slower growth, Fitch anticipates certain capital needs will continue in the intermediate-term given previous rapid economic and population expansion.

CREDIT SUMMARY:

PREVIOUSLY RAPID ECONOMIC EXPANSION SIGNIFICANTLY SLOWED

Casa Grande is the largest city in western Pinal County and a regional retail/commercial hub, located approximately halfway between Phoenix and Tucson at the junction of two major interstate highways. Estimated at nearly 49,000 residents, the city's population base has expanded rapidly since 2000, due largely to affordable residential development within feasible commuting distance to the larger metropolitan employment bases. Such development drove much of the city's double-digit tax base growth that occurred from fiscal years 2006-2009 that has since weakened along with prices and new home building in the area. Local wealth levels are below average.

Area economic conditions remain relatively sluggish in light of overall weak development and spending trends as compared to pre-recessionary trends. At 9.5% in November 2011, city unemployment levels have declined on a year-over-year basis but remain elevated and above state and national levels of 8.4% and 8.2% respectively.

TAX BASE EXPERIENCING SIZEABLE DECLINES

Growth in secondary assessed valuation (SAV; which lags changes in market value by two years) began to reflect the substantial home price declines in fiscal 2011 with a significant 12% decline in SAV. Another SAV decline of nearly 9% occurred in fiscal 2012, bringing SAV down to a modestly-sized $370 million and closer to its pre-fiscal 2009 level. Top taxpayers comprise a moderate 14.5% of SAV. In fiscal 2013, preliminary expectations are for a third, comparable year of SAV decline. While still substantial, these declines are not as severe as those experienced by many Phoenix-area cities.

REDUCED LEVEL OF EXCISE TAXES STILL PROVIDE SOLID BOND COVERAGE

The city relies largely on excise taxes to fund general fund operations. The excise tax is provided by a broad base of revenue sources, including local sales taxes, state shared sales and income taxes, franchise fees, license and permits, and fines and forfeitures. Property taxes comprise less than 10% of total general fund operating revenues. Management prudently accumulated a portion of the large excise tax revenue gains made in earlier growth years, particularly local construction sales tax revenues, and dedicated much of it towards future, one-time capital spending rather than expanding ongoing spending levels.

Legal provisions for excise tax revenue bondholders are strong; the city covenants to levy new or increase existing excise taxes if the minimally required coverage level of 3x is not maintained. Fitch conservatively calculates coverage based on the $27.5 million in excise taxes received in fiscal 2011 (down nearly 7% from the prior year) on the excise tax bonds and the portion of the Water Infrastructure and Financing Authority (WIFA) loan that is secured by excise tax revenues (and which has a parity excise tax pledge) at a solid but reduced 4.4x maximum annual debt service (MADS). However, once wastewater revenues are considered as the sole support of WIFA debt service repayment (which is the city's practice), MADS coverage on the excise tax debt rises to a very strong 7.5x.

FINANCIAL POSITION REMAINS SOLID DESPITE ECONOMIC WEAKNESS

Developed from multiple fiscal years of strong revenue growth prior to the recession and collapse of the housing market, the city's financial cushion peaked in fiscal 2008 with an unreserved general fund balance of $30.6 million or nearly 83% of spending. Management judiciously built a very high level of reserves over time (to be maintained at no less than 50% of general fund spending according to policy) in order to offset some of the risk associated with the economically sensitive excise tax revenues that provide the bulk of funding general operations. Subsequently, various revenue streams (particularly those related to new construction and discretionary spending) softened and declined at times below budget as the recession lengthened.

In response, management reduced spending levels in fiscal 2010 and 2011 thru a variety of operating efficiencies as well as used some of the financial cushion available with the drawdown of roughly $4.5 million in both years. The years' drawdowns were largely for one-time capital spending but also included amounts for ongoing operating expenditures, particularly in fiscal 2011 when year-end results fell roughly $2 million below earlier expectations. Nonetheless, the city continues to maintain a large reserve at fiscal 2011 year-end; the unrestricted general fund balance equaled $24.6 million or a solid 65.4% of spending.

For fiscal 2012, the $38 million expenditure budget was reduced modestly by about 2.5% as compared to the prior year, inclusive of a $2.4 million drawdown that incorporates about $1.1 million for ongoing operating expenditures. Management reports year-to-date revenue and spending trends remain in line with budgeted numbers; reserves are currently projected to end at a still solid $22 million, in line with city policy. Fitch believes actual results may be closer to the $20 million floor required by policy if building-related revenue streams do not perform to budgeted expectations, which were lowered from fiscal 2011.

Beginning budget preparations for fiscal 2013 include management's expectation to address the ongoing, operating structural imbalance with additional budget cuts focused largely on growth-related positions. Fitch expects management will maintain a comparable, high level of reserves through substantial structural balance given the high rating category.

LONG-TERM LIABILITIES APPEAR MANAGEABLE DESPITE ONGOING CAPITAL NEEDS

Overall debt levels are moderately high, approximating $2,370 on a per capital basis and 4.2% of market value. Despite slower growth, Fitch anticipates certain capital needs will continue in the intermediate-term given previous rapid economic and population expansion. The city's direct debt levels are slightly more moderate, supported by utility revenues and the city's practice of pay-go capital spending. Principal amortization of tax-supported debt is average at about 56% in 10 years.

Casa Grande participates primarily in two pension plans that also provide death, disability and health insurance benefits: the Arizona State Retirement System (ASRS or the system) for general employees and the Arizona Public Safety Retirement System (PSPRS) for firefighters and police officers. The actuarial funded position for the ASRS system as of June 30, 2010, improved slightly from the prior year and remained solid at 80.5%. The city has made 100% of its annual required contribution (ARC) for fiscal years 2009-2011. In PSPRS, the city's funded position of 58.4% as of June 30, 2009 for police officers and 62.7% for fire fighters is relatively weak. The funding level has stayed fairly level despite large mandated increases to employer contribution rates over the past three fiscal years. However, management reports that recently approved state legislation that incorporates multi-year increases to employee contribution rates and future benefit changes is projected to improve the city's (and plan's) funded position over time.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's report 'Tax-Supported Rating Criteria', this action was additionally informed by information from Creditscope, Case-Shiller, LoanPerformance, Inc, and IHS Global Insight.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 15, 2011);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842

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