AUSTIN, Texas--()--Fitch Ratings has affirmed the following rating on the Scottsdale Preserve Authority (SPA), AZ bonds:
--$56.3 million excise tax revenue bonds at 'AA+'.
The Rating Outlook is Stable.
The bonds are secured by payments from the city to the authority, payable from and secured by the proceeds of two separate transaction privilege and use taxes dedicated by voters to preservation purposes and which combined total 0.35%.
KEY RATING DRIVERS
SOLID COVERAGE AND SOUND FINANCES: The rating reflects the strong coverage from the pledged revenue source as well as the stellar credit characteristics of the city (GO bonds rated 'AAA' by Fitch); excise tax revenues increased the past two fiscal years after sharp declines during the recession.
NO ADDITIONAL BORROWINGS: The city has no plans to issue additional excise tax revenue bonds for preservation land purchases, choosing instead to issue general obligation (GO) debt.
MANAGEABLE DEBT BURDEN: A higher than average debt per capita burden is mitigated by the city's wealth levels, which are well above average; the pace of GO debt retirement is above average.
TAX BASE WEAKNESS: Taxable values in the city continue to drop, forcing the city to increase tax rates to generate sufficient operating and debt service revenues.
REDUCED CAPITAL NEEDS: Capital needs have declined as the economy has weakened, reducing planned borrowings and annual pay-go capital spending.
IMPROVING REVENUE PICTURE
Pledged excise tax revenues rebounded over the past two years as the Phoenix area economy appears to have stabilized. These increases followed a sharp 30% cumulative dip in revenues from fiscal 2008 - 2010 as the region suffered through the recession and housing collapse. Fiscal 2011 excise taxes totaled $27.2 million, or about 3% above prior year totals.
Debt service coverage remains sound at more than 4.0 times (x) for outstanding parity excise tax bonds; MADS coverage is comparable. Preliminary fiscal 2012 results suggest continued improvement, with pledged excise taxes up another 6% to $28.9 million. The fiscal 2013 budget includes a 4.6% increase in excise tax revenues, which appears reasonable given recent results and other evidence of strengthening economic activity.
AUTHORITY ACQUIRES PRESERVE LAND
The authority is a nonprofit corporation created by the City of Scottsdale in 1997 to finance land acquisitions for the McDowell Sonoran Preserve. Bonds issued by the authority are secured by a first lien on two excise taxes approved specifically for that purpose -- a 0.2% tax approved in 1995 and a 0.15% tax approved in 2004. The preserve plan is designed to provide land for public recreational use and to protect significant wildlife habitat. The city to date has accumulated more than 21,000 acres with an ultimate goal of 36,000 acres.
City voters also approved the issuance of general obligation bonds for the preserve intended to be repaid with proceeds of the taxes; $200 million was authorized with the 1995 tax and $500 million was authorized with the 2004 tax. Currently $260.4 million of preserve GO debt is outstanding, and $387.5 million in authorization remains. Scottsdale's unlimited tax GO bonds are rated 'AAA' with a Stable Outlook by Fitch, and therefore, the SPA benefits from a more favorable interest rate on the GO bonds while the intended repayment source remains the excise tax.
With these two GO bond authorizations in place, the city does not plan to issue additional excise tax revenue bonds for preserve land acquisitions. Current plans call for an additional GO offering early in 2013 for the purchase of several tracts north of the city. The two excise taxes expire 30 years from their authorization dates, and the final maturity of the outstanding excise tax debt is 2024.
Coverage of all SPA-related debt by both the 0.2% and 0.15% taxes is roughly 1.15x for fiscal 2012 (using fiscal 2011 revenues). Fitch notes that all-in coverage approaches 1.0x during the next ten years if revenues are held constant at preliminary fiscal 2012 totals for that period. However, the city's GO pledge is behind the majority of SPA debt and the provision of this additional debt payment support sufficiently mitigates this credit concern. Sizable preserve tax fund balances are another source of repayment if necessary. Legal provisions for the excise tax revenue bonds are satisfactory.
CITY'S FINANCES SOUND
Scottsdale's financial profile has stabilized, as continued gains in local revenues offset continued weakness in other economically sensitive revenues. The most notable improvement has occurred in local sales tax receipts, which reversed course in fiscal 2011 after several years of large declines and registered a 3% increase to $80.1 million. Reserves remain healthy?the fiscal 2011 general fund unrestricted fund balance totaled $53.2 million, or more than 20% of spending.
Taxable values continue to decline, as softening residential and commercial property values continue to work through the multi-year appraisal/review process. The city's secondary assessed valuation (SAV) fell roughly 23% in fiscal 2012 to $5.69 billion, on the heels of a 12% drop the prior year. Management anticipates another, albeit smaller dip of about 10% in fiscal 2013 followed by a 5% decline in fiscal 2014?driven primarily by weaker commercial property values.
PART OF PHOENIX METRO AREA
Scottsdale is located adjacent to Phoenix in Maricopa County, the largest population center in the state. Population in the city increased more than 7% between the 2000 and 2010 census to roughly 217,000, accompanied by gains in both residential and commercial development.
The sharp recessionary decline in residential and commercial construction area-wide also impacted development activity in Scottsdale. While the city did not witness the level of speculative building activity that occurred in other parts of the Phoenix metropolitan area due to its relatively mature status, Scottsdale housing starts have dropped sharply from a recent peak of 1,722 in fiscal 2007 to about 200 the last two calendar years.
The city has a mature and diversified local economic base, anchored by healthcare, tourism, business and professional services and technology. The unemployment rate in Scottsdale has trended downward in recent months after spiking in 2009 and 2010, and it remains below state and national averages; the city's June 2012 rate of 5.8% trailed both the Arizona (8.5%) and U.S. (8.4%) averages for the month. Wealth levels are well above state and national averages.
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 Tax-Supported Rating Criteria, this action was additionally informed by information from CreditScope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, and the National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria