AUSTIN, Texas--()--Fitch Ratings affirms the following ratings for Prescott, Arizona's outstanding general obligation (GO) bonds and Prescott Municipal Property Corporation (the corporation) revenue bonds:
--$2.2 million outstanding GO bonds at 'AA';
--$34.2 million outstanding excise tax revenue bonds (excluding series 2011 not rated by Fitch) at 'AA'.
The Rating Outlook is Stable.
The GO bonds are secured by an unlimited ad valorem tax levied on all taxable property in the city. The revenue bonds are special obligations of the corporation payable from payments made by the city, which are secured by a pledge of and first lien on the city's excise tax and state-shared revenues. All outstanding revenue bonds have a parity lien.
KEY RATING DRIVERS
SOUND FINANCIAL POSITION: Management maintains a solid financial cushion, which serves to offset a portion of the risk associated with operating revenues derived largely from economically sensitive revenue streams. Spending cuts have allowed the city to withstand the economic downturn and subsequent revenue declines.
WEAK ECONOMY; SIGNS OF MODEST RECOVERY: The area economy is somewhat limited, but functions as a regional retail center. Economic conditions remain weak, characterized by sluggish development that is well below pre-recessionary levels. Fitch anticipates a continued, slow pace of economic recovery that may not return to pre-recessionary levels over the near term.
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. In addition, the corporation's lease structure presents no appropriation risk.
SOLID COVERAGE MAINTAINED: Pledged revenue trends reflect a return to modestly positive performance after a cumulative 18% decline was realized over fiscal years 2009-2010. Fitch anticipates high coverage levels will be maintained given pledged revenues are the city's primary operating revenues and an additional bonds test that requires 3 times (x) coverage.
MULTI-YEAR TAX BASE DECLINES: The 13% secondary assessed valuation (SAV) decline in fiscal 2013 added to a substantial, cumulative decline of nearly 40% over the last three fiscal years (2011-2013); the drop reversed previously rapid tax base expansion. Property taxpayer concentration is minimal, although sales taxpayer concentration is sizeable.
MODERATE LONG-TERM LIABILITIES: Fixed carrying costs (debt service, pension costs) are high at 23% of general fund and debt service spending; principal amortization is above-average. Key drivers of the city's capital improvement plans over the near-term include self-supporting water and wastewater plant expansion projects.
Prescott is located roughly 100 miles northwest of Phoenix and 90 miles south of Flagstaff in Yavapai County. The city serves as the area's retail and commercial center. The moderate climate and scenic surroundings contribute to an active tourism industry. Following steady gains, the current population is estimated at about 40,000.
SLOW PACE OF ECONOMIC RECOVERY EXPECTED
Local economic conditions weakened significantly beginning in fiscal 2009 with the unraveling of housing market statewide despite the area's reported lack of speculative building. This was most immediately realized in city sales taxes and growth-related pledged revenues that fell nearly 10% that year. The area has recently begun to show signs of modest economic improvement. Housing data reflects stabilizing home values, which is in line with information provided by city officials. A reduction in the labor force drove down the city's unemployment rate on a year-over-year basis to 8.6% in September 2012 from 9.9% in September 2011, although the rate remains elevated and above the state (8%) and U.S. (7.6%). Local wealth and income levels are mixed but are generally somewhat better than average.
SIZEABLE TAX BASE DECLINES OVER FISCAL YEARS 2011-2013
The city's tax base is largely residential and taxpayer concentration is moderate at 6.3%. Rising home values as well as ongoing residential and attendant retail/commercial expansion contributed to the very rapid run-up in assessed valuation prior to 2010. The district experienced the first of several secondary assessed valuation (SAV) declines in fiscal 2011, registering a nearly 9% drop. The pace of decline accelerated the next two years, and through fiscal 2013, the cumulative SAV decline is just under 40%, down to approximately $553 million and closer to pre-2008 levels.
Initial estimates by management for fiscal 2014 SAV anticipate stable to a modest increase due in part to recent retail and commercial development. Fitch believes this may be feasible, although perhaps somewhat optimistic as the city's SAV trends appear to lag those of the much broader Phoenix MSA by about one year. Proposition 117 was approved by Arizona voters in November 2012 as a constitutional amendment, which will limit annual increases in existing property values to 5%, beginning in fiscal 2016 (2014 real property valuations). Fitch will continue to monitor the evolving impact of Proposition 117 as it reflects a significant change to the property assessment process.
EXCISE TAXES STABILIZE
The excise taxes pledged to pay debt service on the corporation bonds include locally levied 1% transaction privilege (sales) taxes, franchise taxes, licenses and permits, charges for services, and fines and forfeitures; the state-shared revenues consist of state-shared sales taxes and state revenue sharing (income tax) distributed to localities based on population. The city sales tax is the largest excise tax component, comprising about 51% of total excise tax revenues in fiscal 2012. State-shared revenues comprise another 35%.
Recessionary pressures and the fall-out from deterioration of the housing market saw previously steady gains in pledged excise tax revenues reverse and revenues fell nearly 10% in fiscal 2009 and about 9% in fiscal 2010. Subsequently, the combination of improved state-shared revenues and the slow strengthening of local sales tax performance and other growth-related revenues began to evidence improved results. Total pledged excise tax revenues rose modestly by 3% in fiscal 2011 and generally held stable at $24.8 million in fiscal 2012. Although coverage is down from prior highs, it remains solid as fiscal 2012 revenues covered MADS on all outstanding revenue bonds at just under 6x. Fitch notes that while excise taxes are pledged to the repayment of all outstanding corporation debt, the city utilizes other funding sources (primarily utility system revenues and a separate 1% transportation and open space sales tax) to pay nearly all of the corporation's debt.
SOUND FINANCIAL POSITION MAINTAINED
As pledged excise tax revenues comprise much of the city's general operating revenues, a sizeable portion of the city's general operating revenues (44%) are derived from local sales taxes; property taxes contributed a low 4.5% in fiscal 2012. Significant spending cuts were implemented by management beginning in fiscal 2009 given downward recessionary pressures on sales taxes in order to right-size operations and maintain solid reserve levels of no less than 20% of revenues according to policy.
Fiscal 2012 operations generated a $600,000 surplus after two consecutive years of operating deficits due largely to significant pay-go capital spending from the general fund. At fiscal 2012 year-end, the unrestricted general fund balance reserves totaled $11.4 million (or a high 40% of spending), although down from about 42% in fiscal 2011.
Budget-to-budget, the $30.6 million fiscal 2013 budget is flat to slightly down and anticipates a draw of about $900,000 on reserves for pay-go capital spending. Management expects to exceed conservatively budgeted revenue assumptions given modestly positive sales tax trends that are up about 4% over budget year-to-date. Nonetheless, Fitch expects some continued revenue pressure assuming a continued, slow pace of economic recovery.
MODERATE DEBT BURDEN AND OTHER LONG-TERM LIABILITIES
The city's debt profile is generally favorable and has no direct exposure to variable-rate debt or derivatives. Capital needs have historically been financed via the corporation and excise tax revenue bonds and self-supporting water infrastructure financing (WIFA) via the state rather than voter-approved GO debt. At 1% of market value or about $2,000 on a per capita basis, overall debt levels remain modest despite multi-year SAV declines. Principal amortization is above average at about 55% retired within 10 years. The city's five-year capital plan is down from pre-recessionary highs and driven by various self-supporting water and wastewater projects.
The city contributes to two pension plans, as well as for disability, death and healthcare benefits. The general employee plan is through the Arizona State Retirement System (ASRS), a cost-sharing, multiple-employer plan. The city has made 100% of its annual required contribution (ARC) in fiscal years 2010-2012. The city also contributes to the Arizona Public Safety Personnel Retirement System (PSPRS), an agent, multiple-employer plan, making its full ARC payments. ARC payments for both programs total a moderately high 16% of general fund spending or about $4.5 million in fiscal 2012.
PSPRS pension funding levels are weak at 45.7% for police and 58.3% for fire at June 30, 2010. The plan's $30 million unfunded accrued actuarial liability represents a low 1% of market value. ASRS pension funding levels are approximately 68% after adjusting for a more conservative 7% investment rate of return assumption.
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', dated Aug. 14, 2012;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 14, 2012.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria