AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AAA' rating to the City of Chandler (Chandler or the city), Arizona's $110 million excise tax revenue obligations.
The bonds are scheduled for a competitive sale on Oct. 29, 2013. Proceeds will finance various water and waste water improvements in the city.
In addition, Fitch affirms the following ratings at 'AAA':
--$43.88 million excise tax revenue obligations;
--$384.65 million general obligation (GO) bonds.
The Rating Outlook is Stable.
The excise tax revenue obligations are secured by a pledge of the city's excise tax revenues. The GO bonds are secured by an unlimited ad valorem tax levied against all taxable property in the city.
KEY RATING DRIVERS
STRONG FINANCIAL PROFILE: Chandler's conservative fiscal management enabled the city to maintain strong financial flexibility throughout the most recent recession. The city's five-year plan reflects structural balance and plentiful reserves.
ABOVE-AVERAGE ECONOMIC METRICS: A highly educated and skilled workforce contributes to the city's low unemployment and attractive growth prospects; income and wealth trends are well above average.
MODERATE DEBT: The city's manageable debt profile reflects a history of cash-funded capital, rapid amortization, and early debt retirement. Heavily focused on infrastructure maintenance, the city's general governmental capital plan continues to reflect general fund support.
IMPROVED PLEDGED REVENUE TRENDS: Pledged revenues reflect a second year of growth, following three years of recessionary decline, led by strong sales tax collections, and more recently, recovery of state shared revenues and stabilization of state income tax revenues.
ROBUST COVERAGE: Debt service coverage on excise tax debt remains very high, as expected since excise taxes constitute a primary revenue source for the city's operations.
ECONOMIC AND FINANCIAL PROFILE: The rating is sensitive to shifts in the city's strong local economy and financial management practices.
Chandler occupies 70 square miles in southeastern Maricopa County with a 2013 population of approximately 241,200.
HEALTHY EMPLOYMENT BASE ANCHORED IN TECHNOLOGY
Chandler's population has more than doubled since 1990, reflecting regional growth and the city's success in attracting and retaining top technology, manufacturing, advanced business and health services. Anchoring the list of top employers, Intel Corporation is completing a $5 billion fabrication plant expansion and $300 million research and development facility. Recent corporate entrants and expansions have buoyed the city's tax and employment base. Although Chandler is 85% built-out, its attractive workforce, ample capacity within six employment corridors, and strong transportation infrastructure position the city for ongoing growth.
Chandler's unemployment rate of 5.6% as of July 2013 remains well below regional, state and national averages. Local government, public education and health services lend stability to the city's employment base.
The city's median household income represents 140% of state and 135% of national averages. Wealth, as measured by per capita money income exceeds state the U.S. level by 28% and 17% respectively. Chandler's economic metrics remained strong throughout the recession, mirroring the city's employment base strength. Poverty rates approximate about half state and national averages.
STRONG FINANCES ENABLE CASH FUNDED CAPITAL
The fiscal 2012 unrestricted general fund balance of $175.3 million represents a very high 98.5% of spending and transfers out. Historically strong financial flexibility has afforded the city the ability to use excess reserves to fund capital and nonrecurring expenditures, including a new city hall, downtown redevelopment, and street improvements.
Officials estimate a $3.4 million addition to fiscal 2013 unrestricted general fund balance on the strength of sales tax revenues combined with recurring cost savings. Representing the primary operating revenue source for the city, fiscal 2012 sales tax collections increased by 12.7%, and are estimated to gain an additional 4.8% for fiscal 2013. Although the bump in recent sales tax receipts results largely from Intel's fabrication plant expansion, long-term trends demonstrate moderate sales tax growth from recurring operations. The city prudently bases its core operating budget on recurring revenue sources.
Five-year projected general fund balances remain substantial and consistent with Fitch's highest rating, reflecting the use of reserves for infrastructure, economic development and debt retirement purposes consistent with the city's historical financial management practices. Fitch views positively the fiscal conservatism of the city's planning, noting that results typically exceed budget expectations.
RECOVERY OF PLEDGED REVENUES; ROBUST COVERAGE
The city's excise tax revenue obligations are secured by a basket of revenues, including local sales tax, state shared revenues, franchise fees, licenses and permits, and fines and forfeitures. The first two make up the vast majority of total excise tax collections. Excise tax revenues peaked in fiscal 2008 at $162.9 million before declining a cumulative 16% to $136 million in fiscal 2011, with state shared revenues dragging down otherwise stronger performance due to the two year lag in distributions. Fiscal 2012 pledged revenues of $148.9 million grew by a strong 9.3%, as still recovering state shared revenues muted a strong 12.7% gain in local sales tax revenues.
Maximum annual debt service coverage based on fiscal 2012 collections is a healthy 11.5x, which reflects the fact that excise tax collections comprise the city's largest source of operating funds. Fiscal 2013 estimated total collections are up by an additional 5% reflecting improvement in all major sources. The city's fiscal 2014 budget includes a modest dip in pledged revenues associated largely with completion of the most recent cycle of Intel's local investments reflected in local sales tax trends. The city's five-year forecast includes moderate growth in excise tax revenues reflecting local economic development activity underway and the 2-year reporting lag associated with state shared revenues which contribute about 30% to the total.
MANAGEABLE DEBT PROFILE/SELF-SUPPORTING EXCISE TAX BONDS
The five year capital plan through fiscal 2018 totals roughly $450 million (two-thirds of which is enterprise spending), down from $1 billion four years ago. Chandler officials describe near term general government projects as focusing on maintenance of existing facilities. The city does not anticipate new GO debt issuance in the foreseeable future, although the plan does anticipate the potential for an additional excise tax revenue issuance in 2015.
This issue, similar to the city's other outstanding excise tax bonds, funds water and waste water utility system improvements and is supported by surplus utility system revenue. Fitch currently rates the city's utility system revenue bonds 'AA+' with a Stable Outlook.
Overall debt represents a moderate 3.4% of market value. The pace of the city's debt retirement is considered rapid with roughly 62% repaid in 10 years. Despite SAV declines, management does not anticipate an increase in the city's secondary (debt service) tax rate over the near term. The stable tax rate is aided by a series of debt retirements, most recently in fiscal 2013.
Full time employees of the city are covered by one of three state-administered pension programs, the largest of which are the Arizona State Retirement System (ASRS), a multiple employer cost-sharing plan, and the Arizona Public Safety Personnel Retirement System (PSPRS), a separate agent multiple-employer plan. The ASRS state program's funding level at fiscal 2012 year-end was satisfactory at 75.8% but slightly weak at 68.1% based on Fitch's more conservative 7.0% investment rate. The fiscal 2012 PSPRS funding levels are slightly weak at 67.5% and 75.1% respectively for police and fire (and even lower at 58% and 64% when adjusted for Fitch's more conservative 7% investment rate assumption). The city's other post-employment benefit liability is limited to an implied subsidy. The city's carrying costs, representing fiscal 2012 debt service, pension contribution and other post-employment benefits, represent a manageable 17.9% of general fund expenditures and transfers out.
TAX BASE RECOVERY
Officials project that the fiscal 2014 taxable value as measured by secondary assessed value (SAV) has bottomed out at $2.2 billion. After climbing an average of more than 18% annually from fiscal 2005 - 2009, SAV (reflecting a two year lag) registered a modest 1.5% increase in fiscal 2010 before declining by a total of 44% through fiscal 2014.
The city's building permit values reflect solid growth in relation to recessionary lows. The city conservatively projects flat SAV in fiscal 2015 followed by moderate growth. Fitch notes this trend is generally consistent with other Maricopa County municipal expectations and that property tax revenues comprise a relatively small portion of the city's total operating revenues.
Additional information is available at 'www.fitchratings.com'.
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, CoreLogic /Case-Shiller Home Price Index, IHS Global Insight, 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