AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings takes the following action on Tolleson, Arizona's general obligation (GO) bonds:
--$10.7 million GO bonds, series 2006 affirmed at 'AA-'.
The Rating Outlook is Stable.
The GO bonds are secured by an unlimited ad valorem tax levied against all taxable property in the city.
KEY RATING DRIVERS
STRATEGIC LOCATION: Manufacturing, warehousing and distribution businesses have located in Tolleson to take advantage of its favorable location in the larger Phoenix metropolitan statistical area (MSA) along a major interstate.
SAV DECLINES SOFTEN BUT HIGH CONCENTRATION: As a lagging market indicator, secondary assessed valuation (SAV) declines have been sizeable but are moderating as the regional economy stabilizes. Prospects for future, near-term growth in the city's large industrial/commercial tax base appear likely given projects underway. Taxpayer concentration remains high and continues to be a credit concern.
SALES TAXES BOOST SOLID RESERVES: Strong growth in the city's sales taxes point to an improving regional economy and management's conservative budgeting and spending practices of these revenues have subsequently allowed the city to restore high reserve levels. Solid reserves historically maintained by the city largely mitigate Fitch's concerns regarding general operations that depend heavily on economically sensitive sales tax revenues.
ABOVE AVERAGE DEBT AND CARRYING COSTS: Debt levels are high, largely due to the recent trend of SAV declines. Capital needs appear manageable. Moderately high carrying costs stem primarily from a favorably rapid pace of amortization.
DETERIORATION OF FINANCIAL CUSHION: The rating is sensitive to material deterioration of solid reserve levels that provide the city with a high level of financial flexibility. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely over the near term.
PHOENIX METRO CITY
The city is located 10 miles west of downtown Phoenix along Interstate 10 and encompasses approximately six square miles and 6,700 residents. Its central location in the Phoenix MSA and ready access to major interstate highway and rail corridors has made the city an attractive location for transportation intensive enterprises.
The local economy has been transformed from a historically agricultural base to a manufacturing, warehouse and distribution center that provides employment to the larger MSA. Improving economic conditions in the MSA have led to fairly steady declines in unemployment, down from a recessionary high of 9.7% in 2010. Year-over-year unemployment declined to 6.1% in May 2013 from 7% in May 2012 with tepid employment gains accompanied by a similar loss in labor force. Nonetheless, the MSA unemployment rate remained below the state (7.4%) and the U.S. (7.3%) in the same time period.
SAV DECLINES SOFTEN IN HIGHLY CONCENTRATED, COMMERCIAL TAX BASE
The top 10 taxpayers comprise a fairly stable list of large manufacturing, distribution, real estate and service firms. Tax base concentration has declined somewhat over time but remains high at 40% of SAV in fiscal 2014, led by a regional beverage manufacturer at 12.5%.
The city's property tax base grew by a high 17% annually in fiscals 2006-2010 before realizing a recent period of SAV declines (fiscal 2011-2014) due largely to recessionary pressures on valuations. SAV declines occurred slightly later in Tolleson as compared to other more residential Phoenix localities because of the city's unique, predominately commercial/industrial tax base composition, but the cumulative level of decline was fairly comparable. A 12% annual average SAV decline was realized over this four-year span. However, the trend of annual SAV declines began to moderate in fiscal 2014 and at 10% totaled only half of the prior year's decline, reflective of improved market values roughly two years prior given the lag in SAV.
Initial estimates for fiscal 2015 SAV currently anticipate a modest gain, which Fitch believes is reasonable based on recent positive economic activity that includes successful recruitment of a new national firm (Kenworth Trucking) to the city as well as the expansion of existing corporate facilities underway. Tolleson is home to offices of various Fortune 500 corporations and its favorable location bodes well for attracting additional development. However, in a broader view of the city's tax base, Fitch notes a significant change to the property assessment process will be implemented in the near term due to the passage of Proposition 117 by Arizona voters as a constitutional amendment. Fitch will continue to monitor the evolving impact of Proposition 117 as its implementation will limit annual increases in locally assessed, existing property values to 5%, beginning in fiscal 2016 (2014 real property valuations).
SALES TAX PERFORMANCE KEY
Sales taxes comprise a high 70% of fiscal 2012 revenues, up from 56% in fiscal 2008. Taxpayer concentration exists here as well, with the 10 largest sales taxpayers responsible for generating more than one-half of the total. Nonetheless, strong commercial and industrial expansion largely offset the recessionary impact on sales tax revenues despite the concentration that introduces a source of volatility to the revenue stream and the city's finances. The relocation of the large retailer, Staples, to Tolleson from Phoenix in 2011 sparked strong sales tax gains that contributed to the year's 45% year-over year growth or a $3 million increase in sales taxes. A modest 2% dip in sales tax performance was recorded in 2010, which was the only year-over-year decline over the last five fiscal years.
Management added a net $2.4 million to reserves by fiscal 2011 year-end with the strong revenue performance, which brought unrestricted general fund balance to approximately $5.2 million or a high 42% of spending. Conservative budgeting and spending practices along with favorable although moderating sales tax revenue trends saw the city again boost reserves in fiscal 2012. For the year, the unrestricted general fund balance totaled roughly $7.5 million or a strong 55% of spending. Maintenance of such strong reserves that are typically well in excess of the city's stated 20% reserve floor is a key credit factor and Fitch recognizes it can help the city manage potentially large revenue fluctuations associated with any future dislocation of its concentrated commercial/industrial base.
Unaudited fiscal 2013 results currently point to an operating surplus, supported by the year's sales tax performance that exceeds budget by about 5% or $500,000. The $15.5 million fiscal 2014 general fund budget assumes another 6% gain in sales tax revenue and includes a 3% salary increase that totals about $1 million as well as a planned $2 million draw on reserves for pay-go capital spending in support of the city's downtown revitalization efforts.
DEBT LEVELS RISE WITH SAV DECLINES
Overall debt is high, particularly on a per capita basis, about $11,500 per capita given the relatively small population. Debt as a percentage of market value has risen to a high 7.8% (before consideration of self-support for a portion of the city's direct debt) due to the significant, cumulative tax base declines realized. The city's debt amortization is favorably rapid with 88% of principal repaid in 10 years.
The city expects to fund its current capital improvement plan that highlights downtown revitalization over the near term with a combination of current bond proceeds and some pay-go capital spending. The city maintains about $61 million in outstanding bond authorization for various capital improvements. Management indicates the use of roughly $11.5 million in bonds may be used as funding for the construction of a new city hall and public library facility as the next large capital program in the intermediate term once revitalization projects are complete.
PUBLIC SAFETY PENSION FUNDING POSITION LOW
The city contributes to two pension plans, as well as for disability, death and healthcare benefits. The general employee pension plan is through the Arizona State Retirement System, a cost-sharing, multiple-employer plan. The city has made 100% of its annual pension cost (APC) in fiscal years 2010-2012. The plan's funded position is satisfactory at 75.7% at June 30, 2012, although it would fall to a below-average 68% after adjusting for a more conservative 7% investment rate of return.
The city also makes its full APC payments through contributions to the Arizona Public Safety Personnel Retirement System (PSPRS), an agent, multiple-employer plan for police and firefighters. While the fire account is currently satisfactorily funded at 81.5% at June 30, 2012, the police funding level was a weak 61.9% for the same period. The funded position of both accounts would drop to 75.2% (fire) and 57.2% (police) assuming a 7% rate of return.
The city has contributed 100% of its annual required contribution for other post-employment benefits (OPEB) over fiscal years 2010-2012, although the OPEB funded position is not yet reported separately from the pension system. Carrying costs (debt service, pension, and OPEB costs, net of self-supporting debt) totaled a moderately high 22% of governmental spending in fiscal 2012 due largely to the rapid pace of amortization. Fitch believes the city's carrying costs over the near to intermediate term will likely remain at this level or increase somewhat despite a descending debt service schedule given probable increases required by the state to the employer's APC and expectations of future debt issuances.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, CoreLogic Case-Shiller Indexes Report, and IHS Global Insight.
Additional information is available at 'www.fitchratings.com'.
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