Fitch Upgrades Surprise Muni Property Corp, AZ's 2003 Excise Tax Revs to 'AA-'; Outlook Stable

AUSTIN--()--Fitch Ratings takes the following rating action on Surprise Municipal Property Corporation's (AZ) excise tax revenue bonds:

--$28.5 million excise tax revenue refunding bonds, series 2003 upgraded to 'AA-' from 'A+'.

Additionally, Fitch upgrades the city's implied unlimited tax general obligation (ULTGO) to 'AA-' from 'A+'.

The Rating Outlook is Stable.

SECURITY

The excise tax revenue bonds are payable from rental payments made by the city to the corporation, secured by a pledge of the city's excise taxes. Rental payments are not subject to annual appropriation.

KEY RATING DRIVERS

LOWER RISK PROFILE: The upgrade and Stable Outlook reflect Fitch's view that the overall risk profile is now lower following implementation of sound internal controls and removal of uncertainty surrounding past development fee accounting as well as the dismissal of a suit pertaining to the city's collection of governmental development fees.

SOLID FUNDAMENTALS: The 'AA-' rating reflects strong operating performance supported by prudent financial management. The rating further reflects the city's growth prospects, benefitting from proximity to the broader recovery underway in the greater Phoenix area, supported by expanding electronics and manufacturing industries.

SALES TAX DEPENDENCY; STRONG RESERVES: General operations are exposed to an above-average level of economically sensitive sales tax and intergovernmental revenues, together representing 75% of the budget. Improving reserve levels provide a key role in mitigating this exposure.

EXCISE TAX BOND RATING CAPPED: Although Surprise maintains very high debt service coverage on outstanding excise tax revenue bonds and legal provisions are strong, the rating is capped at the implied unlimited tax GO rating.

LOW DEBT BURDEN: Debt levels are low and amortization is rapid, reflecting the city's historically heavy reliance on development fees, internally generated funds, and interfund pledges for capital expenditures. The city projects only moderate near-term capital needs.

RATING SENSITIVITIES

FINANCIAL FLEXIBILITY: The rating is sensitive to the city's overall level of financial flexibility and the degree to which it sufficiently mitigates the inherent cyclicality of the revenue framework.

CREDIT PROFILE

Surprise is located in Maricopa County (rated 'AAA'; Outlook Stable), roughly 20 miles northwest of downtown Phoenix, with a 2013 population of 121,287, up almost four-fold since 2000. The Surprise stadium is the Spring Training home to Major League Baseball's Texas Rangers and Kansas City Royals.

LOWER RISK PROFILE

The upgrade and Stable Outlook primarily reflect resolution of two specific risks. The city's fiscal 2011 audit was qualified due to uncertainty associated with whether the city's accounting of prior year's development fees used to fund growth-related projects was complete and accurate.

Forensic audit results released in the autumn of 2013 confirmed that indeed the city's accounting for development fees is complete and correct subsequent to prior period adjustments made in the fiscal 2010 and 2011 financial statement audits. The city's fiscal 2012 and 2013 audit opinions are clean.

Recent dismissal of a lawsuit provides clarity on the city's legal ability to continue collection of governmental development fees to repay approximately $40 million to the city's general capital projects fund. Development fees currently represent roughly 2% of revenues, down significantly from the peak in fiscal 2007. However, Fitch expects robust economic activity to support future growth in this revenue, making clarity around collections increasingly important.

FAVORABLE FINANCIAL PERFORMANCE

The 'AA-' rating reflects Fitch's expectation that the city will maintain an ample financial cushion in light of its dependence on economically sensitive revenues. Local sales tax receipts combined with the city's proportionate share of statewide sales and income taxes provided about three quarters of the city's fiscal 2013 general operations resources.

The city implemented a cost reduction plan over the past several years which included significant staffing, compensation and benefit reductions. The success of the plan is reflected in the city's fiscal 2013 unrestricted general fund reserves of $17.5 million, representing a solid 24.2% of spending and transfers out.

A strengthening revenue trend is reflected in the city's $12.7 million fiscal 2013 operating surplus (after transfers), equal to 17.6% of spending and surpassing its two-month of spending target. Additional policy-level reserves of $1 million in the city's general capital fund and $.5 million in its transportation fund provide a measure of additional financial cushion. The strong fiscal 2013 performance follows solid 2012 results and is notable given the city's recent history of growth-induced deficits, exacerbated by the recession, and accounting irregularities, since resolved. Officials project a fiscal 2014 net surplus of $7.5 million and year-end unrestricted reserves of $24.7 million, approximately 30% of spending.

STRONG COVERAGE; IMPROVING TREND

The city's series 2003 excise tax bond maximum annual debt service (MADs) of $4.8 million is covered a very strong 48x based on fiscal 2013 pledged revenues of $73.5 million after applying fiscal 2013 development fee and wastewater utility support of $3.2 million. The strong coverage is not fully reflected in the 'AA-' rating as Fitch criteria precludes special tax bonds from being rated higher than an entity's ULTGO.

Excise taxes include transaction privilege (sales) taxes, state-shared revenues (consisting of state-shared sales taxes and state revenue sharing), charges for services, permits and fees, and fines and forfeitures. Fiscal 2013 excise taxes are up for the second consecutive year by a solid 6.8% benefitting from improving local and state economy. Officials project fiscal 2014 excise tax revenues to increase by an additional 3.7%, which Fitch considers reasonable based on performance to date and growth underway throughout the county.

LOW DEBT BURDEN

Overall debt is low at 2.2% of market value. Fitch anticipates the city's debt to remain manageable based on a rapid amortization rate of 83% in 10 years and moderate capital needs.

The city participates in two state-sponsored pension programs, the Arizona State Retirement System (ASRS) for nonpublic safety personnel and the Arizona Public Safety Personnel Retirement System (PSPRS) for public safety employees - both cost sharing, multiple employer plans. The city also participates in the PSPRS other post-employment health plan. The city's carrying costs including annual debt service payments, pension and OPEB contributions represented a low 9.1% of fiscal 2013 governmental expenditures.

RECOVERING ECONOMY WITH GROWTH PROSPECTS

A fiscal 2014 secondary assessed valuation (SAV) increase of 9.0% reversed a multi-year decline associated with the regional housing collapse. SAV more than doubled from fiscal 2006-2009, before losing about 40% of its value through fiscal 2013. Fitch expects ongoing development to materialize in the city's near-term assessed values, reflecting a two-year reporting lag.

Loop 303 transportation improvements improve the city's ready access to the diverse and expanding Maricopa County economy. Affordable property, low tax rates, and adequate existing infrastructure position the city to capture an increasing share of the region's residential, commercial and industrial growth over the intermediate term.

Median household income in Surprise is about 20% higher than the state and 15% higher than U.S. averages. The city's unemployment rate of 7.1% as of November 2013 is improved from a year ago (7.9%), and on par with the state average for the same period.

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, S&P/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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=821160

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Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer, +1-512-215-3733
Director
Fitch Ratings, Inc.
111 Congress Ste 2010
Austin, TX 78701
or
Secondary Analyst
Teri Wenck, +1-512-215-3742
Assistant Director
or
Committee Chairperson
Jessalynn Moro, +1-212-908-0608
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer, +1-512-215-3733
Director
Fitch Ratings, Inc.
111 Congress Ste 2010
Austin, TX 78701
or
Secondary Analyst
Teri Wenck, +1-512-215-3742
Assistant Director
or
Committee Chairperson
Jessalynn Moro, +1-212-908-0608
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com