Fitch Affirms Sierra Vista Municipal Property Corp, AZ's Rev Bonds at 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings takes the following action on Sierra Vista Municipal Property Corporation (MPC), AZ's bonds, issued on behalf of the city of Sierra Vista (the city):

--$13.725 million municipal facilities revenue bonds affirmed at 'AA-';

--$7.08 million municipal facilities revenue refunding bonds affirmed at 'AA-'.

Additionally, Fitch affirms the implied unlimited tax general obligation rating of 'AA-'. The city currently has no general obligation bonds outstanding.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by lease payments made by the city to the MPC. The city's obligation to make lease payments is secured by a pledge of and a first lien on the city's excise taxes. The city's lease payments are not subject to appropriation.

KEY RATING DRIVERS

SOLID FINANCIAL PERFORMANCE: The city's financial position remains notably steady, marked by structurally balanced operations, conservative budgeting, and adequate reserves.

AMPLE COVERAGE: Debt service coverage remains solid, although below the pre-recession peak. Lower pledged revenues continue to reflect the recession due to a two-year lag of state shared revenues and a dip in local excise tax revenues associated with defense spending cutbacks. Legal provisions are sound, providing adequate bondholder protection.

LIMITED ECONOMY: The local economy is closely linked to the economic activities of Fort Huachuca. Additionally, the city serves as a regional retail and commercial hub given its proximity to the Mexican border. Median household income trends above average, poverty below average.

LOW DEBT: The city's debt profile is positive, characterized by very low debt levels, rapid principal payout rate, and no plans to further leverage the pledged revenue stream. The city has no general obligation bonds outstanding.

RATING SENSITIVITY:

DECLINE IN COVERAGE: The rating is sensitive to shifts in fundamental credit characteristics, including declines in pledged revenues that significantly diminish coverage. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely given the historically strong coverage well above indenture requirements.

CREDIT PROFILE

Sierra Vista is located in southeastern Arizona, 70 miles southeast of Tucson and 10 miles from the U.S.-Mexico border. The current population estimate is 46,351, and is home to Fort Huachuca (the fort), which was established in 1877.

STRONG COVERAGE

The excise taxes pledged to the bonds consist of local sales taxes, state shared income and sales taxes, licenses and permits, franchise fees, public utility taxes, and user fees and charges. Excise taxes are the primary revenue stream of the city's general fund and account for about three quarters of total revenue. Consequently, leverage of these revenues is modest and debt service coverage on the bonds is strong, in excess of 7x annually for fiscal 2013 and projected to be the same for fiscal 2014.

Fiscal 2013 pledged revenues of $25.7 million remained relatively flat to the preceding several years and represented about 87% of the pre-recession peak of $29.5 million in fiscal 2008. Improvement in state shared income and sales tax trends is somewhat offset by dampened local sales tax activity associated with lower fiscal 2013 accommodation tax receipts. The drop in lodging activity reflects a Department of Defense (DOD) travel policy which shifted temporary duty personnel to on-base fort-owned housing.

The city projects moderate ongoing gains in pledged revenues over the next several years which include a voter-approved increase in franchise fees on the electric utility effective in fiscal 2014. Fitch considers the projection reasonable given recent trends and the two-year reporting lag for state shared income and sales tax revenues.

LOCAL ECONOMY LINKED TO FORT HUACHUCA

The fort houses the U.S. Army Information Systems Command, U.S. Army Intelligence Center, and U.S. Army Electronic Proving Ground. It is the city's largest employer with roughly 9,400 full-time military and Army civilian workers. While the military comprises the majority of the city's economic base, credit concerns have been historically mitigated by the fort's high-profile mission within the military, which includes operating air-borne drones in military operations. Fitch will continue to monitor the impact of defense spending trends on the local economy.

Health care, retail and tourism sectors supplement the city's economy. Proximity to the border draws a significant influx of Mexican nationals who account for about 25% of the city's retail activity and officials report new retail and commercial development as well as expanding medical facilities. However, the new development has not been sufficient to offset the impact on the local economy of defense spending cutbacks. The city's unemployment rate rose to 8.0% as of December 2013 compared to 7.5% in the prior year, reflecting a moderate contraction of the employment base.

SOUND FINANCIAL POSITION

The city's financial profile remains notably steady and reserves are adequate, benefiting from conservative fiscal management. The city's unrestricted general fund balance at fiscal year-end 2013 was about $3.9 million, or 12.8% of spending. Although the city is exposed to economically sensitive revenues, it has historically adjusted its spending to maintain structural balance and retains ample flexibility in its cost structure. As of February 2014, privilege tax receipts were 2.0% ahead of the prior year and Fitch expects operating results at fiscal year-end to be balanced.

LOW DEBT

Fitch considers the city's debt profile as a positive credit factor, with overall debt at only $501 per capita (less than 1% of market value). The pace of debt repayment is very rapid with 100% of debt principal retired within 10 years; this is consistent with the city's established practice of retiring debt prior to maturity. The city's outstanding debt of roughly $23 million consists mostly of MPC borrowings, and any near-term capital needs for public works are manageable and will be funded for the most part with grant and development fee monies.

BELOW-AVERAGE PENSION FUNDING

Full-time employees of the city are covered by one of two state-administered pension programs, the Arizona State Retirement System (ASRS) and the Public Safety Personnel Retirement System (PSPRS). Annual city contributions are equal to the required contribution amounts as directed by the state, and in aggregate consume a manageable 6.9% of government spending. However, the combined funding level of the state administered programs is low at an estimated 51.2% based on Fitch's more conservative 7% investment return assumption.

The city provides other post-employment benefits (OPEB) through a single-employer defined benefit plan, and the city's 2013 contribution to the plan was $707,573, or a low 1.7% of government spending. Total carrying costs, including of debt service, actual pension cost, and OPEB contribution, make up a manageable 15.7% of government spending.

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, 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:

U.S. Local Government Tax-Supported Rating Criteria

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

Tax-Supported Rating Criteria

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=826135

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Contacts

Fitch Ratings
Primary Analyst:
Leslie Ann Cook, +1-212-908-0507
Analyst
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Rebecca Meyer, +1-512-215-3733
Director
or
Committee Chairperson:
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst:
Leslie Ann Cook, +1-212-908-0507
Analyst
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Rebecca Meyer, +1-512-215-3733
Director
or
Committee Chairperson:
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com