AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned 'AAA' ratings to the following Tempe, Arizona general obligation (GO) bonds:
--$10.5 million GO bonds, series 2014A;
--$15.55 million GO refunding bonds, series 2014B.
Both series of bonds are scheduled for a negotiated sale the week of May 5. Series 2014A proceeds will finance various capital projects and improvements, and series 2014B proceeds will refinance a portion of the city's outstanding GO debt for interest savings.
In addition, Fitch affirms the following ratings for Tempe:
--$417 million GO bonds outstanding (pre-refunding) at 'AAA'.
The Rating Outlook is Stable.
SECURITY: Both series of bonds are payable from an ad valorem tax levied against all taxable property in the city unlimited as to rate, but the taxes securing the series 2014B bonds are limited by statute to the aggregate amount of principal and interest payable on the refunded bonds from the date of issuance of the series 2014B bonds to the final maturity of the refunded bonds. The taxes securing the series 2014A bonds are unlimited as to amount.
KEY RATING DRIVERS
FINANCIAL DILIGENCE MAINTAINS FLEXIBILITY: The city has a history of attending to its financial health through conservative fiscal management practices that help to mitigate its exposure to revenue cyclicality. Ample reserves and liquidity reflect a series of spending cuts, most recently to offset the expiration of a temporary sales tax in June 2014.
SOUND ECONOMY; GROWTH PROSPECTS: The city's mature economic base is broad and diverse with historically strong employment growth. Several years of sales tax gains, an upturn in property values and sizable downtown development projects position the city for ongoing growth.
MANAGEABLE DEBT BURDEN: Fitch anticipates overall debt levels to remain manageable based on affordable capital needs and rapid amortization. The burden of debt service, pension and other post-employment benefit (OPEB) contributions on the budget is moderate, although rising pension contributions may place additional pressure on the budget over time.
UTILITY SYSTEM DEBT SUPPORT: A large portion of the city's outstanding GO debt was issued for utility system improvements and is repaid from system revenues. The utility system maintains healthy liquidity levels, and the city regularly reviews and adjusts rates to meet operational and debt obligations.
FINANCIAL FLEXIBILITY: The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices which afford it a high degree of financial flexibility.
Tempe is located in Maricopa County, the economic hub and population center of the state, with a population of about 165,000. The city is home to Arizona State University (ASU), the largest university in Arizona.
PRUDENT MANAGEMENT MAINTAINS FINANCIAL FLEXIBILITY
Fiscal 2013 unrestricted general fund reserves of $60.8 million represent a strong 35.7% of spending. Strong fiscal 2013 performance reflects solid sales tax and intergovernmental revenue gains that allowed the city to begin lifting austerity measures and to fund a $2 million contingency appropriation in its risk management internal service fund.
Management implemented budget measures in the past several years to address revenue losses associated with the recession. These measures included position eliminations, department consolidations, salary freezes and institution of furlough days, combined with fee increases, and other revenue enhancements. The city returned the transit fund to structural balance in fiscal 2012, relieving pressure on the general fund.
The city projects fiscal 2014 unrestricted general fund reserves of $61 million (34% of spending), reflecting a continuing trend of revenue improvement and ongoing cost controls. The fiscal 2014 budget includes a 4.5% total compensation increase (including the first salary increase since 2009), a return to paygo spending and modest one-time expenditures. Achievement of target reserves in the five-year forecast relies on annual cost adjustments. The city reports that cost measures undertaken since 2011 will mitigate the loss of a temporary .2% sales tax which generates $12 million annually, due to expire on June 30, 2014.
LOCAL SALES TAXES LEAD REVENUE RECOVERY
The city's operations are supported predominantly by economically sensitive local sales and state shared revenues (income and sales taxes), which dropped precipitously during the recession, but are now realizing varying stages of recovery. Sales tax receipts are in their third year of recovery and for the first time, fiscal 2013 general fund sales tax receipts of $90.7 million exceeded the prerecession 2007 peak of $86.9 million.
Fiscal 2013 state shared revenues of $35.5 million realized their first year of post-recession improvement following a cumulative decline of 29% over four years. The lagged recovery of state shared revenues reflects a two-year state distribution cycle of monies to the city. The state reports ongoing improvement in near term state shared revenue trends. The city projects ongoing improvement in local sales and state shared revenues, which Fitch considers reasonable based on current trends and the state distribution lag.
RECOVERY OF CITY PROPERTY VALUES
A moderate 3.4% gain in the city's fiscal 2015 net primary assessed valuation reverses a multi-year loss approximating 30%. While property tax revenues contribute only 9% to general fund operations, the city had progressively increased tax rates to mitigate tax base weakness since 2009. The upturn in values reflects an improved housing market and commercial development.
DEVELOPMENT PROJECTS POSITION TEMPE FOR NEAR TERM GROWTH
Strong fiscal year-to-date permit revenues reflect construction activity on a $600 million, five-building office project under development in the city's downtown. The 'Marina Heights' project is anchored by a State Farm insurance regional headquarters and spans 20-acres north of Arizona State University's (ASU) Sun Devil Stadium.
Officials also report progress on a much anticipated hotel and conference center scheduled to break ground later this year and slated to open by the end of 2015. The project will include a 330-room luxury hotel and 30,000-sqare foot conference center (both operated by Omni Hotels and Resorts) and a basketball facility/event center. Plans for the 10.5 acre site include a multi-use space plan including apartment, office and retail development.
Fitch anticipates these sizable projects to further strengthen the city's employment base, now in its third year of expansion. The city realized a low unemployment rate of 5.5% as of December 2013, below state and national rates of 7.3% and 6.5% for the same period.
MODERATE DEBT WITH UTILITY SUPPORT/MANAGEABLE CAPITAL
Overall debt, including $233 million of excise tax debt, is moderate at 5% of market value. GO debt is amortized at rapid rate of 74% in 10 years.
Approximately 57% of the city's $429.3 million in GO bonds outstanding (after this sale) are supported by revenues from the water and wastewater utility. The utility's financial position is sound, with fiscal 2013 liquidity of $49 million, representing about 500 days of operations. The city has established a track record of regular utility rate increases to meet increasing system needs and its water and waste water cost of service remains very competitive in relation to regional providers.
The city's preliminary 2015 five-year capital plan appears manageable at roughly $334 million (34% general purpose projects). The plan assumes a maximum 1.8% increase to the total property tax levy and the potential for additional GO authorization in 2016.
RISING STATEWIDE PENSION COSTS
The city participates in several state-sponsored pension programs, the two largest being the Arizona State Retirement System (ASRS) for non-public safety personnel, and the Arizona Public Safety Personnel Retirement System (PSPRS) for public safety employees. The funding level for ASRS at June 30, 2012 is 75% but drops to a lower estimated 68% using Fitch's more conservative 7% investment return. The funding level for PSPRS at June 30, 2012 was roughly 49.8% (police) and 59.5% (fire); these levels assumed an 8% return, and funding drops to an estimated 44.8% (police) and 53.5% (fire) when a more conservative 7% return is assumed.
Management anticipates contribution rates for its pension programs will rise over the next several years, which will maintain pressure on operations. Tempe's OPEB liability has shrunk considerably since the city elected to discontinue the benefit for recent hires in 2009 and to move from a defined benefit program to a defined contribution program in 2011, to which all participants were recently migrated.
The burden of the city's debt service, pension and OPEB contribution on the budget is a moderately low 11% of fiscal 2013 government spending, with a positive trajectory reflecting anticipated increases in the state PSPRS contribution rates.
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
U.S. Local Government Tax-Supported Rating Criteria