AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings on the following Peoria, AZ (the city) and Peoria, Arizona Municipal Development Authority (MDA) revenue bonds:
--$81 million MDA revenue bonds at 'AA+';
--$152.8 million in outstanding City of Peoria general obligation (GO) bonds at 'AA+'.
The Rating Outlook is Stable.
The MDA excise tax revenue bonds are secured by purchase payments from the city to the authority, secured by a first lien on excise taxes (comprised of local sales tax, franchise fees, licenses and permits, user fees and charges, fines & forfeitures, state shared revenues and miscellaneous revenues). The GO bonds are payable from an unlimited ad valorem tax levied against all taxable property in the city. The series 2008 MDA transportation revenue bonds are secured by a first lien on revenues from a .3% city transportation sales tax and are further payable from subordinate excise taxes and state shared revenues after payment of revenue bond debt service.
KEY RATING DRIVERS
HEALTHY COVERAGE; GO PARITY: Excise tax revenue bond debt service coverage is very high, which is expected due to the fact that excise tax revenues are a primary operating revenue source for the city. This reliance on excise tax revenues for operations is the primary reason for the parity rating with the city's GO bonds.
SOUND FINANCIAL PROFILE: The city's strong financial practices are a credit-strength. Although robust general fund balances are reduced from prerecession highs due to the application of reserves for capital and one-time expenditures, they remain consistent with the city's financial policies.
IMPROVING ECONOMIC PROSPECTS: A trend of favorable sales tax receipts, recovery of the housing market and ongoing development position the city for near term growth. However, the city's primary revenue sources--local sales tax and state shared revenues--remain susceptible to economic cyclicality.
MANAGEABLE DEBT BURDEN: The city's overall per capita debt is moderate but above average in relation to market value, reflecting a significant loss of market value over the past five years. Fitch anticipates the debt burden on the budget to remain affordable, based on moderate issuance plans included in the city's 10-year capital plan.
ABOVE-AVERAGE ECONOMIC METRICS: Peoria's median household income is above average and unemployment is low, reflecting the city's participation in the broad and expanding Phoenix-area economy.
STRONG FINANCIAL MANAGEMENT: The rating is sensitive to shifts in fundamental credit characteristics, including the city's strong financial management practices.
Peoria is situated in the northwest part of the Phoenix metropolitan area with a population of about 160,500, representing an almost 50% gain since the year 2000.
IMPROVING PLEDGED REVENUE TRENDS
Local sales tax and state shared revenues (sales and income taxes imposed by the State of Arizona) comprise about 80% of pledged revenues, with each realizing solid fiscal 2013 growth. Local sales tax revenues of $56.1 million increased by 9% in fiscal 2013, driven largely by retail and construction contracting sectors. This increase was the third consecutive year of growth and follows a three year 20% recessionary decline from the 2007 peak of $59.2 million. Management projects moderate growth for the current year, tempered somewhat in fiscal 2015 by the legislature's recent exclusion of certain prime contracting services from the sales tax base.
Seven percent growth of fiscal 2013 state-shared sales tax and state revenue sharing (income tax) bring the combined total to $27.1 million, representing 84% of the fiscal 2008 peak value. The city estimates strong fiscal 2014 growth, which Fitch considers reasonable based on the improving statewide economic climate and the two-year lag in state income tax distributions to the city.
The total fiscal 2013 pledged revenues of $105 million provides very healthy MDA maximum annual debt service coverage in excess of 28x, although sound coverage is expected given that the pledged revenues comprise a majority of operating revenues for the city.
SOUND FINANCIAL MANAGEMENT
Peoria entered the recession with sizable reserves exceeding 70% of annual spending levels. Consistent with its financial policies, the city has regularly applied reserves to capital and one-time expenditures and combined these outlays with targeted spending cuts to both maintain a sound cushion and avoid significant service curtailments during the recession.
The city's fiscal general fund 2013 unrestricted reserves remain sizable at $50.6 million (49% of spending), reflecting the recent positive revenue performance which has been absorbed to a degree by expenditure growth, principally personnel costs. Based on balanced operations and budgeted applications of reserves for one-time applications, the city estimates ending the current year with a modest draw on reserves and a still sound unrestricted general fund balance of $47.9 million (39% of spending).
MANAGEABLE DEBT; GROWING DEBT CAPACITY
The city's overall debt is moderate at about $3,470 per capita, but above average at 5.5% of market value. Debt capacity is ample to accommodate near term needs, based on fiscal 2013 secondary assessed valuation (SAV). The city realized its first SAV gain in five years with a better than 9% gain in fiscal 2015. Development underway and in various stages of planning signal further SAV growth, which will help maintain debt capacity.
The fiscal 2015 10-year capital improvement plan totals $598 million, and anticipates the potential for moderate GO and MDA revenue bond issuance in the next several years (depending on capital project priorities and project readiness). Debt amortization is rapid, with roughly 71.4% of GO and excise tax principal scheduled for retirement within 10 years.
INCREASING PENSION CONTRIBUTIONS TO SHORE UP STATE PLANS
The city participates in several state-sponsored pension programs, the two largest being the Arizona State Retirement System (ASRS), a cost-sharing multiple employer plan and the Arizona Public Safety Personnel Retirement System (PSPRS) an agent multiple employer plan. Both plans are characterized by below average funding levels using Fitch's more conservative 7% investment rate assumption, ASRS's funding level is estimated at 68% and the combined PSPRS program funding level is estimated at 54% as of June 30, 2012.
The city's fiscal 2013 carrying cost (debt service, pension and other post-employment benefit contributions) is moderate at 21.5% of governmental spending, although projected growth in pension contribution rates could apply pressure to future budgets.
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