Fitch Affirms Gilbert MPC, AZ's Revs at 'AA+'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings affirms its 'AA+' rating on the following Gilbert, AZ Public Facilities Municipal Property Corporation (MPC) excise tax revenue bonds:

--$40.4 million revenue bonds, series 2006.

Fitch also assigns an implied unlimited tax general obligation (GO) bond rating of 'AA+' to the Town of Gilbert.

The Rating Outlook is Stable.

SECURITY

The excise tax revenue bonds are payable from rental payments made by the town to the corporation, secured by a pledge of the town's excise taxes, including state shared income and sales taxes. Rental payments are absolute and unconditional and not subject to annual appropriation.

KEY RATING DRIVERS

STRONG FINANCES AND DEMOGRAPHICS: Gilbert's trend of favorable operating results is enabled by prudent planning, cost containment, and economic growth. The town's population is relatively young and highly educated. Income and wealth measures are above average and unemployment is below average.

ECONOMICALLY SENSITIVE REVENUES: The rating incorporates heavy reliance on cyclical excise tax revenues to support operations; a solid growth trend follows several years of a recessionary slide. The town has a demonstrated ability to manage within this revenue structure.

SOUND COVERAGE AND ABT: Healthy maximum annual debt service (MADS) coverage on MPC excise tax bonds reflects the town's use of residual pledged revenues for operations. Fitch expects all-in MADS coverage to remain sound and well-above the strong additional bonds test (ABT).

MODERATE DEBT PROFILE: Fitch anticipates debt to remain moderate in the near term based on the town's near-term issuance plans but to pressure carrying costs (debt service payments and pension contributions). Elevated carrying costs reflect rapid principal amortization and high pension contribution rates.

RATING SENSITIVITIES:

The rating is sensitive to the town's continued ability to maintain strong financial flexibility, a credit mitigant to the town's reliance on cyclical excise tax revenues, and successfully manage growth-related infrastructure needs.

CREDIT PROFILE

Gilbert is located about 20 miles southeast of Phoenix with a planning area of 73 square miles. Population grew from approximately 30,000 in 1990 to an estimated 230,000 in 2013.

STRONG FINANCIAL MANAGEMENT

Gilbert's consistent record of operating surpluses has bolstered fiscal 2013 unrestricted reserves to a strong $69.6 million (63% of spending), despite heavy reliance on excise tax revenues which fund 80% to 85% of operations. The town steadily improved its financial position over the past five years by managing expenditures to offset the impact of cyclical excise tax revenues.

Management estimates adding $6 million to fiscal 2014 unrestricted general fund reserves on the strength of local sales tax and state shared revenues. The town's financial plan reflects ongoing structural balance.

HEALTHY EXCISE TAX COVERAGE

Fiscal 2013 peak excise tax revenues of $109.6 million provided MPC coverage of 6.6x. Excise tax revenues lost 17.4% of value during fiscal years 2009 through 2011, before seeing gains of 9.9% and 12.6% during the past two years.

Unaudited fiscal 2014 revenues reflect an additional 7.2% increase and cover MPC debt service 7.1x, 8.9x considering the benefit of self-supporting system development fees. MADs of $16.6 million in 2020 is covered by audited fiscal 2013 revenues a strong 6.6x.

Fiscal 2013 excise tax revenues are comprised primarily of local sales tax revenues (56%), state shared sales tax revenues (19%) and state shared income tax revenues (16%). Other local excise tax revenues consist of fines and forfeitures, franchise fees, business licenses, and park & recreation fees. State shared revenues are distributed to local governments based on population.

The town anticipates issuing $40 million in subordinate excise tax revenue bonds in the near term. Taking into account the town's reasonable fiscal 2014 and 2015 excise tax revenue projections, Fitch expects all-in coverage to remain sound. Legal provisions provide adequate bondholder protections, including an above-average additional bonds test of 3.0x MADS.

MODERATE DEBT; ONGOING CAPITAL NEEDS

Gilbert's overall debt is a moderate 2.6% of market value. A rapid principal amortization (84.5% within 10 years) contributes to a weaker debt service burden equal to 21% of governmental spending.

The town is considering issuing a portion of $71 million in previously authorized GOs later this fiscal year and may seek additional GO authorization in 2016. Fitch expects the town's debt burden to remain moderate in the near term, with the potential for a higher debt burden in the medium term based on the extent of infrastructure development undertaken in relation to tax base growth.

ELEVATED CARRYING COSTS

The town's carrying costs, including debt service and pension contributions represents an above-average 26% of general fund spending. Fitch expects growth-related debt needs to further elevate the town's carrying costs.

The city participates in several state-sponsored pension programs, the two largest being the Arizona State Retirement System (ASRS) for nonpublic safety personnel(a cost-sharing, multiple employer defined benefit plan) and the Arizona Public Safety Personnel Retirement System (PSPRS) for public safety employees (an agent multiple-employer defined benefit pension and health insurance premium plan).

The reported funding level for ASRS at June 30, 2013 was 75.3%, and the funding level for PSPRS at June 30, 2013 was roughly 83%; the funding levels are 68% and 73%, respectively using Fitch's 7% discount rate adjustment. The town does not have any other post-employment benefit obligations.

RESIDENTIAL PHOENIX COMMUNITY

The region has transitioned from an agricultural to a suburban economy with a strong commercial and industrial presence over the last 20 years. Income and wealth levels exceed state and national standards, with a very low 4.2% unemployment rate as of April 2014.

The tax base grew considerably during the economic boom that benefited the Phoenix metropolitan area, with a more than doubling of secondary assessed value (SAV) between 2006 and 2009. However, the recession and housing market collapse caused a cumulative 40% drop in the town's SAV through fiscal 2014 before rebounding a strong 15% in fiscal 2015.

The town is about two-thirds built out, with significant growth underway and strong growth prospects driven by its proximity to Phoenix and strong demographic profile. Fitch anticipates ongoing growth in the local economy based on recent local and regional development trends that have included growth in the town's residential, commercial and health sciences sectors.

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, Zillow.com, National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria', Aug. 15, 2011;

--'U.S. Local Government Tax-Supported Rating Criteria', Aug. 15, 2011.

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=843298

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Rebecca Meyer, +1-512-215-3733
Director
Fitch Ratings, Inc.
111 Congress Ave. Ste. 2010
Austin, Texas 78701
or
Secondary Analyst
Steve Murray, +1-512-215-3729
Senior Director
or
Committee Chairperson
Jessalynn Moro, +1-212-908-0608
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings, Inc.
Primary Analyst
Rebecca Meyer, +1-512-215-3733
Director
Fitch Ratings, Inc.
111 Congress Ave. Ste. 2010
Austin, Texas 78701
or
Secondary Analyst
Steve Murray, +1-512-215-3729
Senior Director
or
Committee Chairperson
Jessalynn Moro, +1-212-908-0608
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com