Fitch Affirms Scottsdale Preserve Auth, Arizona Excise Tax Bonds at 'AA+'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has affirmed its 'AA+' rating for the following Scottsdale Preserve Authority (SPA), AZ bonds:

--$48.5 million outstanding excise tax revenue refunding bonds, series 2004, 2010 and 2011.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by payments from the city to the authority, payable from and secured by the proceeds of two separate transaction privilege and use taxes dedicated by voters to preservation purposes.

KEY RATING DRIVERS

STRONG COVERAGE: Fiscal 2013 pledged revenues provided 4.7x maximum annual debt service (MADS) coverage. Receipts from the two taxes continue a post-recession recovery, which should provide continued strong coverage given no additional borrowing plans.

REMOTE LEVERAGING RISK: The city has no plans to issue additional excise tax revenue bonds for preservation land purchases, choosing instead to use residual pledged revenue to pay debt service on general obligation (GO) debt issued for the same purpose. Also, land purchases are winding down as the city's preserve acquisition program nears completion.

SOLID ECONOMIC FOUNDATION: The city has a growing and diversified local economic base, low unemployment rates, and wealth levels that are well above state and national averages. Long term regional economic prospects remain positive.

RATING CAPPED BY ULTGO: The rating on the SPA excise tax revenue bonds is capped by the city's unlimited tax general obligation (ULTGO) rating, which is currently 'AAA'. The rating cap reflects Fitch's view that the pledged excise tax revenues might not be viewed as special revenues under Chapter 9, and would thus be susceptible to impairment in a bankruptcy situation.

RATING SENSITIVITIES

CONTINUED HEALTHY COVERAGE: The rating is sensitive to any change in debt service coverage. Fitch expects coverage to remain sound given the city's current borrowing strategy.

CHANGE IN SCOTTSDALE ULTGO RATING: While not expected, any downward movement in the city's 'AAA' ULTGO rating would result in negative rating action on the SPA's bonds.

CREDIT PROFILE

The authority is a nonprofit corporation created by the City of Scottsdale in 1997 to finance land acquisitions for the McDowell Sonoran Preserve. Bonds issued by the authority are secured by two excise taxes approved specifically for that purpose - a 0.2% tax approved in 1995 and a 0.15% tax approved in 2004; each tax expires 30 years after authorization. The preserve plan is designed to provide land for public recreational use and to protect significant wildlife habitat. The city to date has accumulated more than 30,000 acres.

PLEDGED REVENUES REBOUNDING

Pledged excise tax revenues have posted three consecutive years of gains and recovered a good portion of the cumulative 30% decline during the recent recession. For fiscal 2013 the combined taxes totaled $30.4 million, a 5.4% increase from the prior year. Current projections for fiscal 2014 anticipate a 7% increase to $32.5 million, which would put collections about $4.8 million or 13% below peak collections in fiscal 2007. The adopted fiscal 2015 budget includes a 2.5% increase in excise tax revenues, which appears reasonable given the recent gains and improved economic activity.

Debt service coverage remained sound through the recession and has strengthened as revenues have improved. MADS occurs in 2016 at $6.48 million, and MADS coverage using fiscal 2013 receipts is healthy at roughly 4.7x. A gradually descending debt service schedule and no further borrowing plans suggest strengthening coverage levels until final maturity in 2024, assuming satisfactory revenue generation.

GO BONDS ALSO FINANCE PRESERVE

City voters also approved the issuance of GO bonds for the preserve, to be repaid with proceeds of the excise taxes (on a subordinate basis to the revenue bonds); $200 million was authorized with the 1995 tax and $500 million was authorized with the 2004 tax. Currently, $331 million of preserve GO debt is outstanding, compared to $48.5 million in excise tax revenue bonds; $298.5 million in GO authorization remains.

The city has issued GO preservation bonds regularly--most recently $14 million in April 2014. With these two bond authorizations in place, the city does not plan to issue additional excise tax revenue bonds for preserve land acquisitions. Given the city's practice to favor higher-rated GO over excise tax debt and its desire to repay all of the debt with excise tax revenues, Fitch believes additional excise tax bond leveraging is unlikely.

Coverage of all SPA-related debt by both the 0.2% and 0.15% taxes hovered around 1.0x over the past several years as tax collections dipped. Coverage improves slightly to 1.1x for fiscal 2015 using projected fiscal 2014 receipts. Legal provisions for the excise tax revenue bonds are satisfactory and include a 1.5x additional bonds test and a reserve requirement of 10% of outstanding bonds should pledged revenues in any fiscal year drop below 150% of debt service.

Current plans call for an additional GO preserve borrowing in early 2015. Roughly 3,700 acres remain in the city's preserve acquisition plan, but this land reportedly is also a possible target for private developers. The city is considering its options for these remaining acres, recognizing the cost may be higher than prior purchases.

PART OF GREATER PHOENIX ECONOMY

The city has a mature and diversified local economic base, anchored by healthcare, tourism, business and professional services and technology. The unemployment rate in Scottsdale has trended downward after spiking in 2009 and 2010, and it remains below state and national averages; the city's June 2014 rate of 5.2% was well below both the Arizona (7.5%) and U.S. (6.3)% averages for the month. Wealth levels are well above state and national averages; per capita money income is twice the Arizona average and 184% of the U.S. average, and median household income is roughly 140% of both the Arizona and U.S. averages.

Taxable values continue to decline, as softening residential and commercial property values continue to work through the multi-year appraisal/review process. The city's secondary assessed valuation (SAV) fell roughly 23% in fiscal 2012 and another 11% in fiscal 2013. The decline for fiscal 2014 was more modest at 5%, bringing SAV to $4.8 billion. The current projection is for a modest uptick in values beginning in 2015. This projection is consistent with those of other Phoenix-area cities for the near term and with recent home price data. According to Zillow, median home prices in Scottsdale were $377,000 in 2013, up notably from a recent low of about $275,000 in 2010.

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:

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=856814

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Contacts

Fitch Ratings
Primary Analyst
Steve Murray, +1 512-215-3729
Senior Director
Fitch Ratings, Inc.
111 Congress Ave., Suite 2010
Austin, TX 78701
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, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Steve Murray, +1 512-215-3729
Senior Director
Fitch Ratings, Inc.
111 Congress Ave., Suite 2010
Austin, TX 78701
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, +1 212-908-0526
elizabeth.fogerty@fitchratings.com