AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AAA' rating to the following Scottsdale, Arizona bonds:
--$28.5 million Municipal Property Corporation (MPC) excise tax revenue bonds, tax-exempt series 2015A;
--$14.6 million Municipal Property Corporation excise tax revenue bonds, taxable series 2015A.
The bonds are scheduled for competitive sale on Dec. 9, 2014.
In addition, Fitch affirms the following ratings:
--$619.1 million outstanding general obligation (GO) bonds at 'AAA';
--$481.6 million Municipal Property Corporation excise tax revenue bonds outstanding at 'AAA'.
The Rating Outlook is Stable.
SECURITY
The GO bonds are payable from an unlimited ad valorem tax levied against all taxable property in the city.
The MPC excise tax revenue bonds are special obligations of the corporation payable from payments made by the city, to which a first lien on the city's excise taxes is pledged.
KEY RATING DRIVERS
RESPONSIVE FINANCIAL MANAGEMENT: The city's revenue structure is subject to a high degree of volatility, as seen over the last several years. General fund reserves remain sound despite declines in recent years, due primarily to significant expenditure reductions in response to recessionary pressures.
GOOD COVERAGE: Excise tax debt service coverage remains healthy as pledged revenues recover from steep recessionary declines. Fitch expects strong coverage to continue given the fact that the pledged revenues comprise the bulk of general fund revenues.
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.
MIXED DEBT, PENSION BURDENS: A higher-than-average debt per capita burden is mitigated by the city's wealth levels, as indicated by a moderate debt-to-market value ratio. Capital needs have declined with the slowing of economic growth, which reduced planned borrowings and annual pay-go capital spending. Pension liabilities and overall carrying costs are sizable.
RATING SENSITIVITIES
MAINTENANCE OF FINANCIAL FLEXIBILITY: The ratings are sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
CREDIT PROFILE
Scottsdale is located adjacent to Phoenix in Maricopa County, the largest population center in the state. Population in the city increased nearly 10% since the 2000 census to roughly 223,000, accompanied by gains in both residential and commercial development.
SOUND FINANCES; REVENUES RECOVERING
Scottsdale's overall financial profile remains sound despite uneven operating results in the post-recession years. Fitch expects financial performance and reserve levels to be stable over the near term, as recent budgetary adjustments and an improving revenue picture have countered previous steep revenue declines.
The greatest revenue improvement has occurred in local sales tax receipts, which reversed course in fiscal 2011 after several years of large declines and registered a cumulative increase of more than 20% the last four fiscal years. Local general sales tax revenues are the largest general fund revenue source at 40% of the fiscal 2014 total. The improvement in sales tax receipts is consistent both with gains reported in other Phoenix area cities and with improvement in various economic measures.
These gains helped offset ongoing declines in state shared revenues (sales and income tax), which fell nearly 25% in fiscal 2011 and another 13% in fiscal 2012 before rebounding 14% in fiscal 2013 and another 8% in fiscal 2014. The income tax portion of these revenues reflects economic activity two years prior, and the recent gains confirm improving economic conditions.
The basket of revenues that comprise pledged excise taxes - local sales tax, state shared sales and income tax, permits and fees, franchise fees, and fines and forfeitures - represent the majority of general fund revenues for the city. Consequently, debt service coverage on outstanding excise tax debt historically has been very healthy and remains solid despite recent revenue declines. Fitch considers the historical additional bonds test a positive credit factor at 3x the next year's debt service plus any proposed debt.
Pledged excise tax revenues peaked at $217.6 million in fiscal 2007, and then decreased for four consecutive years before growing modestly in fiscal 2012; the cumulative reduction over this period was more than 20%. Fiscal 2012 results registered a 1.4% gain, followed by a stronger 9.5% jump in fiscal 2013 and a 7.7% gain in fiscal 2014 to $183.4 million (excluding transient excise taxes that are not pledged).
Maximum annual debt service (MADS) coverage on all outstanding excise tax debt using fiscal 2014 revenues is a sound 3.7x, and MADS coverage jumps to more than 10x when utility-supported excise tax debt and debt repaid by the Arizona Sports and Tourism Authority is deducted. Of the roughly $525 million in excise tax debt (including these offerings), roughly $298 million or 56% is for utility projects and is repaid from utility system revenues. Fitch rates the city's water and wastewater utility revenue bonds 'AAA' with a Stable Outlook.
RECENT BUDGETARY ADJUSTMENTS
Operating reserves remain solid as a result of management's recent revenue and spending adjustments, including elimination of vacant positions, departmental consolidations, layoffs, and property tax hikes. The general fund recorded manageable operating shortfalls in four of the five fiscal years through 2013, but fiscal 2014 saw a modest $3.7 million surplus after transfers. The unrestricted general fund balance at fiscal 2014 year-end totaled $52.6 million or a solid 21% of spending and transfers out.
The recent operating losses generally have been small and have resulted from one-time outlays. Management expected a similar loss for fiscal 2014, but better than expected revenues and continued expenditure control generated the positive results. The fiscal 2015 budget incorporates a 3% merit pay program, a roughly 3% increase in general fund spending from the prior year budget, and a property tax rate reduction. Sales tax collections this year are running 7% ahead of fiscal 2014 year-to-date and are expected to exceed budget given the level of economic activity.
MANAGEABLE DEBT BURDEN
Scottsdale's overall per capita debt levels are above average at roughly $5,720, but this is largely offset by the city's robust wealth levels. Debt-to-market value is a moderate 3%. Fitch notes the pace of GO and excise tax revenue debt retirement is above average at more than 60% in 10 years.
Proceeds from these series will partially finance the Scottsdale Museum of the West, and provide funds for improvements to the TPC Golf Course and the city's water and wastewater utility system. The city's reported capital needs appear manageable, and near-term borrowing plans are limited. A failed GO bond election in fall 2013 means city leaders must develop a new schedule for approaching voters; management reports 2017 as a likely target.
The city participates in state-sponsored pension programs for its retirees, and funding levels (using Fitch's more conservative 7% investment return assumption) are less than adequate for the general employee and police programs, estimated at under 70%; the fire pension program is over-funded. Pension contributions have been at the required amounts and have been increasing, and expected further increases (particularly for the police plan) could pressure operations. The city's OPEB liability is manageable. Total carrying costs (debt service, pension and OPEB contributions) are large but currently manageable at roughly 24% of fiscal 2014 governmental spending.
PART OF THE PHOENIX METRO 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 September 2014 rate of 4.6% was well below both the Arizona (6.8%) and U.S.(5.7)% averages for the month. Wealth levels are well above state and national averages; per capita money income is twice the Arizona average and 180% of the U.S. average, and median household income is roughly 140% of both the Arizona and U.S. averages.
The sharp decline in residential and commercial construction area-wide during the recession also impacted development activity in Scottsdale. While the city did not witness the level of speculative building activity that occurred in other parts of the Phoenix metropolitan area due to its relatively mature status, Scottsdale housing starts dropped sharply from a recent peak of 1,722 in fiscal 2007 to less than 200 annually from 2008-2012. Building permit revenues have been trending positively the past two years but remain well below pre-recession peaks.
Taxable values reversed a multi-year slide for fiscal 2015, with secondary assessed valuation (SAV) increasing 7.2% to $5.18 billion. As did virtually all Arizona cities, Scottsdale experienced a dramatic decline in taxable values during the last recession and housing market collapse. SAV dropped by more than 40% from fiscal 2010 to fiscal 2014. The recovery in housing prices over the past several years is now producing SAV gains. Further increases are likely given the continued recovery underway and reported construction activity (particularly in multi-family housing).
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=932935
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