Fitch Rates Pinal Co, Arizona Excise Tax Revs 'AA-'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned an 'AA-' rating to the Pinal County (the county), Arizona's following obligations:

--$39 million pledged revenue refunding obligations, tax-exempt series 2015A;

--$3.7 million pledged revenue obligations, taxable series 2015B.

The bonds are scheduled for a negotiated sale the week of March 30, subject to market conditions. Proceeds of series 2015A will refund outstanding series 2004 certificates of participation (COPs). Series 2015B proceeds will reimburse the county for monies advanced by the county to advance refund $3.6 million of the 2004 COPs on March 23, 2015.

Fitch affirms the following outstanding obligations:

--$52.7 million pledged revenue obligations, series 2014 at 'AA-';

--$40.3 million pledged revenue refunding obligations, series 2014 at 'AA-';

--$48.7 million (pre-refunding basis) COPs, series 2004 at 'A+'.

Additionally, Fitch affirms the county's implied unlimited tax general obligation (GO) rating at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The series 2015 and 2014 pledged revenue obligations are payable from a second-lien pledge of the county general excise tax revenues in favor of the county's Third Loan Repayment Agreement and 2010 obligations, a third-lien pledge of net state shared revenues in favor of the county's Second and Third Loan Repayment Agreements and 2010 obligations, and a first-lien pledge of vehicle license tax (VLT) revenues. The COPs carry a pledge of lease payments from the county to the trustee, subject to annual appropriation by the county.

KEY RATING DRIVERS

IMPROVED PLEDGED REVENUE TRENDS: Pledged revenues reflect a third year of growth, following four years of recessionary decline; the gains were led by strong county-wide excise tax collections, and more recently, recovery of state shared revenues.

SOUND COVERAGE; AVERAGE ABT: Debt service coverage on excise tax debt remains ample, as excise taxes constitute a significant source of operating revenues. The additional bonds test (ABT) is average at 1.5x maximum annual debt service (MADs).

SOUND FINANCES; BUDGET PRESSURES: The county, which cut costs to maintain solid reserves throughout the recession, anticipates addressing current and near-term budget pressure through additional cost reductions, a likely tax rate hike and reserve applications. Officials report plans to maintain reserves at no less than 10% of spending.

TAX-BASE RECOVERY: The tax base lost a significant portion of the value it had gained in the decade leading up to the regional housing collapse. Fitch expects the upturn in 2015 values to be followed by additional near-term tax-base growth, based on current economic conditions and the two-year assessment process.

MANAGEABLE DEBT; UNDERFUNDED PENSIONS: Fitch expects the county's overall debt levels to remain moderate based on modest debt issuance plans. Fitch considers the potential for increased pension costs relating to two underfunded plans to be manageable in light of the county's currently low carrying costs.

RATING SENSITIVITIES

GO CAPS REVENUE RATING: The county's ULTGO rating of 'AA-' serves as a ceiling for the pledged revenue bond rating; any decline in the ULTGO rating would result in a downgrade for the pledged revenue bonds.

MAINTENANCE OF SOUND FINANCES: The rating is sensitive to the county's ability to restore structural balance and maintain sound reserves in accordance with its stated policy levels.

SOUND COVERAGE: The rating is also sensitive to maintenance of solid pledged revenue coverage levels. A material decline in coverage and coverage approaching the ABT would place pressure on the rating.

CREDIT PROFILE

Pinal County is adjacent to Maricopa County, southeast of Phoenix and north of Tucson. At an estimated 396,237, the county's population has grown about 220% since 2000.

RECOVERY OF PLEDGED REVENUES; ADEQUATE COVERAGE

The county's pledged revenue obligations are payable from a second-lien pledge of the county's general excise tax revenues, a third-lien pledge of net state shared revenues and a first-lien pledge of vehicle license tax (VLT) revenues. The first lien on county general excise taxes and first and second liens on net state shared revenues are closed.

The pledged revenues are economically sensitive. Following a multi-year decline of 32% in revenue, excise tax and net state shared revenue collections showed modest improvement in fiscal 2011 and 2012, respectively. VLT revenues lost 10.5% during the recession before beginning to rebound in fiscal 2012. All three pledged revenue sources continued to strengthen through fiscal 2014 with solid gains.

MADs coverage is a satisfactory 1.93x based on current-year collections. The city anticipates ongoing improvement in near-term pledged revenues, which Fitch considers reasonable based on current trends and the two-year reporting lag associated with state shared revenues. A stress test indicates collections would need to drop by approximately 48% below current levels to reach break-even MADs coverage. The ABT is average at 1.5x MADs.

TAX-BASE CYCLICALITY; STABLE LOCAL ECONOMY

Primary assessed value peaked in fiscal 2010 at $2.9 billion, after a 10-year, five-fold increase that followed rapid regional development. Following a four-year decline of 31%, fiscal 2015 values demonstrate some stabilization with a modest increase of 1%.

There is moderate concentration in the tax base, with large taxpayers representing utility, mining, energy, retail, and telecom concerns. Fitch anticipates the tax base to realize additional near-term growth based on development underway and considering the two-year reporting lag.

The county's strategic location adjacent to Maricopa County and its large mass of developable land position it well for growth already underway. Median household income levels approximate those of the state. Unemployment trends moderately above the state and national levels; however, at 7.1% as of December 2014, the rate is improved from the 7.6% recorded a year prior due to job growth outpacing labor force gains. Large governmental and health services employers lend stability to the local economy.

SOUND FINANCES DESPITE REVENUE CYCLICALITY

Property tax revenues provide half of general fund support; economically sensitive excise taxes and intergovernmental revenues (largely state shared sales tax revenues) account for about 38% of total general fund revenues. The county has maintained solid reserves during the past several years through cost cutting and a hike in its primary ad valorem tax rate during fiscals 2011 and 2012 (to 3.99 cents from 3.2 cents).

Healthy fiscal 2013 unrestricted general fund reserves of $47.3 million (29.9% of spending) reflect ongoing cost containment and a modest decline in the primary tax rate to 3.79 cents. However, unaudited fiscal 2014 results draw down unrestricted reserves to $35.8 million (20.9% of spending) reflecting the tax-base trough and modest public safety cost increases.

BUDGET CHALLENGES REMAIN

The fiscal 2015 budget includes increased judiciary costs and the loss of about $11 million associated with termination of an Immigration and Customs Enforcement (ICE) prisoner contract, not entirely offset by moderate gains in excise and intergovernmental revenues and cost reductions. Additionally, the county faces estimated costs of $4.7 million shifted to it by the state during the state's most recent budget cycle.

The county anticipates maintaining reserves at a level no less than 10% of spending until structural balance is reestablished in fiscal 2016/2017. Officials expect the fiscal 2016 budget to include further cost reductions and a likely tax-rate hike. Fitch will continue to monitor the county's ability to regain structural balance and maintain reserve adequacy, both key credit factors.

MODERATE DEBT; INCREASING PENSION COSTS

The county's overall debt is moderate at 3.5% of fiscal 2015 market value. Amortization is average at 59% in 10 years. The county's capital needs are modest and officials do not anticipate near-term debt issuance plans.

The county participates in several state pension plans including the Arizona State Retirement System (ASRS), Public Safety Personnel Retirement System (PSPRS), and Corrections Officer Retirement Plan (CORP). The county fully funds the actuarially required contributions for all plans. ASRS is 75.4% funded, or an estimated weak 68% based on Fitch's more conservative 7% investment rate. PSPRS is also weakly funded at 56.1% (and an even lower estimated 51.3% when adjusted for Fitch's more conservative rate of 7%). CORP is adequately funded, although the dispatcher portion of CORP is weakly funded at an estimated 58.3% when adjusted for Fitch's more conservative rate assumption.

Carrying costs (debt service, state pension and related state-plan post-retirement health benefit contributions) represent a low 11.3% burden on the county's fiscal 2014 unaudited governmental fund spending, reflecting low direct debt levels. While Fitch anticipates increased pension contributions based on projected rate increases in the PSPRS and CORP plans, these appear manageable at this time.

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981801

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Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer
Director
+1-512-215-3733
Fitch Ratings, Inc.
111 Congress Ave., Suite 2010
Austin, Texas 78734
or
Secondary Analyst
Rebecca Moses
Director
+1-512-215-3739
or
Committee Chairperson
Karen Krop
Senior Director
+1-212-908-0661
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer
Director
+1-512-215-3733
Fitch Ratings, Inc.
111 Congress Ave., Suite 2010
Austin, Texas 78734
or
Secondary Analyst
Rebecca Moses
Director
+1-512-215-3739
or
Committee Chairperson
Karen Krop
Senior Director
+1-212-908-0661
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com