Fitch Rates Gilbert, AZ's Sub. Revs 'AA+'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned an 'AA+' rating to the following Gilbert, AZ obligations:

--$35.5 million subordinate lien pledged revenue obligations, series 2015.

In addition, Fitch affirms the 'AA+' rating on the $38.2 million outstanding Gilbert Public Facilities Municipal Property Corporation (MPC) revenue bonds, series 2006 and 2014.

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

The Rating Outlook is Stable.

SECURITY

The series 2015 subordinate excise tax revenue obligations are payable from rental and installment payments made by the town to the trustee from excise taxes and state shared revenues, subordinate to outstanding and any additional senior (MPC) excise tax revenue bonds. The MPC 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 and installment payments are absolute and unconditional and not subject to annual appropriation.

KEY RATING DRIVERS

STRONG FINANCES AND DEMOGRAPHICS: The 'AA+' rating on the senior revenue bonds and implied GO rating reflects Fitch's anticipation that Gilbert will continue to realize favorable operating results and maintain solid reserves to offset the risks of revenue volatility. The town's population is relatively young and highly educated. Income and wealth measures are above average and unemployment is below average.

SUBORDINATE BONDS AT PARITY: The parity rating of subordinate obligations reflects strong coverage and practical limitations on leveraging above the sound additional bonds test (ABT), based on the town's use of excise tax revenues for general operations.

ECONOMICALLY SENSITIVE REVENUES: The ratings incorporate reliance on economically sensitive excise tax revenues to support operations. The town has a demonstrated ability to manage within this structure despite sizable swings in revenue performance.

HEALTHY GROWTH; ADEQUATE INFRASTRUCTURE: Gilbert's economy has experienced rapid post-recessionary expansion; adequate transportation infrastructure positions the town to manage additional near-term growth. Fitch anticipates the town's debt profile to remain moderate based on limited near term issuance plans and a rapid amortization rate.

RATING SENSITIVITIES:

SOUND FINANCES; MANAGEABLE CAPITAL: Maintenance of strong finances and manageable capital needs may lead to positive rating action over the medium term despite the town's significant exposure to economically sensitive revenues.

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 235,276 in 2015.

PHOENIX COMMUNITY WITH STRONG GROWTH PROSPECTS

Gilbert has transitioned over the past 20 years from an agricultural to a diversified economy with a strong commercial and industrial presence. The town's median household income is a strong 151% of the U.S. average, reflecting high levels of educational attainment. A very low 4.6% unemployment rate as of Jan. 2015 reflects an expanding local employment base and access to the broad Phoenix job market.

The town is about two-thirds built out by population, with significant growth underway and strong growth prospects driven by its proximity to Phoenix and strong demographic profile. Resumption of rapid economic growth is evidenced by sales tax compound annual growth (CAGR) of 10.5% between fiscal 2011 and 2014. Representing economic activity from fiscal 2013, the fiscal 2015 ad valorem tax base realized strong 15% growth subsequent to recessionary losses totaling 30% since fiscal 2009. 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 as evidenced by strong fiscal 2016 market value estimates. However, Fitch is concerned about the volatility inherent in such rapid economic growth given sizable recessionary declines.

HEALTHY COVERAGE FROM VOLATILE EXCISE TAX

Fiscal 2014 excise tax revenues of $117.3 million provided all-in coverage of 7.1x, and 11.4x considering the benefit of self-supporting system development fees. Before seeing gains of 9.9%, 12.6%, and 7.3% in fiscal 2012, 2013, and 2014 respectively, excise tax revenues had declined 17% during fiscal years 2009 through 2011. The town's conservative budget reflects an additional 3% growth in excise tax revenues with indications of further strengthening in fiscal 2016. Pro forma all-in MADs of $17.7 million in 2018 is covered by audited fiscal 2014 revenues a strong 6.6x.

Excise tax revenues are composed primarily of local sales tax revenues (56%), state shared sales tax revenues (19%) and state shared income tax revenues (15%). 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.

This subordinate issuance funds the construction of a Saint Xavier University satellite campus. Gilbert expects that the university will be responsible for all debt-related costs. Fitch views this assumption with caution as the new university campus is not yet established. Legal provisions provide adequate bondholder protections, including an above-average ABT of 3x MADS on the senior and 2x MADs on the subordinate obligations.

STRONG FINANCIAL MANAGEMENT

Gilbert's consistent record of operating surpluses has bolstered fiscal 2014 unrestricted reserves to a strong $73.8 million (57.6% 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.

The town estimates adding $3.8 million to its fiscal 2015 unrestricted reserves based on fiscal year to date results, reflecting healthy growth in local sales tax and state shared revenues. The town's financial plan reflects ongoing structural balance.

MANAGEABLE DEBT PROFILE

Gilbert's overall debt is a moderate 3.7% of market value. Rapid principal amortization (78% within 10 years) contributes to elevated carrying costs, including debt service and pension contributions, equal to 23.6% of governmental spending.

Fitch anticipates the town's debt metrics to remain moderate based on issuance plans and the currently rapid amortization rate.

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, 2014 was 75.4%, and the funding level for PSPRS at June 30, 2014 was 73.4%. These levels are approximately 68% and 60%, respectively using Fitch's 7% discount rate adjustment. Officials report plans to bolster the PSPRS funding ratio in the near term. The town does not have any other post-employment benefit obligations.

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

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=982917

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Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer, CFA, CPA
Director
+1 512-215-3733
Fitch Ratings, Inc.
111 Congress Ave. Ste. 2010
Austin, Texas 78701
or
Secondary Analyst
Steve Murray
Senior Director
+1 512-215-3729
or
Committee Chairperson
Amy Laskey
Managing Director
+1 212-908-0568
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer, CFA, CPA
Director
+1 512-215-3733
Fitch Ratings, Inc.
111 Congress Ave. Ste. 2010
Austin, Texas 78701
or
Secondary Analyst
Steve Murray
Senior Director
+1 512-215-3729
or
Committee Chairperson
Amy Laskey
Managing Director
+1 212-908-0568
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com