AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings takes the following rating action on Queen Creek, AZ's outstanding debt:
--$23.2 million excise tax and state shared revenue obligations, series 2007 affirmed at 'A+';
--$44.2 million improvement district no. 1 improvement bonds affirmed at 'A-'.
Additionally, Fitch affirms the town's implied unlimited tax general obligations (GO) at 'A+'.
The Rating Outlook is revised to Positive from Stable.
SECURITY
The excise tax and state shared revenue obligations are payable from a first lien on local excise taxes and a pledge of state shared revenues.
The improvement district bonds are payable from special assessments imposed upon real property within the district assessed for expenses associated with various infrastructure improvements, with the town responsible for assessment deficiencies according to bond provisions.
KEY RATING DRIVERS
OUTLOOK REFLECTS IMPROVED PROFILE: The revision to a Positive Outlook from Stable reflects improved reserves and a moderating debt profile. Aided by strong revenue growth over the past two years, the town has limited its spending to improve its financial cushion. The town's moderating debt burden results from amortization in excess of new issuance and tax base growth.
RATING PARITY TO ULTGOS: Parity of the excise tax and implied GO ratings reflects shared reliance on local excise tax and state shared revenues.
RELIANCE ON VOLATILE REVENUES: The rating incorporates the town's dependence on economically sensitive sales and excise tax revenues which have seen strong growth over the past several years subsequent to a multi-year recessionary slide.
STRONG DEBT SERVICE COVERAGE: Debt service coverage is strong, reflecting that local and state shared revenues provide the majority of the town's operating revenues.
RATING SENSITIVITIES
SOUND FINANCES: The town's ability to maintain a strong financial profile and manageable debt burden could result in an upgrade.
CREDIT PROFILE
Queen Creek, population 31,767, is located in the southeastern portion of Maricopa County, with a small portion reaching into Pinal County.
STRONG FINANCIAL PROFILE
Queen Creek has maintained a high degree of financial flexibility despite significant exposure to volatile revenues and growth pressure. The town has aggressively cut costs, primarily through staff reductions and salary freezes. Fiscal 2014 marked the fourth year of surplus performance, following two years of modest reserve draws during the recession.
The fiscal 2014 unrestricted general fund balance of $23 million represents a very strong 100% of spending. Officials project a fiscal 2015 general fund balance of $17 million (52.3% of spending), an ample level in Fitch's view, due to application of $10 million for capital projects. The town's long range plan reflects balanced operations and reasonable growth assumptions.
VOLATILE REVENUES REFLECT STRENGTHENING TREND
Local sales tax revenues contribute 53% to the town's fiscal 2014 general fund operating revenues, followed by 23% from intergovernmental revenues (largely state shared sales tax revenues and distributions of state income tax revenues). After six years of a cumulative 37% decline through fiscal 2011, fiscal 2012 represented a return to growth.
Fiscal 2014 general fund sales tax revenues of $13.9 million reflect strong 18.4% compound annual growth (CAGR) since the trough in fiscal 2011. The town's fiscal 2014 intergovernmental revenues of $6.2 million have realized a similarly strong 21% CAGR since the fiscal 2011 trough. The town's five-year pro forma reflects ongoing moderate revenue gains which support reinstatement of salary increases. Fitch considers the town's high reserve levels prudent in light of its exposure to severe revenue volatility.
MODERATING DEBT PROFILE; IMPROVED PENSION FUNDING
The town's current debt burden equals 5% of market value, having moderated from a recent high of 6.6% in fiscal 2013. Amortization is moderate at 45.2% in 10 years. The town's near term capital plans include road improvements funded through the accumulation of a 2% sales tax on construction activities dedicated by town policy to transportation projects. Given the volatility of a construction-specific sales tax, the town prudently accumulated a sizable fund balance in excess of $10 million before initiating transportation project expenditures.
The town anticipates a near-term issuance of $23 million to fund public safety facilities and road projects. In addition to excise tax and improvement district bonds, the governmental debt profile includes $17.8 million of parity Greater Arizona Development Authority (GADA) debt.
The town participates in two state-sponsored pension programs, the Arizona State Retirement System (ASRS) for nonpublic safety personnel and the Arizona Public Safety Personnel Retirement System (PSPRS) for public safety employees. The funding level for ASRS as of June 30, 2014 is 75%, but drops to a lower 68% using Fitch's more conservative 7% investment return assumption.
The town's PSPRS unfunded actuarial accrued liability (UAAL) was $1.5 million as of June 30, 2014. Town council adopted a resolution on June 3, 2015 to pay off the liability and maintain full funding of the plan on a prospective basis. Carrying costs, including the town's debt service, state pension and other post-employment plan contributions place a moderate 16.7% burden on governmental spending.
SOUND DEBT SERVICE COVERAGE
Improved fiscal 2014 pledged revenues totaling $31.7 million cover excise tax debt service ($1.9 million) and parity GADA debt service ($1.1 million) a strong 10.6x, up from a low of 5.9x in fiscal 2011. Coverage improves to 11.2x considering the application of development fees to pay the excise tax and GADA debt service.
The town projects ongoing near-term improvement in coverage based on moderate growth in pledged revenues and a level debt service. Fiscal 2014 coverage represents the maximum annual debt service (MADS) coverage, given the town's level debt service structure. Bond provisions allow for issuance of parity lien obligations so long as prior year's pledged revenues cover MADS by 2x.
IMPROVEMENT DISTRICT RATING REFLECTS TOWN SUPPORT
The improvement district was formed to facilitate the construction of street improvements in Queen Creek and concurrently encourage commercial and residential development within the district. Major tenants at the two large commercial development projects include big box retailers and a number of smaller specialty stores, banks and restaurants. Strong growth over the past couple of years includes the recent opening of a 14-screen movie theatre and variety of new restaurants. The town reports a current occupancy rate of 84.7%.
While the improvement district rating reflects the strong statutory provisions obligating the town to pay assessments, the potential additional assumption of assessment obligations could pressure the general fund.
GROWING LOCAL ECONOMY
Queen Creek witnessed a sharp drop in residential development activity, with corresponding declines in home values during the recession as evidenced by an approximate 40% drop in market value between fiscal 2010 and fiscal 2014 (reflecting a two-year assessment cycle). Strong growth of fiscal 2015 and 2016 values (25% and 29.5%, respectively) reflects commercial and residential development. The town reports resumption of growth in all subdivisions that had stalled during the recession.
Growth prospects are reasonably strong based on the town's proximity to Phoenix and its availability of developable property. The town is currently about one-third built out.
Median household income represents 158% of the U.S. level. Strong job growth has dropped the town's unemployment rate to 3.8% as of March 2015, below regional and national levels for the same period.
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
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=986853
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=986853
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.