Fitch Rates Yuma, AZ Muni Property Corp's Excise Tax Bonds 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'AA-' rating to the following Yuma, AZ (the city) Municipal Property Corporation (MPC) excise tax revenue bonds:

--$46.0 million senior lien excise tax revenue and revenue refunding bonds series 2015;

--$41.2 million senior lien road tax and subordinate lien excise tax revenue refunding bonds series 2015.

The bonds are expected to be sold through competitive bids within about a month. Proceeds from the senior lien excise tax bonds will be used to refund MPC municipal facilities revenue bonds series 2003B and 2007B for debt service savings and to fund the construction costs of an athletic complex and fleet services maintenance shop.

Proceeds from senior lien road tax and subordinate lien excise tax revenue refunding bonds will be used to refund MPC municipal facilities revenue bonds series 2007D for debt service savings.

In addition, Fitch affirms the following ratings:

--$22.4 million (re-refunding) MPC municipal facilities revenue bonds series 2007B at 'AA-';

--$44.5 million (pre-refunding) MPC municipal facilities revenue bonds series 2007D at 'AA-';

--$24.1 million MPC municipal facilities revenue bonds series 2010B at 'AA-';

--The city's implied unlimited tax general obligation (ULTGO) rating at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The MPC bonds are payable from tax and fee derived payments made by the city. Following issuance of the 2015 bonds, payments on the series 2010B bonds will be backed by a first lien pledge of the city's excise taxes with no additional debt permitted at this lien position. The series 2015 senior lien excise tax revenue bonds will be backed by a second lien pledge of the city's excise taxes. Payments on the series 2015 senior lien road tax bonds will be backed by a first lien pledge of a 0.5% sales tax for roads and a third lien subordinate pledge of city excise taxes.

KEY RATING DRIVERS

IMPLIED ULTGO RATING: The 'AA-' implied ULTGO rating reflects the city's underlying credit fundamentals, including a sound financial profile, moderate debt burden, and weak economic indicators. The rating on the MPC bonds is capped at the implied ULTGO rating.

ECONOMICALLY SENSITIVE REVENUE DEPENDENCE: City finances are highly dependent on economically sensitive excise tax revenues, largely local sales tax and state-shared sales and income tax revenues. Local sales tax and state-shared receipts have recently performed positively, but the city remains vulnerable to their potential volatility.

SOUND RESERVES MAINTAINED: The city's financial profile has remained sound despite revenue shortfalls in recent years. Reserves have been maintained at adequate levels and are expected to remain so.

MODERATE DEBT BURDEN: Overall debt levels are moderate and remain manageable even with additional debt issuance. Amortization of direct debt is rapid. Overall carrying costs (debt service and retirement-related costs) as a percentage of spending are sizeable. These costs are expected to grow due to increases in required pension contributions resulting from the current, low pension funding levels.

WEAK ECONOMIC INDICATORS: Area unemployment is historically high due to the large number of seasonal migrant workers. Wealth levels are below state and national averages. The military is a major part of the local economy, and the city is expected to benefit from the ongoing expansion of military facilities in the area.

HEALTHY DEBT SERVICE COVERAGE: Debt service coverage on MPC bonds remains strong. Coverage is protected by sound legal provisions as well as the city's reliance on the surplus revenues for general fund operations.

RATING SENSITIVITIES

MAINTENANCE OF FINANCIAL STABILITY: The rating is sensitive to the maintenance of stable financial operations, including adequate reserves, as the city addresses spending pressures from deferred spending in recent years and increased pension costs. Fitch believes adequate reserves at close to current levels are necessary to offset the city's dependence on economically sensitive revenue sources.

CREDIT PROFILE

Yuma is located in southwestern Arizona at the confluence of the Colorado and Gila Rivers and serves as the county seat for Yuma County. The 2013 population estimate is about 91,923, which represents growth of 19% since 2000, though recent years have seen modest declines.

SOUND FINANCIAL PROFILE; ADEQUATE RESERVES DESPITE DRAW-DOWNS

The city's financial profile remains sound despite recent year revenue and expenditure pressures, aided by management's careful budgeting. In recent years, management reduced spending in response to a contraction in revenue, maintaining strong unrestricted general fund balances totaling nearly 40% of spending in fiscal 2011. Starting in fiscal 2012, management began to reverse some of the deep cuts and closed the year with a $3 million deficit, reducing reserves to a still solid 31.3% of spending. A surplus ($1.3 million) and deficit ($1.9 million) followed in fiscal years 2013 and 2014, respectively. Fiscal 2014 ended with a general fund unrestricted ending balance of $17.7 million or 28% of spending.

The city faces deferred capital, staffing and salary needs, some of which it has begun to address as its revenue picture has been improving. Both fiscal 2015 and 2016 budgets include salary increases and increased staffing. City finances have also been challenged by increased public safety pension costs. Preliminary estimates for fiscal 2015 (unaudited) indicate a deficit of about $440 thousand (0.7%), which would result in a still adequate ending balance of about $17.5 million or about 27% of spending.

Budget estimates for fiscal 2016 indicate a larger $2.3 million deficit, with the unassigned ending balance budgeted at about 20% of spending. However, management has indicated that the draw down is likely to be lower due to historic trends of lower than budgeted spending and the fiscal 2016 budget's over $1 million in contingency appropriations/ set asides not expected to be needed in fiscal 2016. The fiscal 2016 budget includes a property tax rate increase to $2.07 from $1.83 per $100 of assessed value, which is estimated to add about $1 million to property tax collections. The additional revenues will be applied to increased public safety pension costs. A tax rate increase to $2.24 was initially proposed for the fiscal 2016 budget. The final budget was approved with a smaller increase and a commensurate reduction to expenditures. The city does not assess a secondary property tax.

MODERATE DEBT BURDEN

Yuma's overall debt levels are average, estimated at about $2,057 per capita and 4.2% of market value in fiscal 2015. Debt service as a percentage of operating expenditures is above average at about 13%, but somewhat offsetting this is a rapid pace of principal amortization, with about 69% retired in 10 years. The city currently has no plans for additional debt issuance and debt levels remain moderate, even with the 2015 additional issuance.

The city contributes to two major pension systems: the Arizona State Retirement System (ASRS) and the Public Safety Personnel Retirement System (PSPRS) for police and fire personnel. The city consistently makes 100% of its actuarial annual required contribution for each system. The funding level for ASRS as of June 30, 2013 is 75.4%, but drops to an estimated 68% using Fitch's more conservative 7% investment return. The funding levels for PSPRS police and fire plans as of June 30, 2013 were 59.2% and 49.8% or 54.1% and 45.6%, respectively, when adjusted for Fitch's more conservative investment rate assumption.

Carrying costs, including debt service and pension/other post-employment plan contributions place a sizable (about 22%) burden on governmental spending. Required pension contributions have been increasing and, given low pension funding levels, are likely to continue to rise and will challenge city budgeting. A significant increase in carrying costs could pressure the rating.

WEAK ECONOMIC INDICATORS

The area's climate has fostered a significant agricultural base while also attracting tourists from both the U.S. and Mexico. The economy is anchored by two major military bases, the U.S. Marine Corps Air Station and the U.S. Army Yuma Proving Ground, which employ more than 8,000 workers combined. The air station is designated as the home to a new joint strike fighter squadron, which continues to bring in additional troops and has spurred economic activity related to base infrastructure improvements. Recent economic development also includes growth at the Yuma Regional Medical Center, which has expanded its operations, adding an additional wing for a new surgical center.

As is common among heavily agricultural areas, unemployment rates have historically trended significantly higher than state and national rates. The city unemployment rate for May 2015 was 12.9%, down from a year prior (14.7%), but well above the comparable state (5.5%) and national (5.3%) rates. City income and wealth levels are below state and national averages.

The city's taxable assessed value registered strong growth before contracting, starting in fiscal 2012. Annual declines have recently slowed, with the fiscal 2016 decline at less than 1%, vs 3.9% in fiscal 2015 and 9.2% in fiscal 2014. The city expects modest near-term growth, as home values have been increasing. However, overall growth may be moderated in light of the recent change to the property assessment process. Proposition 117, which was approved by Arizona voters in November 2012 as a constitutional amendment, limits annual increases in existing property values to 5% beginning in fiscal 2016 (2014 real property valuations), excluding increases associated with any new construction.

STRONG DEBT SERVICE COVERAGE

The excise taxes pledged to the MPC bonds are composed of a number of components, including sales taxes, state-shared revenue (income and sales taxes), building permits and inspection fees, and auto in-lieu taxes. Led by the local sales tax component (about 37% of fiscal 2015 pledged excise tax revenues), total excise tax receipts declined sharply as a result of the economic downturn, about 7% annually in fiscal years 2009 through 2011 before flattening out in fiscal 2012. Revenues grew strongly in fiscal 2013 (14.4%), largely reflecting the addition of a new ambulance service fee, with a modest decline in fiscal 2014 (1.4%) reflecting inclusion of three additional months of ambulance fee revenues in fiscal 2013 from fiscal 2012. Projections for fiscal 2015 show a solid 6.4% increase, with continued growth projected for fiscal 2016 (1.3%).

Following issuance of the 2015 debt, coverage by pledged excise tax revenues (excluding the road tax) of maximum annual debt service (MADS) on all debt carrying a pledge of excise tax revenues, is solid at over 4x. The series 2015 senior lien road tax bonds are additionally backed by road sales tax revenues, which alone cover senior lien road tax bonds MADS by about 2.0x. Fitch expects coverage to remain solid as surplus excise taxes are needed for general fund operations. Sound legal provisions include additional bonds tests of 3.0x and 1.5x MADS for senior lien excise tax bonds and senior lien road tax bonds, respectively.

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

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Contacts

Fitch Ratings
Primary Analyst
Maria Coritsidis
Analytic Consultant
+1-212-908-0514
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Rebecca Moses
Director
+1-512-215-3739
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Sandro Scenga, New York, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Maria Coritsidis
Analytic Consultant
+1-212-908-0514
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Rebecca Moses
Director
+1-512-215-3739
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Sandro Scenga, New York, +1 212-908-0278
sandro.scenga@fitchratings.com