Fitch Rates Chandler, Arizona Excise Tax Revs 'AAA'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned an 'AAA' rating to the city of Chandler (Chandler or the city), Arizona's $70 million excise tax revenue obligations (ETROs) series 2015.

The obligations are scheduled for a competitive sale the week of Dec. 7. Proceeds will be used to fund water and wastewater system improvements.

In addition, Fitch has affirmed the following ratings at 'AAA':

--$332.87 million general obligation (GO) bonds;

--$137.43 million ETROs.

The Rating Outlook is Stable.

SECURITY

ETROs are payable from a first lien on the city's excise tax revenues. The GO bonds are payable from an unlimited ad valorem tax levied against all taxable property in the city.

KEY RATING DRIVERS

ROBUST COVERAGE: High coverage reflects four years of healthy pledged revenue growth. Fitch expects coverage to remain above the 3.0x additional bonds test (ABT) based on issuance plans.

MANAGEABLE LONG-TERM LIABILITIES: Chandler's low governmental debt burden reflects a history of cash and enterprise-funded capital, rapid amortization, and early debt retirement. The city's 10-year financial plan includes accelerated funding to materially reduce its growing unfunded pension obligations.

STRONG FINANCIAL PROFILE: Chandler's conservative fiscal management, growing economy, and sound reserves mitigate exposure to economically sensitive revenues and enable the city to maintain strong financial flexibility. The city's five-year plan reflects structural balance and a financial cushion consistent with the city's four-month operating target.

ABOVE-AVERAGE ECONOMIC METRICS: A highly educated and skilled workforce contributes to the city's low unemployment and attractive growth prospects; income and wealth trends are well above average.

RATING SENSITIVITIES

MAINTENANCE OF SOUND FINANCES: The rating assumes continued strong financial flexibility and healthy reserves.

CREDIT PROFILE

Chandler occupies 70 square miles in southeastern Maricopa County with a 2015 population of 247,552.

PLEDGED REVENUE GROWTH; HIGH COVERAGE

The city's excise tax revenue obligations are secured by a basket of revenues, including local sales tax or transaction privilege tax (TPT), state shared revenues (reflecting a two-year lag in distributions), franchise fees, licenses and permits, and fines and forfeitures. The first two make up 93% of fiscal 2014 pledged excise tax collections of $162.7 million. Revenues reflect annual 3.9% growth and three-year compound average growth of 6.1% subsequent to a recessionary slide of 16% during the previous three years.

Fiscal 2015 unaudited collections are up by an additional 4.8%. Maximum annual debt service coverage based on fiscal 2015 collections remains high at 8.3x. ETROs fund the city's water and waste water system improvements and these system revenues support ETRO debt service. Projections which include the addition of a $100 million ETRO issuance in fiscal 2017 indicate that ETRO MADs coverage from pledged excise tax revenues remains high at 6.1x and water & waste water revenues remain sufficient to cover all supported debt service.

The city's five-year forecast includes moderate growth in excise tax revenues reflecting local economic development activity underway and the two-year reporting lag associated with state shared revenues which contribute about 30% to the total.

MANAGEABLE DEBT; GROWING PENSION OBLIGATIONS

Chandler's debt burden, net of enterprise self-support, represents a low 1.8% of fiscal 2016 market value. Fitch expects the city's debt burden to remain manageable based on an affordable 10-year governmental capital plan of $392 million, a rapid 85% amortization rate and significant cash funded capital plans.

Full-time employees of the city are covered primarily by two state-administered pension programs. These are the Arizona State Retirement System (ASRS), a multiple employer cost-sharing plan and the Arizona Public Safety Personnel Retirement System (PSPRS), a separate agent multiple-employer plan.

The Arizona legislature annually establishes the ASRS contribution rate, generally equivalent to the legislatively determined actuarially rate (although by statute the legislature can establish a contribution rate that differs from the actuarially determined rate). The PSPRS rate is actuarially based.

Under GASB 67 and 68, the city reports a fiscal 2015 ASRS net pension liability (NPL) of $105.7 million, with fiduciary assets covering 69.5% of total pension liabilities at the plan's 8% investment return assumption (approximately 60% based on a lower 7% investment rate assumption). The NPLs for the city's PSPRS plan are $73 million and $35 million respectively for police and fire. Fiduciary assets cover 58.7% and 66.0% of total pension liabilities for police and fire respectively at the plan's 7.85% investment return assumption (approximately 52.4% and 58.8% respectively for police and fire based on a lower 7% investment rate assumption).

The NPL of the plans represent a modest 1% of the city's fiscal 2015 market value. The city's financial plan includes accelerated contributions to eliminate the city's PSPRS plan unfunded liability within nine years. Chandler is also participating in state-wide pension reform efforts to address affordability and sustainability of the state's defined benefit plans.

Chandler's fiscal 2014 net other post-employment benefit (OPEB) obligation of $16.4 million, represents less than 0.1% of market value. Carrying costs (debt service, pension and other post-employment benefits (OPEB)) place a moderate 17.4% burden on fiscal 2014 governmental expenditures. However, Fitch expects the city's carrying costs to increase based on rising statutory contribution rates for the state public safety plans (under its current structure) and Chandler's plans to continue to accelerate pension contributions to eliminate the city's unfunded PSPRS plan liability within the city's 10-year planning horizon.

STRONG FINANCES ENABLE CASH-FUNDED CAPITAL AND ACCELERATED PENSION FUNDING

Chandler's strong financial performance reflects structurally balanced operations and solid post-recessionary revenue growth. The city budgets conservatively and uses non-recurring sales tax revenues for one-time uses.

The city's fiscal 2014 unrestricted general fund balance of $177.6 million represents a very high 93.2% of spending. Historically strong financial flexibility has afforded Chandler the ability to use excess reserves to fund capital and other nonrecurring expenditures, including a new city hall, downtown redevelopment, and street improvements. An unaudited fiscal 2015 net surplus of $7 million (3.5% of spending) brings unrestricted reserves to $184 million (90.3% of spending).

Chandler's structurally balanced five-year plan continues to include programmed reserve applications. These include infrastructure, key capital projects, and accelerated pension funding to reduce the city's PSPRS unfunded liability. The city projects eliminating the PSPRS unfunded liability within 10 years while maintaining the city's minimum target level of general fund reserves equal to four months of budgeted general fund revenues.

EXPANDING LOCAL ECONOMY ANCHORED IN TECHNOLOGY

Chandler's population has more than doubled since 1990, reflecting regional growth and the city's success in attracting and retaining top technology, manufacturing, advanced business and health services. Anchored by Intel Corporation, top employers represent technology, manufacturing, financial, health care, and telecommunication interests.

Fiscal 2016 market value of $25 billion reflects two consecutive years of strong 9.5% annual growth. The city conservatively projects modest tax base growth over the medium term.

Chandler's unemployment rate of 4.6% as of Sep. 2015 remains below regional, state and national averages. Local government, public education and health services lend stability to the city's employment base. The city's median household income trends well above state and national averages.

New business entrants and expansions continue to grow the city's employment base. Chandler's educated workforce and strong transportation infrastructure position the city for ongoing growth.

Additional information is available at 'www.fitchratings.com'.

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from CreditScope, IHS Global Insight, and Zillow Group.

Applicable Criteria

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

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=994415

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=994415

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.

Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer, CFA, CPA
Director
+1-512-215-3733
Fitch Ratings, Inc.
111 Congress Ave. Ste. 2010
Austin, TX 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:
Sandro Scenga, New York, +1 212-908-0278
Email: sandro.scenga@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, TX 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:
Sandro Scenga, New York, +1 212-908-0278
Email: sandro.scenga@fitchratings.com