Fitch Rates Peoria, AZ GOs 'AA+'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned an 'AA+' rating to the city of Peoria (the city), AZ's million general obligation bonds (GOs) as follows:

--$30.275 series GOs, 2015A;

--$66.4 million refunding GOs, series 2015B.

The obligations are scheduled for a negotiated sale the week of December 7. Series 2015A proceeds will be used to fund parks, drainage, transportation, and safety improvements. Series 2015B proceeds will be used to refund outstanding debt for savings.

In addition, Fitch has affirmed its 'AA+' rating on the city's $132.7 million GO bonds (pre-refunded basis).

The Rating Outlook is Stable.

SECURITY

The GO bonds are payable from an unlimited ad valorem tax levied against all taxable property in the city.

KEY RATING DRIVERS

SOUND FINANCIAL PROFILE: Peoria's rating reflects strong financial practices and consistent operating performance. Healthy reserves serve as a mitigant to economically sensitive sales tax exposure and provide the city with flexibility to cash-fund capital and other non-recurring projects.

MODERATE DEBT BURDEN: Moderation of the city's debt burden reflects limited issuances and a trend of market value growth. Fitch anticipates the debt burden to remain moderate given the city's manageable capital plan.

INCREASING CARRYING-COST TRAJECTORY: The city's debt service, pension contributions and other post-employment benefits (OPEB) contributions place a sizable burden on the budget. Fitch expects increases in funding requirements for state-administered pension plans and city efforts to address unfunded liabilities to increase the carrying-cost burden over time.

GROWING LOCAL ECONOMY: Peoria's median household income is above average and unemployment is low, reflecting the city's participation in the broad and expanding Phoenix-area economy. A trend of favorable sales tax receipts, recovery of the housing market, and ongoing development continue to signal near-term ongoing growth.

RATING SENSITIVITIES

FINANCIAL FLEXIBILITY: The rating assumes sound finances and adequacy of the city's financial cushion. An increase in long-term liabilities, particularly those associated with unfunded pension liabilities, could pressure the rating in the medium term.

CREDIT PROFILE

Peoria is situated northwest of Phoenix with a population of about 164,000 representing a 50% gain since the year 2000. The city-owned Peoria Sports Complex hosts the Seattle Mariners and San Diego Padres major league baseball spring training and minor league activities. These facilities anchor the city's growing entertainment district.

STRONG GAP-CLOSING CAPABILITIES; FINANCIAL FLEXIBILITY

Peoria maintained adequate reserves during the great recession and has managed expenditure growth below that of strong post-recessionary revenue expansion. Fiscal 2014 unrestricted general funds of $57.7 million represent a strong 55.4% of spending.

Fiscal 2015 unaudited financial statements also report unrestricted reserves at 55.4% of spending, reflecting continued revenue growth. The city's structurally balanced fiscal 2016 budget includes application of an estimated $12.3 million of reserves for capital and nonrecurring projects with sound reserves in compliance with the city's 35% policy target.

ECONOMICALLY SENSITIVE REVENUES TREND UPWARD

Local sales tax and state shared revenues account for nearly three-quarters of the city's operating revenues, with property taxes contributing less than 5%. Benefitting from strong construction and retail activity, fiscal 2014 sales tax revenues increased for the fourth consecutive year to $39.5 million, exceeding the city's fiscal 2007 pre-recession peak of $39.1 million. Above-budget fiscal 2015 sales tax revenues (unaudited) grew by an additional 4.8% and fiscal 2016 trends continue favorable to budget.

Fiscal 2015 (unaudited) general fund state shared revenues of $39.1 million exceed the city's pre-recession peak of $38.1 million in fiscal 2008 and reflect state-wide economic recovery. The city's receipt and reporting of state shared revenues reflects a two-year distribution lag. The city conservatively projects stable-to-modest growth in state shared revenues in the near term.

MANAGEBLE DEBT; RISING PENSION OBLIGATIONS

Fitch expects the city's debt burden, 4.1% of fiscal 2016 market value, to remain moderate based on the city's near-term capital budget and modest debt issuance plans.

The city participates in state-administered defined benefit pension plans including the Arizona State Retirement System (ASRS), a cost-sharing multiple-employer plan and the Arizona Public Safety Personnel Retirement System (PSPRS) for public safety employees, an agent multiple-employer plan.

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

Under GASB 67 and 68, the city reports a fiscal 2015 ASRS net pension liability (NPL) of $77 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 $41.3 million and $17 million, respectively, for police and fire. Fiduciary assets cover 54.7% and 73.0% of total pension liabilities for police and fire, respectively, at the plan's 7.85% investment return assumption (approximately 48.8% and 65.1% for police and fire based on a lower 7% investment rate assumption).

The NPL of the plans represent a modest 1.2% of the city's fiscal 2015 market value. The unfunded OPEB liability is de minimus. The city is evaluating options to improve PSPRS plan funding levels, which is likely to elevate the already high contribution rate.

The city's fiscal 2014 carrying costs, including debt service, pension and OPEB contributions are high at 22.3% of fiscal 2014 governmental spending with an upward trajectory. However, the city has a history of strong budget management and flexibility to manage the increasing pension costs.

GROWING LOCAL ECONOMY

The region's residential construction virtually collapsed in 2008 and ensuing years. Fiscal 2016 market value of $14 billion reflects 17.9% compound annual growth from the fiscal 2014 trough, but represents just 76.5% of the city's fiscal 2009 market value peak. Fitch anticipates further tax base growth based on a variety of development projects underway or planned, as well as ongoing transportation improvements.

Peoria's September 2015 unemployment rate of 5.2% remains below the regional (5.5%) and state (6.4%) levels, but slightly higher than the national average (4.8%) for the same period. The city's median household income continues to exceed state and national levels.

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 less 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=995198

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=995198

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer, CFA, CPA
Director
+1-512-215-3733
Fitch Ratings, Inc.
111 Congress, 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, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer, CFA, CPA
Director
+1-512-215-3733
Fitch Ratings, Inc.
111 Congress, 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, +1-212-908-0278
sandro.scenga@fitchratings.com