Fitch Rates Pima County, AZ's COPS 'AA-'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned an 'AA-' rating to the following Pima County, AZ (the county) securities:

--$29.49 million certificates of participation (COPs) series 2016A;

--$15.195 million COPs, taxable series 2016B.

The COPs are scheduled for a negotiated sale the week of March 7. Proceeds from series A will finance wastewater system improvements and refund outstanding debt for savings. Series B will finance a new aeronautics facility.

In addition, Fitch affirms the following county ratings:

--$383.9 million outstanding GO bonds at 'AA';

--$139.35 million outstanding COPs at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The series 2016 and outstanding COPs are payable from payments from the county under a master lease agreement with a security interest in mostly essential assets. The lease is subject to annual appropriation and the trustee has the right to seize the assets in the event of less than full appropriation. GO bonds are payable from an unlimited ad valorem tax levied against all taxable property in the county.

KEY RATING DRIVERS

STABILIZED FINANCES: Modest improvement in fiscal 2015 reserves reflects strong revenue growth mirroring the expansionary economic cycle. Fitch expects that conservative budgeting and the county's commitment to reserve adequacy will continue to generate an improved financial cushion over the next several years.

TAX BASE BOTTOMS OUT: Fiscal 2016 tax base growth begins to reverse a trend of precipitous multi-year declines. Fitch expects further tax base gains based on development underway and the two year lag from market value.

LARGE, DIVERSE REGIONAL ECONOMY: The local economy remains a positive long-term credit consideration, with its diverse and stable elements providing a sound foundation.

MODERATE LONG-TERM LIABILITIES: Fitch anticipates the county's long-term liabilities to remain moderate based on a rapid debt amortization schedule and current issuance plans. Pension plan obligations are manageable.

RATING DISTINCTION ON COPs: The COP rating is one notch lower than the unlimited tax (ULT) rating. Although lease payments are subject to annual appropriation, Fitch believes the incentive to continue to appropriate is strong. The county is a regular COP issuer and most of the leased assets are essential to core governmental purposes.

RATING SENSITIVITIES

ADEQUATE FINANCIAL FLEXIBILITY: The ratings reflect Fitch's expectation that the county will be successful in its plans to replenish operating reserves to historical levels.

CREDIT PROFILE

Pima County is home to Tucson, Arizona's second largest city, with an approximate population of about 1 million.

IMPROVING FINANCES MIRROR ECONOMIC RECOVERY

Fiscal 2015 unrestricted reserves of $48.1 million represent 8.9% of spending, above the county's minimum reserve target of 5%. Fitch considers the target low given the demonstrated revenue volatility of the last economic cycle. The county increased its fiscal 2015 primary tax rate by 16.7%, which yielded about a 15.7% levy increase, to address expenditure growth coming out of reduced spending during the recession.

Property tax revenues contribute 62% of fiscal 2015 general fund revenues. Officials project fiscal year-end 2016 reserves to approximate $48.5 million (9.1% of spending). The county typically outperforms its conservative budget assumptions and

Fitch expects the county will take advantage of improving economic trends to rebuild reserves.

MANAGEABLE DEBT BURDEN

Series 2016A proceeds will fund waste water improvements and refund outstanding obligations for savings. The taxable series 2016B COPs will finance a new aeronautics facility to be leased to a private entity as part of an economic development initiative of the County.

Overall debt is moderate at 2.2% of fiscal 2016 market value. Fitch expects the county's debt burden to remain moderate based on a rapid amortization schedule and modest near term issuance plans. Fiscal 2017 issuance plans include routine GOs, $10 million in transportation bonds, and an estimated $45 million in sewer revenue obligations.

UNDERFUNDED STATE PENSION PLANS

The county participates in five state-sponsored pension programs for its retirees. The three most significant of these are the Arizona State Retirement System (ASRS), a cost-sharing multiple-employer plan; the Public Safety Personnel Retirement system (PSPRS), an agent multiple-employer (AME) plan; and the Corrections Officer Retirement Plan (CORP), also an AME plan.

Under GASB 67 and 68, the county reports a fiscal 2015 ASRS net pension liability (NPL) of $379 million, with fiduciary assets covering 69.5% of total pension liabilities at the plan's 8% investment return assumption (approximately 63% based on a lower 7% investment rate assumption). The NPL for the county's PSPRS plan is $185 million, with fiduciary assets covering 43.1% of total pension liabilities at the plan's 7.85% investment return assumption (approximately 39.4% based on a lower 7% investment rate assumption). The NPL for the county's CORP is $52 million, with fiduciary assets covering 48.2% of total pension liabilities at the plan's 7.85% investment return assumption (approximately 44.1% based on a lower 7% investment rate assumption).

The NPL of all county plans represent a modest 1.4% of the city's fiscal 2015 market value. The unfunded OPEB liability is de minimus. Fitch will continue to evaluate efforts at the state level to improve the sustainability of the PSPRS plan.

The county's fiscal 2015 carrying costs, including debt service, state pension and OPEB contributions are moderate at 17.2% of fiscal 2015 governmental spending.

LARGE, DIVERSE REGIONAL ECONOMY

The county's diverse economy features higher education, healthcare, government, technology, tourism and manufacturing as primary anchors. The top 10 taxpayers represent retail, healthcare, utility and mining sectors, comprising a modest 7.0% of total fiscal 2015 assessed valuation.

Expansion of the local economy is evidenced by 6% growth in fiscal 2016 market value and Fitch anticipates additional near term tax base growth based on regional trends and new development. Major southern Arizona employers include the University of Arizona, Raytheon Missile Systems, Davis-Monthan Air Force Base, state and local government, Wal-Mart Stores Inc., Tucson Unified School District, U.S. Customs & Border Protection/U.S. Border Patrol, Freeport-McMoRan Copper, and UA Healthcare.

An unemployment rate of 5% as of December 2015 is favorable to the state average of 5.5% for the same period. The county's housing market continues to strengthen as evidenced by a reported uptick in permits and housing starts. County wealth

levels are moderately below state and national averages.

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 the end of the first quarter of 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 Lumesis and the Zillow Group

Applicable Criteria

Exposure Draft: Incorporating Enhanced Recovery Prospects into US Local Tax-Supported Ratings (pub. 02 Feb 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=875108

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=999552

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999552

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, +1-512-215-3733
Director
Fitch Ratings, Inc.
111 Congress Ave., Suite 2010
Austin, Texas 78701
or
Secondary Analyst:
Leslie Cook, +1-212-908-0507
Analyst
or
Committee Chairperson:
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Rebecca Meyer, CFA, CPA, +1-512-215-3733
Director
Fitch Ratings, Inc.
111 Congress Ave., Suite 2010
Austin, Texas 78701
or
Secondary Analyst:
Leslie Cook, +1-212-908-0507
Analyst
or
Committee Chairperson:
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com