Fitch Upgrades Prescott Valley Bonds to 'AA+'; Outlook Revised to Stable

AUSTIN, Texas--()--Fitch Ratings upgrades the following bonds of the Prescott Valley Municipal Property Corporation, AZ (MPC):

--$12.9 million municipal facilities revenue refunding bonds, series 2011 to 'AA+' from 'AA-'.

Fitch also upgrades the Prescott Valley, AZ (the town) Issuer Default Rating (IDR) to 'AA+' from 'AA-'.

The Rating Outlook has been revised to Stable from Positive.

SECURITY
The MPC bonds are payable from rental payments made by the town to the corporation which are secured by a first lien on excise tax revenues collected by the town.

KEY RATING DRIVERS

The upgrade of Prescott Valley's IDR to 'AA+' from 'AA-' is based on the continuation of positive credit trends, with structural budget balance and post-recessionary reserve replenishment. The town has a low liability burden and significant control over revenues and spending. Fitch expects that the town will maintain solid financial resilience throughout a normal economic downturn. The rating on the MPC bonds is capped by the town's IDR; the upgrade of the bond rating to 'AA+' is based on the upgrade of the IDR.

Economic Resource Base
Prescott Valley, with a population of about 42,000, is located approximately 90 miles northwest of Phoenix, along State Routes 69 and 89A. The local economy includes industry, manufacturing, retail, trade and service sectors. The town's location along state transportation routes provides tourism traffic contributing to the town's sales tax base.

Revenue Framework: 'aaa' factor assessment
Fitch anticipates that Prescott Valley's revenues will continue to outpace U.S. GDP based on the town's participation in strong regional growth trends. The ability to raise the local sales tax rate is subject only to council approval, and therefore entirely within the town's independent legal control.

Expenditure Framework: 'aa' factor assessment
Fitch expects the town's spending to grow at or below the pace of revenues. Expenditure flexibility resides in the town's discretion with regard to labor costs and its moderate carrying cost profile, characterized by rapid amortization and limited debt plans.

Long-Term Liability Burden: 'aaa' factor assessment
Long-term liabilities are 9% of personal income. Fitch expects these to remain consistent with an 'aaa' assessment based on population and income trends relative to regional debt needs. Additionally, the town's net pension liability is modest. With the exception of police, employees participate in the town's defined contribution plan.

Operating Performance: 'aaa' factor assessment
Fitch believes that the town would cut costs and increase its tax rate to offset the impact of a moderate recession on its economically sensitive revenue base. The town is rebuilding reserves which had declined considerably during the Great Recession.

RATING SENSITIVITIES
Solid Financial Cushion: The rating is sensitive to Prescott Valley's maintenance of a solid financial cushion, as an additional tool to provide financial flexibility in light of above-average exposure to economically sensitive revenues.

CREDIT PROFILE

Prescott Valley experienced solid 3.8% average annual population growth from 23,500 in fiscal 2000 to over 42,000 today. A resurgence of residential construction is expected to continue to spur the town's retail and commercial sales tax base.

Revenue Framework
Economically sensitive local sales tax and intergovernmental revenues, including state shared revenues, provide about 90% of the town's general fund operating revenues.

Fitch expects population and economic expansion underway in Prescott Valley to drive local sales tax revenue through the medium term horizon at a pace that continues to exceed the rate of U.S. GDP. Growth prospects for the town's share of state income and sales tax revenues are similarly strong based on state-wide trends.

As a home rule town, Prescott Valley has the unlimited ability to adjust its local sales tax rate. The town increased its sales tax rate by 1/2 a cent to 2.83% effective Jan. 1, 2016. Local sales tax rates in the state range from .25% to 5.3%, averaging 2.1% in 2016.

Expenditure Framework
The town's general fund budget supports police, parks, roads, recreation, and library services. Fire service is provided by the Yavapai Fire District.

Fitch expects the town's spending trajectory to remain aligned with or below revenue growth based on expected population and revenue growth trends.

Prescott Valley participates in a meet-and-confer process with police employees. However, the meet and confer process defers ultimate decision-making authority for work rules and pay to the town. The town's moderate carrying costs, 13.4% of fiscal 2015 spending (primarily in the form of debt service), are likely to decline as virtually all debt is scheduled for repayment within 10 years and the town has limited debt issuance plans. The town's pension and other post-employment benefit contributions to the Public Safety Personnel Retirement System (PSPRS-Police) are likely to increase over time, but represent a modest portion of overall carrying costs.

Long-Term Liability Burden
The town's long-term liability burden, 9% of estimated personal income, is expected to remain moderate given the area's limited expected capital needs and the town's modest unfunded pension liabilities. The town's budget identifies sales tax revenues and impact fees as the primary funding sources for its capital program which is largely funded on a pay-as-you-go basis.

The town participates in PSPRS for police employees. Under GASB 67 and 68, the town reports a net pension liability of $6.8 million, with fiduciary assets covering 66% of total plan liabilities at the plan's 7.85% investment rate assumption (approximately 60.5%, for an $8.7 million unfunded liability, at a lower 7% investment rate assumption). The NPL is relatively modest in relation to the town's net overall debt ($99.5 million). Proposed legislation provides modest PSPRS reforms applicable to new hires and eliminates the automatic cost of living adjustments currently in place which Fitch anticipates could, if implemented, improve long-term plan funded ratios.

Operating Performance
Fitch expects the town to maintain solid financial resilience through a moderate economic downturn given its sales tax rate capacity, considerable expenditure flexibility, and sound reserve position.

Fiscal 2015 unrestricted reserves of $10.5 million represent a high 39.5% of spending. Prescott Valley expects to increase annual sales tax revenues by $3 million through its 1/2 of 1% rate hike effective in January 2016. The increased revenues will be used to fund street maintenance ($2 million) and police services ($1 million). The town also expects to improve its financial cushion during fiscal 2016 and 2017 taking advantage of growth associated with the economic expansion underway. The assessment reflects Fitch's expectation that the town will maintain its unassigned reserves at or above its 25% of revenue minimum target.

Operating performance typically outperforms the town's conservative budgeting and the town rebalances operations and replenishes reserves during expansionary phases of the economy.

Dedicated Revenue Stream Details
The excise tax revenues pledged to the bonds grew by 4.9% on average between fiscal 2004 and 2014. An expanding population and economy are expected to spur ongoing pledged revenue growth consistent with historical trends and in excess of U.S. GDP.

Pledged revenues consist of local sales tax revenues, state shared income and sales taxes, licenses and permits, and fines and forfeitures. Legal provisions provide adequate bondholder protections. They include an additional bonds test (ABT) of 2.5x maximum annual debt service (MADS; using an historical test), for bonds outstanding plus bonds to be issued.

To evaluate the sensitivity of the dedicated revenue stream to cyclical decline, Fitch considers both revenue sensitivity results (using a 1% decline in U.S. GDP scenario) and the largest decline in revenues over the period covered by the revenue sensitivity analysis. Fitch's analytical sensitivity tool (FAST) generates a 3% scenario decline in pledged revenues. The largest actual cumulative decline in historical revenues is a steep 25.3% decline from fiscal 2007-2011. The pledged revenues have been sensitive to economic downturns as reflected in the historical analysis.

Assuming issuance up to the 2.5x ABT, well below actual current coverage, debt service would be covered with a 60% drop in revenues, 20x the scenario results and 2.4x the largest actual revenue decline in the review period. Fitch believes that these results are consistent with an 'AA+' rating that can withstand a normal economic downturn (noting that the fiscal 2007-2011 performance reflected a more severe economic stress). A recurrence of that severe revenue volatility, while not presently anticipated, could put negative pressure on the rating.

Fiscal 2015 pledged revenues of $27.2 million were up for the fourth consecutive year and cover MADS (2023) a very high 7.3x. The pledged revenues comprise the majority of general fund revenues and therefore Fitch does not anticipate that the town will issue to the ABT.

The special tax bond rating is limited by the town of Prescott Valley's 'AA+' IDR as Fitch does not believe that the security insulates the bonds from the general credit of the issuer. Fitch does not view the pledged excise tax revenues as special revenues under section 902(2)(B) of the bankruptcy code, which defines 'special excise taxes imposed on particular activities or transactions' as special revenues.

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

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Applicable Criteria
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478

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Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer
Director
+1-512-215-3733
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Steve Murray
Senior Director
+1-512-215-3729
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer
Director
+1-512-215-3733
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Steve Murray
Senior Director
+1-512-215-3729
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com