AUSTIN--(BUSINESS WIRE)--Fitch Ratings upgrades the following obligations of Gilbert, AZ to 'AAA' from 'AA+':
--$28.0 million outstanding Municipal Property Corporation (MPC) revenue bonds, series 2014;
--$37 million subordinate lien pledged revenue obligations, series 2015.
Fitch also upgrades the town of Gilbert, AZ Long-Term Issuer Default Rating (IDR) to 'AAA' from 'AA+'.
The Rating Outlook is Stable.
SECURITY
The MPC excise tax revenue bonds are payable from rental payments made by the town to the corporation, secured by a pledge of the town's excise taxes, including state shared income and sales taxes. Rental and installment payments are absolute and unconditional and not subject to annual appropriation. The series 2015 subordinate excise tax revenue obligations are payable from rental and installment payments made by the town to the trustee from excise taxes, including the state shared revenues, subordinate to outstanding and any additional senior (MPC) excise tax revenue bonds.
KEY RATING DRIVERS
The upgrade of the town's Long-Term IDR to 'AAA' from 'AA+' results from positive credit trends and application of Fitch's revised criteria for U.S. state and local governments, released on April 18, 2016, particularly with respect to a more focused consideration of the local economy and its impact on revenue growth prospects. The rating upgrade to 'AAA' from 'AA+' also recognizes Gilbert's continuing strong operating performance, low liability burden and solid expenditure flexibility. The 'AAA' excise tax revenue (ETRO) ratings reflect an ample financial cushion, sound additional bonds test and expectation for continued strong growth in the pledged revenue stream.
Economic Resource Base
Gilbert is located about 20 miles southeast of Phoenix with a planning area of 73 square miles. Population grew from approximately 30,000 in 1990 to an estimated 256,200 in 2016. The town's median household income is a strong 152% of the U.S. average, reflecting high levels of educational attainment.
Revenue Framework: 'aaa' factor assessment
Revenue growth prospects are strong, consistent with historical trends exceeding those of U.S. economic performance. Gilbert has the independent legal ability to raise its local sales tax rate without external approval.
Expenditure Framework: 'aa' factor assessment
The town's natural pace of spending is expected to grow in line with revenues. Gilbert's expenditure flexibility is derived from its discretion over workforce rules and compensation. Moderate carrying costs incorporate a rapid principal amortization rate and do not pressure the town's operating budget.
Long-Term Liability Burden: 'aaa' factor assessment
Long-term liabilities are about 5% of estimated personal income. Fitch expects the long-term liability burden to remain low based on regional growth to support new issuances, and the town's plans to accelerate pay-off of one of its pension liabilities.
Operating Performance: 'aaa' factor assessment
Fitch expects the town to demonstrate strong financial resilience during a moderate economic downturn based on its ample revenue-raising capacity and solid expenditure flexibility, supplemented by its currently robust financial cushion.
RATING SENSITIVITIES
Financial Flexibility: The 'AAA' rating is sensitive to shifts in fundamental credit characteristics, most notably the town's ongoing strong financial flexibility and solid economic growth.
Coverage Cushion: The rating is sensitive to maintenance of a strong coverage cushion.
CREDIT PROFILE
Gilbert has transitioned over the past 20 years from an agricultural to a fast-growing suburban economy with a strong commercial and industrial presence. The town is home to over 20 business and industrial parks, contributing to its expanding employment base. Major employers represent education, healthcare, government, construction, supermarkets, high technology, retail distribution/warehousing, and aerospace.
Gilbert is about two-thirds built-out by population with ongoing residential growth underway. Commercial development includes the 250-acre Rivulon development, consisting of class A office space, retail and hotels.
Revenue Framework
The town's local sales tax or transaction privilege tax (TPT) collections contributed 51% of fiscal 2015 general fund revenues, followed by state shared revenues (33%).
Gilbert's general fund revenue compound annual growth rate (CAGR) of 6.3% over the 10 years ending in fiscal 2014 exceeds the pace of U.S. economic performance as measured by U.S. GDP. Growth prospects remain strong through the medium term based on regional trends and development currently underway.
Gilbert retains the independent legal capacity to change its own TPT rate, currently at 1.5% for most sales tax categories, without respect to limit.
Expenditure Framework
Similarly to other Arizona municipalities, the town's public safety expenditures absorb just over 50% of its general fund operating budget.
Gilbert's natural pace of spending for public safety and its other operating costs are expected to grow in line with the town's revenues, generally mirroring growth in the economy.
Gilbert manages its workforce costs without collective bargaining or other labor agreement or process constraints. The town's carrying costs represented a moderate 20% of spending in fiscal 2015, driven primarily by debt service at 16% of spending. The potential for increased carrying costs is dependent on the pace of new debt issuance in relation to the town's overall operating budget. The town's rapid 10-year principal amortization rate of 80% provides a measure of flexibility for its plans to accelerate pension contributions over the next five years to pay down its Public Safety Personnel Retirement System (PSPRS) net pension liabilities (NPLs).
Long-Term Liability Burden
Gilbert's long-term liability burden ($625 million) is a low 5% of estimated personal income reflecting the town's practice of pay-as-you-go capital funding. Debt of $507 million is comprised in roughly equal portions of direct and overlapping components. During fiscal 2017, the town plans to issue $70 million of general obligation (GO) bonds to fund street projects and to potentially cash fund both the design costs of a public safety facility and construction of a parking structure. Gilbert's fiscal 2018 plans include a potential water resource bond issuance and additional GO authorization to fund public safety and road projects. Fitch expects the town's long-term liability burden to remain low based on moderate area debt needs, an expanding economy and the town's management of its unfunded pension liabilities.
Under GASB 67 and 68, the town reports a fiscal 2015 Arizona State Retirement System (ASRS) NPL of $51 million (governmental portion), with fiduciary assets covering 69% 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 town's PSPRS police and fire plans are $30 million and $8 million, respectively, with fiduciary assets covering 65% of total police plan and 85% of fire plan pension liabilities at the plan's 7.85% investment return assumption (approximately 59% and 78% based on a lower 7% investment rate assumption). Notably, the town's fiscal 2017 budget included annual contributions in excess of the actuarially determined contribution to achieve pay-off of the unfunded liabilities within an estimated five-year planning horizon. Additionally, proposed legislation provides modest PSPRS reforms applicable to new hires and eliminates the automatic cost of living adjustments currently in place.
Operating Performance
Fitch expects Gilbert to demonstrate an exceptionally strong level of financial resilience throughout the economic cycle based on its ample revenue raising capacity and solid expenditure flexibility, supplemented by its sizable financial cushion.
Gilbert's policies provide funding for infrastructure repair and replacement fund needs. The town rebuilds its reserves during periods of economic expansion. Pension contributions are consistently made at the actuarially determined levels and the town plans to pay off its PSPRS NPL within five years through accelerated contributions in excess of the actuarially required level.
Excise Tax Revenue Bonds and Obligations
Pledged revenues include TPT revenues, state shared revenues (reflecting a two-year distribution lag), business license revenues, franchise fees, parks and recreation fees and permits, and fines and forfeitures. Pledged revenues reflect a strong 7.3% CAGR from fiscal 2004 through 2014 and solid 7% growth in fiscal 2015. Growth prospects remain strong.
To evaluate the sensitivity of the dedicated revenue stream to cyclical decline, Fitch considers both revenue sensitivity results (using a 1% decline in national GDP scenario) and the largest decline in revenues over the period covered by the revenue sensitivity analysis. Based on the town's 15-year pledged revenue history, Fitch's analytical sensitivity tool (FAST) generates a 1% scenario decline in pledged revenues. The largest actual cumulative decline in historical revenues is a 17% decline from fiscal 2009-2011, reflecting sensitivity of TPT and state shared revenues to the economic downturn.
Assuming issuance up to the 3.0x ABT, well below actual current coverage, senior debt service would be covered with a 67% drop in revenues, 67x the scenario results and 3.9x the largest actual revenue decline in the review period. Assuming subordinate lien issuance up to the 2.0x ABT, all-in debt service would be covered with a 50% decline in revenues, 50x the scenario results and 2.9x the largest actual revenue decline in the review period. Fitch believes that this level of resilience is consistent with an 'AAA' rating, noting that actual coverage is expected to remain significantly higher.
Fiscal 2015 pledged revenues of $125.7 million are up for the fourth consecutive year and cover senior and all-in (including subordinate obligations) maximum annual debt service (MADS; 2018) a high 8.2x and 7.1x respectively. Fitch expects the coverage cushion to remain high based on strong pledged revenue growth prospects, the lack of issuance plans, and the town's reliance on excise tax and state shared revenue collections to support operations.
Issuing Entity Exposure
The dedicated tax bond rating is limited by the town of Gilbert's IDR ('AAA') as Fitch does not believe that the security insulates the bonds from the general credit of the issuer.
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/site/re/879478
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