AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings rates the City of Tucson, Arizona's (the city) general obligation bonds (GOs) and certificates of participation (COPs) as follows:
--$11.66 million GO refunding bonds, tax-exempt series 2012A at 'AA';
--$35.08 million GO refunding bonds, federally taxable/State of Arizona tax-exempt series 2012B at 'AA';
--$31.8 million COPs, refunding series 2012 at 'AA-'.
All three series are scheduled for a negotiated sale the week of March 26. Proceeds from each offering will be used to refund outstanding GOs and COPs for annual interest savings.
In addition, Fitch affirms the following ratings:
--$222.4 million GO bonds outstanding (pre-refunding) at 'AA';
--$262.2 million COPs outstanding (pre-refunding) at 'AA-'.
The Rating Outlook is Stable.
The GO bonds are secured by an unlimited ad valorem tax levied against all taxable property in the city. The COPs are secured by lease payments from the city to the trustee, subject to annual appropriation by the city.
KEY RATING DRIVERS
IMPROVED FINANCIAL PROFILE: The city's financial profile showed improvement with fiscal 2011 results, as spending reductions and revenue enhancements closed a budget gap and contributed to positive results and an increase in reserves.
BUDGET CHALLENGES REMAIN: Financial challenges remain due to ongoing pressure on economically sensitive revenue sources, increasing outlays for employee benefits, and prior use of one-time budget solutions; operating liquidity remains very weak and continues to be a credit concern.
MANAGEABLE DEBT BURDEN: Debt levels remain affordable and the pace of GO and COP debt repayment is well above average; the five-year capital improvement plan (CIP) is little changed from previous plans and remains sizable at about $1 billion.
LARGE, DIVERSE ECONOMY: Despite higher unemployment and a weaker housing profile, Tucson's economy remains diverse and relatively stable, with a good mix of higher education, military and services employment.
Financial Picture Stabilizing
The general fund reported better than expected results in both fiscal 2010 and 2011, increasing reserves by more than $20 million over this period. These results were generated from improved revenue totals and continued cost cutting efforts, and followed combined net losses for fiscal 2009 and 2010 of more than $40 million. The unrestricted general fund balance (committed, assigned and unassigned) totaled $52.5 million at fiscal 2011 year-end, or more than 12% of spending. Liquidity remains weak and is a credit concern; general fund cash and investments at June 30, 2011 totaled only $597,000, down from $1.4 million the prior year and a recent peak of $87.9 million in fiscal 2007.
Tucson relies heavily on economically sensitive sales tax and state shared revenues for operations, and the weakness in these revenue sources since the recession began in 2007 has been a primary factor behind the city's financial pressures. Local sales tax revenues typically comprise roughly 40% of general fund revenues, and they slid by more than $30 million (or 17%) from fiscal 2008-2011. State shared revenues (state sales and income tax), which comprise roughly 30% of general fund revenues, registered a steep 26% decline over this same period.
Local sales tax receipts came in better than expected during fiscal 2010 by roughly $6 million and posted a modest 1% gain in fiscal 2011. Likewise, state shared sales tax revenue climbed nearly 5% in fiscal 2011. This improvement, along with recurring budget adjustments, offset continued weakness in state shared income tax revenue (down nearly 25% in fiscal 2011) and contributed to the improved operating results.
The city has responded on a variety of fronts to the revenue losses, including the elimination of nearly 1,100 positions since fiscal 2009, salary freezes, benefit adjustments, city-wide department spending cuts, and various revenue enhancement measures. Consequently, general fund spending has declined steadily over the past three fiscal years, dropping by more than $80 million (18%) to $364.4 million in fiscal 2011. The fiscal 2012 budget continued with these efforts, with a nearly 5% reduction in general fund outlays, 475 positions eliminated, furlough days, and continued deferral of minor capital projects. The city also has utilized several one-time measures to close budget gaps in recent years, including annual debt restructurings. While another $9.5 million debt restructuring was included in the fiscal 2012 budget, management reports that no restructuring will be necessary.
The current fiscal 2012 projection is for both local and state shared sales tax revenues to register moderate 2%-3% gains, and for state share income tax revenues to fall another 15% (state income tax revenues are based on economic activity for two years prior). Operating reserve levels are expected to remain essentially unchanged as increased benefits and mass transit outlays are offsetting the revenue gains and other spending reductions. Fitch believes this projection is reasonable given recent revenue trends. Fitch will continue to monitor the city's efforts to restore structural budgetary balance and notes that any further deterioration in the city's overall financial profile, a prolonged delay in restoration of reserves, and/or reliance on one-time revenues and debt restructurings would not be consistent with the current rating level and likely would result in rating action.
Debt Moderate, Pension Funding Weak
Including street and highway user revenue debt and COPs, both direct and overall debt levels of the city are moderate. In addition, amortization of GO and COP debt is well above average at 80% retired in 10 years. The city's $1 billion five-year CIP is consistent with previous plans, with major spending categories including transportation, parks and recreation, general services, public safety, and water. These refunding GO bonds will refinance $42.9 million of outstanding GO bonds for annual savings, while the refunding COPs will refinance $31.4 million in outstanding COPs for savings. The debt repayment schedule is not extended with either refunding.
The city maintains a single-employer pension program for non-uniformed personnel, and the city and uniformed staff contribute to a state-sponsored public safety retirement program. The city's plan had a funded ratio of 67% as of June 30, 2011, and using a more conservative 7% investment rate assumption the funding level drops to a weak 62%. The public safety retirement plan was roughly 63% funded for both police and fire as of June 30, 2010; the funding levels drop to 54% using a 7% investment assumption. Fitch notes the weak funding levels for both programs and recent and anticipated contribution increases, and cautions that increasing benefit outlays likely will pressure operations for some time. The city contributes to post-employment medical benefits on either a percentage of premium basis or a flat-rate basis (depending on certain retirement program parameters), and finances these costs on a pay-go basis.
Broad, Diverse Regional Economy
Tucson is the second most populous city in Arizona, with a 2010 census population of 520,116. At more than 50% built-out, growth of the city's residential base has slowed from its peak in 2001, when it recorded 3,800 single-family home permits; only 390 new housing permits were issued in 2010. While the city reports more than 600 housing permits issued through the third quarter of 2011, the Tucson housing market is still weak and likely will be a drag on economic growth over the near term.
Services, military, and government are the area's prominent employment sectors. The military presence in the Tucson area is substantial with U.S. Army Intelligence Center, Fort Huachuca, and Davis-Monthan Air Force Base. Public sector employment is led by state and local government agencies and public and higher education, including the University of Arizona main campus, which employs nearly 12,000. Raytheon Missile Systems is the largest private employer in Tucson, with a staff of 11,500. Retail trade, manufacturing, and tourism also are important components of the local economy.
Unemployment levels historically have been below those of the state and nation, but since the recession the local rate has been at or below the state average and higher than the national average. The December 2011 rate of 8.7% was down from 9.3% recorded in the same period last year, and was consistent with the state average (8.8%) and higher than the U.S. average (8.3%) for the month. Also, local personal income levels traditionally have trailed those of the state and nation.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, and the National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria