Fitch Affirms $23MM Avondale, AZ Muni Devel Corp Bonds at 'AA-'

NEW YORK--()--Fitch Ratings takes the following action on Avondale, AZ's Municipal Development Corporation (the corporation) bonds:

--$23.8 million series 2005 and 2006 excise tax revenue bonds affirmed at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The bonds are special obligations of the corporation, payable from lease payments made by the city of Avondale pursuant to an agreement between the corporation and the city. These payments are secured by a pledge of and first lien on the city's excise taxes, which include transaction privilege (sales) taxes, state-shared revenues (consisting of state-shared sales taxes and state revenue sharing), franchise taxes, permits and fees, and fines and forfeitures.

KEY RATING DRIVERS

SOUND COVERAGE: Debt service coverage provided by pledged revenues remains sound. Bondholders have a first lien on the pledged revenues and lease payments are not subject to appropriation.

RATING CEILING: The rating on the excise tax bonds is limited by the city's general credit quality to reflect the potential for a disruption in pledged revenue in the unlikely event of the city's bankruptcy.

GOOD FINANCIAL FLEXIBILITY: The city maintains a high level of financial cushion, as reflected in strong liquidity and reserve levels.

STRUGGLING HOUSING MARKET: Avondale was one of the hardest hit communities in the Phoenix MSA in terms of home valuation declines, housing construction slowdown, and foreclosures. While permit totals have shown modest improvement in recent months, they remain well below pre-recession levels.

AFFORDABLE DEBT BURDEN: Key debt ratios are moderate and the pace of debt retirement is above average. Required pension contributions are consistently funded and consume an affordable share of the budget.

RATING SENSITIVITIES:

FUND BALANCE DECLINE: Maintenance of operating reserves at or above the city's policy minimum is necessary for maintenance of the rating given offset inherent risk associated with economically sensitive sales tax revenues. Declines materially below this target would put downward pressure on the rating.

CREDIT PROFILE

IMPROVING COVERAGE

Pledged excise tax revenues have stabilized after declines from fiscal years 2008-2011 resulted in a cumulative 29% slide in receipts. Aggregate excise tax revenues have increased annually since fiscal 2012 and have almost reached pre-recession levels, aided by strong city sales tax receipts (which account for two-thirds of total excise taxes). The city's out-year projections, which Fitch views as reasonable, show additional improvement in this revenue stream, albeit at a moderated pace.

Debt service coverage provided by excise tax revenues continued to improve at a high 7.1x maximum annual debt service (MADS) in fiscal 2013. Estimated fiscal 2014 results show MADS coverage at 7.6x. Fitch expects coverage to remain high given the descending debt service schedule and the recent closure of the senior lien on the bonds.

AMPLE RESERVES & LIQUIDITY

Recovering revenues post-recession paired with expenditure controls have provided the city with excess revenues to fund pay-as-you-go capital outlays. In addition, the city has contributed to fund balance in fiscals 2012-2014, boosting unrestricted reserves from an already strong $26 million (56% of spending) in fiscal 2011 to $32 million (75% of spending) in unaudited fiscal 2014, well in excess of the city's 35% fund balance floor. Liquidity also remained ample, with fiscal year-end general fund cash and investments covering more than six months of operating costs.

BETTER THAN BUDGETED OPERATING RESULTS IN 2014

Gains in sales tax receipts coupled with significant under-spending of the budget in fiscal 2014 are expected to yield a $1 million operating surplus after transfers, handily exceeding a $5.4 million budgeted deficit. The gain is anticipated despite $7 million being transferred out of general fund for various one-time capital expenditures. The fiscal 2015 budget includes a similar draw-down of reserves of $8.7 million (17% of spending) for one-time uses, although a draw-down of that magnitude is unlikely given the city's history of conservative budgeting and positive operating results.

RESIDENTIAL SUBURB OF PHOENIX

Avondale is a primarily residential suburb located 15 miles west of Phoenix in Maricopa County. The current population estimate of 79,000 is more than double the 2000 census total, and this rapid population growth fed the housing construction boom that ultimately led to the collapse of the housing market beginning in 2008. Avondale has been one of the hardest hit communities, seeing a marked slowdown in home construction, plummeting real estate values, and elevated foreclosures. However, the effect on the budget from declining property values has been more muted as property taxes comprise a relatively small share (6% in fiscal 2013) of operating revenues.

The city's assessed valuation (AV) reflects this boom and bust cycle, appreciating 118% from fiscal years 2006 - 2009 to $704 million before falling to $315 million in fiscal 2014. Housing starts remain dramatically below pre-downturn figures. Fiscal 2015 marks the first year of growth since the recession at 11.3% ($351 million). While Fitch expects the improving housing market to continue to be reflected in AV increases, further AV growth will be muted given the AZ Property Tax Assessed Valuation Amendment that will limit AV growth to 5% plus new construction beginning in fiscal 2016.

Recent employment indicators are positive as gains in employment outpaced labor force growth and brought the unemployment rate down to 7.3% in July 2014 from 8.1% just 12 months prior, slightly lower than the state (7.4%) and above the national average (6.5%). Residents' per capita money income is roughly 80% of the state and nation and city's market value (MV) per capita is a low $40,000. The individual poverty rate has increased from 10.5% in 2006 to 15.5% in 2012.

MANAGEABLE LONG-TERM LIABILITIES

Annual required contributions for pension liabilities are consistently fully funded and affordable as a share of the annual budget. The city participates in two major pension plans: the Arizona State Retirement System, a cost-sharing multiple-employer plan, and the Public Safety Personnel Retirement System (PSPRS; police and fire), an agent multiple-employer plan. While the general employee plan is fairly well funded, Fitch considers the funded position of the PSPRS plan weak at an estimated 54% when adjusted to a more conservative 7% investment return assumption.

Debt ratios are moderate at $1,645 per capita and 3.74% of market value. The fixed-cost burden on the budget (debt service and pension ARC) is high at 29% of fiscal 2013 governmental expenditures. This concern is somewhat offset by the above-average amortization of tax-backed debt (61% retired in 10 years), which makes up the majority of the fixed-cost burden, along with the declining debt service schedule. The city has no other post-employment liability.

The capital plan for the city totals $374 million through fiscal 2024 and will be funded with a combination of available revenues (development fees, sales tax revenues, and operating transfers) and bond proceeds. The capital improvement plan shows a $25 million bond issuance in fiscal 2015 for local improvement districts, but management has indicated the borrowing may be pushed out another year. Total projected tax-supported debt for the 10 year period is manageable at $79 million.

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

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, and the National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=890274

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Contacts

Fitch Ratings
Primary Analyst
Leslie Ann Cook
Analyst
+1-212-908-0507
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
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
Elizabeth Fogerty, +1 212-908 0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Leslie Ann Cook
Analyst
+1-212-908-0507
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
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
Elizabeth Fogerty, +1 212-908 0526
elizabeth.fogerty@fitchratings.com