AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings on the following Peoria, AZ and Peoria, AZ improvement district's bonds.
--$142.9 million in outstanding Peoria general obligation (GO) bonds at 'AA+';
--$2.3 million in District No. 0601 (Park West), Peoria improvement bonds, series 2007 at 'AA'.
The Rating Outlook is Stable.
The GO bonds are payable from an unlimited ad valorem tax levied against all taxable property in the city. The improvement bonds issued by the district (approximately 74 acres in the western portion of the city) are secured by assessments levied against benefitted properties within the boundaries of the district. State law requires the city to make up any assessment delinquencies prior to scheduled debt service payments from the city's general fund.
KEY RATING DRIVERS
SOUND FINANCIAL PROFILE: The city's strong financial practices are a credit-strength. Although robust general fund balances are reduced from prerecession highs due to the application of reserves for capital and one-time expenditures, they remain consistent with the city's financial policies.
IMPROVING ECONOMIC PROSPECTS: A trend of favorable sales tax receipts, recovery of the housing market and ongoing development position the city for near-term growth. However, the city's primary revenue sources - local sales tax and state shared revenues - remain susceptible to economic cyclicality.
MANAGEABLE DEBT BURDEN: The city's overall per capita debt is moderate but above average in relation to market value, reflecting a significant loss of market value over the past five years. Fitch anticipates the debt burden on the budget to remain affordable, based on moderate issuance plans included in the city's 10-year capital plan.
BACKUP PLEDGE BOLSTERS RATING:
The improvement bonds are an affordable contingent liability of the city's general fund in the unlikely event of default by property owners. Pledged revenues provide adequate debt service coverage on the improvement district bonds which Fitch expects to increase based on parity bonds maturing.
ABOVE-AVERAGE ECONOMIC METRICS: Peoria's median household income is above average and unemployment is low, reflecting the city's participation in the broad and expanding Phoenix-area economy.
FINANCIAL FLEXIBILITY: The rating is sensitive to shifts in the city's strong financial management practices.
Peoria is situated northwest of Phoenix with a population of about 164,104, representing a 50% gain since the year 2000. The city-owned Peoria Sports Complex hosts the Seattle Mariners and San Diego Padres major league baseball spring training and minor league activities. These facilities anchor the city's growing entertainment district.
Improvement district No. 0601 is located one mile northwest of the University of Phoenix stadium covering about 74.2 assessable acres, including a 56-acre mixed-use project, with 360,000 square feet (SF) of retail space, 250 multi-family residential units, 70,000 SF of office space and a 2.5 acre site for a possible hotel. The district includes several retailers, restaurants, and an apartment complex.
Peoria entered the recession with sizable reserves exceeding 70% of annual spending levels. Officials prudently responded to deteriorating economic conditions with numerous spending adjustments beginning in fiscal 2009, including eliminated positions, salary and vacant position freezes, a retirement incentive program, and operational consolidations. Management's quick response to revenue weakness enabled the city to avoid significant service curtailments, while maintaining a strong financial position.
Peoria completed fiscal 2014 favorable to budget, reflecting the city's alignment of costs with strengthening revenue trends. Fiscal 2014 unrestricted general funds of $57.7 million represent a strong 55.4% of spending. The city projects similar reserves for fiscal 2015, in excess of the 35% policy target. Healthy reserves provide an important mitigant to the city's reliance on economically sensitive revenues for operations.
ECONOMICALLY SENSITIVE REVENUES TREND UPWARD
Local sales tax and state shared revenues account for nearly three-quarters of the city's operating revenues, with property taxes contributing less than 5%. Benefitting from strong construction and retail activity, sales tax revenues increased for the fourth consecutive year to $39.5 million, exceeding the city's fiscal 2007 prerecession peak of $39.1 million. The city projects ongoing near-term sales tax growth.
General fund state shared revenues of $36.4 million represent 95.5% of their fiscal 2008 peak, reflecting state-wide economic recovery and a two-year lag in state income tax distributions to the city. The city conservatively projects stable-to-modest growth in state shared revenues in the near term.
MANAGEABLE DEBT; GROWING DEBT CAPACITY
The city's overall debt is moderate at about $3,246 per capita, but somewhat elevated at 5.3% of market value. Debt capacity is ample to accommodate near-term needs, based on fiscal 2015 secondary assessed valuation (SAV). The city realized its first SAV gain in five years with a better than 9% gain in fiscal 2015. Development underway and in various stages of planning signal further SAV growth, which will help maintain debt capacity.
The fiscal 2015 10-year capital improvement plan totals $598 million, and anticipates the potential for moderate GO and MDA revenue bond issuance in the next several years (depending on capital project priorities and project readiness). Debt amortization is rapid, with roughly 69.4% of GO principal scheduled for retirement within 10 years.
MANAGEABLE IMPROVEMENT DISTRICT DEBT
Peoria improvement district no. 0601 has $2.3 million of its original $4.95 million in debt outstanding. Pledged revenues comprise fixed assessments levied against benefitted properties within the boundaries of the district. Pledged revenue coverage of fiscal 2014 debt service on the outstanding improvement district no. 0601 parity improvement bonds was a sound 2.65x.
Four of the city's five districts's bonds matured in Jan. 2013; the remaining debt for no. 0601 extends to 2022. Fitch expects this strong coverage to continue going forward based on relatively flat debt service through 2022 and the lack of debt issuance plans. Fitch believes that the city's contingent obligation with regard to the district's bonds represents a manageable liability in relation to its substantial resources. The city reports no delinquent assessments.
RISING PENSION CONTRIBUTIONS MAY PRESSURE MODERATE CARRYING COSTS
The city participates in several state-sponsored pension programs, the two largest being the Arizona State Retirement System (ASRS), a cost-sharing multiple employer defined benefit plan and the Arizona Public Safety Personnel Retirement System (PSPRS) for public safety employees, an agent multiple-employer defined benefit plans.
The ASRS funded ratio is reported at 75.4%; Fitch estimates it at 68% and the combined PSPRS program funding level is estimated at 66% as of June 30, 2013 using a 7% investment rate assumption. The city's planning forecasts realistically assume rising pension contribution rates over the next couple years, including election of a one-time catch-up adjustment in fiscal 2016 pursuant to a change in state funding levels. The city is evaluating options to improve PSPRS plan funding levels.
The city's carrying costs, including debt service, pension and other post-employment benefit contributions are high at 25% of governmental spending with an upward trajectory. However, the city has a history of strong budget management and flexibility to manage the increasing pension costs.
GROWING LOCAL ECONOMY
The region's residential construction virtually collapsed in 2008 and ensuing years, as evidenced by fiscal 2014 assessed value at only 53% of its fiscal 2009 peak. Strong 9.3% assessed value in fiscal 2015 reflects new development and improvements and growth in the residential housing market. Fitch anticipates further tax base growth based on a variety of development projects underway or planned, as well ongoing transportation improvements.
Local unemployment rates remain well below regional, state and national averages. The city's February 2015 rate of 4.8% continues to trend well below state and U.S. averages. The city's median household income continues to exceed state and national levels by 16.9%.
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, 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
U.S. Local Government Tax-Supported Rating Criteria