Fitch Rates Tucson, AZ's Sr. Lien Highway User Revs 'AA'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned an 'AA' rating to the following bonds of Tucson, Arizona:

--$28.2 million senior lien street and highway user revenue refunding bonds, series 2015.

The bonds are scheduled for a negotiated sale on or around June 10. Proceeds will be used to refund outstanding street and highway user revenue bonds for interest savings.

In addition, Fitch affirms the following ratings:

--$61.8 million in outstanding senior lien street and highway user revenue bonds (pre-refunding) at 'AA';

--$35.3 million in outstanding junior lien street and highway user revenue bonds (pre-refunding) at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The senior lien bonds are payable from a priority lien on highway user taxes and other taxes, fees and charges collected by the state and returned to the city for street and highway purposes. The junior lien bonds are payable from a subordinate lien on the same pledged revenue stream.

KEY RATING DRIVERS

REVENUE GROWTH, SOUND COVERAGE: Pledged revenues are on track to record a third consecutive year of gains following large recessionary declines. Debt service coverage remained solid despite a downturn in revenues and state re-direction of highway monies during the recession.

NO FURTHER BORROWINGS PLANNED: The city has no remaining highway user revenue bond authorization, and no plans to return to voters in the near term for additional authorization.

ADDITIONAL STREET FUNDING AUTHORIZED: Tucson voters in 2012 approved a $100 million general obligation (GO) bond authorization for street projects, eliminating the need for near to medium term leveraging of highway user revenues.

RATING NOT CAPPED BY GO: Fitch believes pledged taxes fall within the definition of 'special revenues' under Chapter 9 of the U.S. Bankruptcy Code; therefore, the rating is not capped by the city's GO rating.

RATING SENSITIVITIES

REVERSAL OF REVENUE GAINS: Future economic weakness in Arizona likely would lead to another decline in pledged revenues, which would pressure debt service coverage on Tucson's highway revenue bonds. Such weakness also may prompt the Arizona legislature to resume its practice of diverting highway revenues for related state program needs in response to state budgetary challenges. This practice had previously reduced the pledged revenue stream.

CREDIT PROFILE

Tucson is located in southern Arizona and is the state's second largest city with an estimated population of 529,000.

SOUND DEBT SERVICE COVERAGE

Coverage remains healthy despite a decline in pledged revenues from fiscal 2008-2012, due to weak economic conditions that impacted gasoline tax and motor vehicle registration and license fees. Revenues also were affected by the state legislature's periodic re-allocation of monies into and out of the Arizona Highway User Revenue Fund (from which funds are distributed to counties, cities and towns for street-related projects).

Another factor that has affected Tucson's highway user revenue stream is the population and point of origin consumption-driven distribution formula for these revenues. Tucson has experienced less rapid population growth than other Arizona cities in recent years, which contributed to the drop in revenue collections for the city. The city's growth likely will be moderate going forward as well.

Fiscal 2014 pledged revenues of $41.3 million were up 2% from the prior year and followed a solid 9% increase in fiscal 2013. Using these audited fiscal 2014 revenues, maximum annual debt service (MADS) coverage on senior lien bonds is healthy at 3.4x, and MADS coverage on all highway user revenue bonds is also solid at 2.4x. Coverage climbs moderately higher using projected fiscal 2015 pledged revenues of $42.6 million (a 3.3% increase from fiscal 2014).

ADDITIONAL STREET FUNDING APPROVED

Tucson has no street and highway user revenue bonding authority remaining, and the city has no immediate plans to seek additional voter authorization. Tucson voters in 2012 approved $100 million in GO bond authorization for street projects. Management reports that this funding source eliminates the need for any further highway user revenue leveraging at least for the foreseeable future. Surplus highway user revenues after debt service finance ongoing maintenance and minor capital. The pace of debt retirement remains rapid--all highway user bonds are amortized by 2022.

PLEDGED REVENUE COMPONENTS

Highway user tax revenues consist of motor vehicle fuel taxes, motor vehicle registration fees, motor vehicle licenses taxes, motor carrier fees, motor vehicle operator's license fees, and other miscellaneous fees and revenues. Highway user tax revenues are collected by the state and deposited into the state highway user fund until distributed.

Arizona cities and towns receive 27.5% of highway user tax distributions. One-half is distributed to cities and towns on the basis of population in proportion to all cities and towns in the state. The remaining one-half is distributed, first, on the basis of county origin of sales of motor vehicle fuels within the state, and second, to cities and counties on the basis of population in proportion to all cities and towns in the county.

Arizona cities with populations exceeding 300,000 (including Tucson) also receive a 3% allocation for certain street and highway purposes. Due to improving economic conditions in Arizona, the legislature has offset diversions of highway user revenues for other programs in fiscal 2014 and fiscal 2015 with additional revenues, making the budgetary adjustments revenue neutral. Fitch's expectation is that any future state diversions would not be large enough to materially affect coverage on Tucson's highway user revenue bonds.

SATISFACTORY LEGAL PROVISIONS

Legal provisions provide adequate bondholder protections. They include an additional bonds test of 2.0x MADS for senior lien bonds and a 1.5x MADS ABT for junior lien bonds. Following the required deposits for debt service payments, surplus highway user revenues are used by the city for capital projects and for staffing, maintenance and contractual expenses related to streets and highways.

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=985029

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Contacts

Fitch Ratings
Primary Analyst
Steve Murray
Senior Director
+1-512-215-3729
Fitch Ratings, Inc.
111 Congress Ave., Suite 2010
Austin, TX 78701
or
Secondary Analyst
Andrew Ward
Director
+1-415-732-5617
or
Committee Chairperson
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Steve Murray
Senior Director
+1-512-215-3729
Fitch Ratings, Inc.
111 Congress Ave., Suite 2010
Austin, TX 78701
or
Secondary Analyst
Andrew Ward
Director
+1-415-732-5617
or
Committee Chairperson
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com