AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA' rating to the following obligations of Casa Grande, Arizona:
--$16 million general obligation (GO) bonds, series 2016A;
--$20 million GO refunding bonds, series 2016B.
The bonds are scheduled for a negotiated sale the week of May 30, 2016. Series 2016A proceeds will be used to finance various infrastructure improvements, and series 2016B proceeds will refund a portion of the city's outstanding tax supported debt for interest savings.
In addition, Fitch affirms the following ratings:
--$22.7 million GO bonds at 'AA';
--$23.9 million excise tax revenue bonds at 'AA';
--The city's Issuer Default Rating (IDR) at 'AA'.
The Rating Outlook is Stable.
The GO bonds are payable from an unlimited ad valorem tax levied upon all taxable property in the city. Excise tax revenue bonds are backed by a first lien on the city's excise tax revenues.
KEY RATING DRIVERS
Casa Grande weathered Arizona's severe housing crisis and recession well, due in no small part to conservative budgeting policies and practices (e.g. a minimum general fund balance policy of 50% of spending). Economic prospects have brightened since the recession, as evidenced by gains in both taxable values and sales and excise tax revenues. The city's reliance on economically sensitive revenues for operations is a vulnerability mitigated by the aforementioned management practices.
Economic Resource Base
Casa Grande is a regional retail/commercial hub located approximately halfway between Phoenix and Tucson. The city has a population of roughly 50,000.
Revenue Framework: 'aaa' factor assessment
Growth prospects for revenue appear positive, based on post-recession increases in economically sensitive revenues. Property tax revenue growth from existing properties is limited by statute, but the maximum local sales tax rate is unlimited and any increase requires only city council approval.
Expenditure Framework: 'aa' factor assessment
The pace of spending growth is expected to generally track revenue growth as population-driven service demands increase. Annual carrying costs--debt and post-retirement benefit outlays--are manageable and are not expected to shift materially given limited current borrowing plans.
Long-Term Liability Burden: 'aa' factor assessment
Debt levels are manageable, and the combined debt and pension burden is comfortably within the 'aa' category range.
Operating Performance: 'aaa' factor assessment
Revenue and spending flexibility provides very strong gap-closing ability through a typical business cycle. A normal downturn is not expected to impair the city's ability to maintain healthy reserves, which is important given Casa Grande's reliance on economically sensitive revenues.
Maintenance of Financial and Debt Flexibility: The ratings are sensitive to material changes in excise tax revenue collections and debt service coverage beyond the range of Fitch's expectations, as well any changes to the city's sound financial and debt management practices that could affect financial flexibility.
Casa Grande's location adjacent to the intersection of two interstate highways has fostered its development as a retail/commercial hub and should support additional moderate growth. While the top 10 property taxpayer list is relatively high at 16% of the fiscal 2015 total, any risk is lessened by the diversity of the list and the city's relatively minor reliance on property tax revenues for operations.
Local sales tax and state shared revenues (income and sales tax) provide the bulk of Casa Grande's operating revenues, comprising roughly three-quarters of the fiscal 2015 general fund. These two sources are also the largest components of the basket of revenues that are pledged to repayment of the city's excise tax bonds. Meanwhile, property taxes contributed less than 10% of the total. Revenue volatility was extreme during the severe 2008-2009 recession but is expected to be much less so through a typical business cycle.
The general fund revenue history over the past decade has been notably volatile, marked by rapid growth prior to 2007 then sharp recessionary-led declines from 2009-2011. The rating anticipates much less volatility going forward with future downturns of a more typical recessionary nature. Overall prospects are positive given the city's advantageous location.
Arizona cities can increase the property tax levy for operations by 2% from the prior year, plus new construction. There is no legal limit on the local sales tax rate in Casa Grande, and any increase requires only city council approval. This feature provides significant legal flexibility in terms of revenue raising ability.
The city has managed spending pressures successfully through both the rapid growth years prior to 2007 and the housing-led recession in 2008-2011, adjusting outlays as needed and utilizing historically robust reserves to limit the impact of revenue volatility.
The expectation is that business cycle patterns will be more moderate going forward and that Casa Grande will not experience the sharp swings in economic activity and revenues that characterized the past 15 years. Spending growth should largely track revenue trends over the near term, as anticipated additional growth will generate the revenue necessary to fund expanded service demands.
Casa Grande has effectively controlled overall spending growth as the city and state recovered from the last recession, despite large and increasing public safety pension contributions. While the annual pension payment will remain a source of pressure, the city enjoys considerable control and flexibility over other personnel matters. Carrying costs for debt service and post-retirement benefits in fiscal 2015 were moderate at 16% of governmental spending.
Long-Term Liability Burden
Casa Grande's governmental debt profile is comprised of GO and excise tax borrowings for basic infrastructure improvements, and the overall burden is moderate. Management reports no near term borrowing plans following this transaction, which is expected to have minimal impact on the city's tax rate. The city contributes to state-sponsored pension programs for both non-uniformed and uniformed retirees. Recent legislative changes to the two public safety plans should address sizable net pension liabilities for both plans over the long term but will provide no near to intermediate term relief to high contribution rates. The combined debt and pension liability for Casa Grande is moderate at 15.4% of personal income.
Casa Grande's practice of maintaining sizable operating reserves reflects the city's dependence on economically sensitive revenues. A demonstrated gap-closing ability and revenue and expenditure flexibility contribute to the city's overall financial resiliency.
The city prudently controlled spending levels during the last downturn, and has continued with restrained spending growth during the subsequent period of economic recovery. General fund spending in fiscal 2015 totaled $36.4 million, down roughly 2% from the prior year and up a modest 3.4% from fiscal 2009. Management currently is anticipating a manageable $2.4 million decline in operating reserves in fiscal 2016 due to budgeted one-time outlays. Local sales taxes and pledged excise taxes are projected to register modest increases over fiscal 2015 totals.
The proposed fiscal 2017 budget is described as a maintenance budget funded by moderate projected revenue increases. Contributions to both public safety pension plans will increase, with the police contribution rate exceeding 45% of compensation. These funding requirements will be a source of operating pressure until the recently enacted program reforms begin to improve the plans' liability positions. In general, times of economic recovery and expansion will provide Casa Grande an opportunity to replenish any depleted reserves and bolster its financial position.
Excise Tax Revenue Bonds
Excise taxes are composed of a broad base of revenue sources, including local sales taxes, state shared sales and income taxes, franchise fees, license and permits, and fines and forfeitures. After declines in excise tax revenues during the most recent recession, the city has realized four years of gains over fiscals 2012-2015. The gain was largely a result of strengthened local sales taxes. Pledged excise tax revenues grew about 9% in fiscal 2015 to roughly $36 million and covered maximum annual debt service by more than 4x; this calculation includes debt service on a Water Infrastructure and Financing Authority (WIFA) loan, a portion of which is secured by excise tax revenues (and which has a parity excise tax pledge).
Legal provisions for excise tax revenue bondholders are strong; the city covenants to levy new or increase existing excise taxes if the minimally required coverage level of 3x is not maintained, although the critical need for excise taxes to fund operations guards against over-issuance. Fitch does not consider the pledged excise taxes as special revenues under section 902(2)(B) of the bankruptcy code, as they fail to meet the requirements specified in Fitch's U.S. Tax Supported Rating Criteria for that designation. As a result, the rating on the city's excise tax revenue bonds is capped by the city's IDR.
To evaluate the sensitivity of the dedicated revenue stream to cyclical decline, Fitch considers both revenue sensitivity results (using the same 1% decline in national GDP scenario that supports assessments in the IDR framework) and the largest decline in revenues over the period covered by the revenue sensitivity analysis. Based on the 15-year pledged revenue history, Fitch's analytical sensitivity tool (FAST) generates a 7.4% scenario decline in pledged revenues. The largest actual cumulative decline in historical revenues is a steep 32.3% decline from fiscal 2009-2011.
Assuming issuance up to the 3x ABT, debt service would be covered with a more than 60% drop in revenues, 9x the scenario results and 2.1x the largest actual revenue decline in the review period. Fitch believes that these results are consistent with an 'AA' rating that can withstand a normal economic downturn (noting that the fiscal 2009-2011 performance reflected a more severe economic stress). A return to more severe revenue volatility, while not presently anticipated, could put negative pressure on the rating.
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.
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
Dodd-Frank Rating Information Disclosure Form