TEXT-Fitch rates Scottsdale, Ariz. GOs 'AAA'
Jan 18 - Fitch Ratings assigns the following rating for Scottsdale, Arizona's general obligation (GO) bonds: --$75.0 million general obligation bonds, project of 2004, series 2013 (preserve acquisition) 'AAA'. The bonds are scheduled for a competitive sale on Jan. 29, 2013. Proceeds will finance the acquisition and improvement of land for the McDowell Sonoran Preserve. In addition, Fitch affirms the following rating: --$594.4 million outstanding GO bonds at 'AAA'; The Rating Outlook is Stable. SECURITY The bonds are secured by an unlimited ad valorem tax levied against all taxable property in the city. KEY RATING DRIVERS RESPONSIVE FINANCIAL MANAGEMENT: General fund reserves remain sound despite declines in recent years, due primarily to significant expenditure reductions in response to recessionary pressures. The city's revenue structure is subject to a high degree of volatility as evidenced over the last several years. STRONG ECONOMIC FOUNDATION: The city has a mature and diversified local economic base, low unemployment rates, and wealth levels that are well above state and national averages. MANAGEABLE DEBT BURDEN: A higher than average debt per capita burden is mitigated by the city's wealth levels, as indicated in a moderate debt to market value ratio. Pension liabilities and overall carrying costs are sizable. REDUCED CAPITAL NEEDS: Capital needs have declined with the slowing of economic growth, reducing planned borrowings and annual pay-go capital spending. CREDIT PROFILE Scottsdale is located adjacent to Phoenix in Maricopa County, the largest population center in the state. Population in the city increased more than 7% between the 2000 and 2010 census to roughly 217,000, accompanied by gains in both residential and commercial development. SOUND FINANCES Scottsdale's overall financial profile has stabilized after posting operating deficits in four of the last five fiscal years, as the recent gains in local revenues offset continued weakness in state-shared revenue. Fitch expects financial performance and reserve levels to remain stable. The greatest revenue improvement has occurred in local sales tax receipts, which reversed course in fiscal 2011 and fiscal 2012 after several years of large declines and registered increases of 3% and 5%, respectively. Local general sales tax revenues are the largest general fund revenue source at more than 35% of the fiscal 2012. These gains helped offset ongoing declines in state shared revenues (sales and income tax), which fell nearly 25% in fiscal 2011 and another 13% in fiscal 2012. The income tax portion of these revenues reflects economic activity two years prior. The declines in state revenues are due largely to changes in the distribution formula, which favor faster population growth in less mature Arizona communities over the past decade. RECENT BUDGETARY ADJUSTMENTS The city responded promptly to the revenue declines during the recession; cost saving measures included cancelled pay increases, a retirement incentive program, elimination of vacant positions, layoffs, departmental consolidations and various cutbacks in discretionary spending. The city also increased property tax rates beginning in fiscal 2010 as values dropped. For fiscal 2012, management reduced an initial $28 million general fund budget gap to $7 million by the time council adopted the budget. The adopted budget included further reductions in revenues and outlays, the elimination of 94 general fund positions, and departmental reorganizations to increase efficiencies. Audited results include a modest $1 million dip in general fund reserves, consistent with earlier projections. As a result of management's revenue and spending adjustments, operating reserves remain at healthy levels. At fiscal 2012 year-end the unrestricted general fund balance totaled $52.1 million or roughly 22% of spending and transfers out. While considerably less than the $93.2 million reported at fiscal 2006 year-end, this amount still represents a sizable cushion. The fiscal 2013 budget highlights include a 12% increase ($0.13) in the total property tax rate, a pay-for-performance program, general fund revenue and spending increases of 7% and 4%, respectively, and the elimination of 32 positions. A modest drawdown in reserves is included, but the city historically has budgeted conservatively and outperformed initial projections. MANAGEABLE DEBT BURDEN Scottsdale's overall per capita debt levels are above average at roughly $6,200, but this factor is largely offset by the city's robust wealth levels. Debt to market value is a moderate 3.3%. Fitch notes the pace of GO debt retirement is above average at 60% in ten years. Proceeds from the series 2013 GO bonds will finance the acquisition of land for the McDowell Sonoran Preserve. The bonds are part of $500 million approved by voters in 2004 for the city's preserve acquisition and development program. After this sale roughly $312 million will remain unissued from the 2004 authorization. The city's current plans for future issuances are limited as the preserve acquisition program is nearing its goal. The city plans to repay the bonds (as well as $260 million in outstanding GO preserve debt) from the residual proceeds of two separate excise taxes which combined total 0.35%. Revenue from these taxes also declined during the downturn, but the $28.8 million in fiscal 2012 receipts represented a more than 5% increase from the prior year and provide solid debt service coverage of more than 4.0x on the $56 million Scottsdale Preserve Authority excise tax revenue debt outstanding (Fitch rated 'AA+'/Stable Outlook) to which these revenues are pledged. The excise tax receipts also support the GO preserve bond debt payments, although margins thinned when revenues declined. This reduced margin introduces the possibility of the city using property tax revenues to support GO preserve debt service if excise taxes are insufficient. The city's capital improvement plan (CIP) has shrunk in size in recent years with fewer growth-related needs. The current five-year general government plan is roughly $600 million, consistent with recent years and well below the recent peak of $767 million in 2008. The only borrowings planned for the near term, (beyond this offering and a concurrent GO bond sale), are roughly $50 million in MPC issues. Management anticipates another GO authorization request will likely be placed before voters in fall 2013; they provided a preliminary cost estimate of roughly $260 million. The city participates in state-sponsored pension programs for its retirees, and funding levels (using Fitch's more conservative 7% investment return assumption) are less than adequate for the general employee and police programs at less than 70%; the fire pension program is over-funded. Recent changes to the retiree health benefit program effective July 1, 2012 require retirees to pay the full cost of coverage, ending the subsidy previously provided by the city. Total carrying costs (debt service, pension and OPEB contributions) are fairly high for the rating category at more than 20% of fiscal 2012 governmental spending. PART OF THE PHOENIX METRO ECONOMY The sharp decline in residential and commercial construction area-wide in the recession also impacted development activity in Scottsdale. While the city did not witness the level of speculative building activity that occurred in other parts of the Phoenix metropolitan area due to its relatively mature status, Scottsdale housing starts dropped sharply from a recent peak of 1,722 in fiscal 2007 to less than 200 in each of the past four years. Taxable values also continue to decline, as softening residential and commercial property values continue to work through the multi-year appraisal/review process. The city's secondary assessed valuation (SAV) fell roughly 23% in fiscal 2012 to $5.69 billion, on the heels of a 12% drop the prior year. SAV registered another 11% decline in fiscal 2013, well above management's earlier projection of 5%. The current projection is for flat values in fiscal 2014 before a modest uptick the following years. This projection is consistent with those of other Phoenix-area cities for the near-term and with recent home price data. While it appears reasonable, Fitch has some concerns given the difference between fiscal 2013 projected and actual values. The city has a mature and diversified local economic base, anchored by healthcare, tourism, business and professional services and technology. The unemployment rate in Scottsdale has trended downward after spiking in 2009 and 2010, and it remains below state and national averages; the city's October 2012 rate of 5.4% was well below both the Arizona (8.1%) and U.S.(7.5)% averages for the month. Wealth levels are well above state and national averages; per capita money income is twice the Arizona average and 184% of the U.S. average, and median household income is roughly 140% of both the Arizona and U.S. averages. 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. 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
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