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
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
In addition, Fitch affirms the following rating:
--$594.4 million outstanding GO bonds at 'AAA';
The Rating Outlook is Stable.
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
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.
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.
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