Fitch Upgrades Gilbert, Arizona's Street & Hwy User Revs to 'AA-'; Affirms MPC Excise Tax Bonds

November 11, 2009 5:08 PM EST

AUSTIN, Texas--(BUSINESS WIRE)-- During the course of routine surveillance, Fitch Ratings takes the following rating action regarding the Town of Gilbert, AZ:

--$27.3 million street and highway user revenue bonds, series 2003 (HURF bonds) upgraded to 'AA-' from 'A+';

--$89.6 million public facilities municipal property corporation revenue bonds, series 2001 and series 2006 (excise tax bonds) affirmed at 'AA-'.

The Rating Outlook for both is Stable.

The HURF bonds are secured by a first lien on revenues derived by the town from highway user taxes and all other taxes, fees, and charges collected by the state and returned to the town for street and highway purposes as prescribed by law. The excise tax bonds are payable from lease payments by the town to the corporation, secured by a first lien on town excise taxes and state-shared revenues.

The upgrade to 'AA-' on the HURF bonds is based on solid debt service coverage and no near term plans for additional borrowing from this source. Coverage remains healthy despite a sizeable projected decline in projected revenues for fiscal 2009 and fiscal 2010, as weak economic conditions affect gasoline tax and motor vehicle registration and license fees.

The 'AA-' affirmation on the excise tax bonds reflects the sound financial profile of Gilbert, characterized by healthy operating margins, and the ample debt service coverage. As is the case with highway user tax revenues, various components of the basket of taxes and fees that comprise pledged excise taxes have declined over the past two years. However, town officials have acted promptly to make expenditure adjustments, resulting in little impact to the town's large general fund reserves. Also factored into the rating is the town's heavy reliance on local sales tax revenues for operations, which increases susceptibility to changing economic conditions. Given the recent precipitous decline in housing construction and home values in Gilbert, Fitch will continue to closely monitor the impact of these factors on both sales tax revenues and the town's overall financial profile.

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 among Arizona counties, cities and towns based on population and sales' point of origin.

Projected fiscal 2009 pledged highway user tax revenues total nearly $10.7 million, which represent a 14% decline from fiscal 2008 totals. The town is anticipating another 6% drop in pledged revenues for fiscal 2010. Despite the weaker revenue totals, projected maximum annual debt service (MADS) coverage remains sound. Using projected fiscal 2009 revenue totals, MADS coverage on the series 2003 bonds is 3.0 times (x). The town has no plans for additional borrowings from this revenue source presently, and the series 2003 bonds mature in 2019. Legal provisions provide adequate bondholder protection.

The local component of excise taxes consist of the town privilege (sales) tax, business licenses, franchise fees, parks and recreation fees, and fines and forfeitures. The state component consists of state-shared income tax and sales tax revenues. Total excise tax revenues peaked in fiscal 2008 at $107.2 million, due primarily to a sizable jump in Gilbert's allocation of state income tax revenues. The current estimate for fiscal 2009 suggests a drop of more than 6% to $100.4 million, led by declines of roughly 12% and 9% in local sales tax and state-shared sales tax revenues, respectively.

While debt service coverage on outstanding excise tax debt remains robust at nearly 9x for fiscal 2009, Fitch notes that these revenues are the primary operating revenues for the town. Despite the recent weakness in sales tax and other development-related revenues, the town's general fund reserves remain healthy. The fiscal 2008 unreserved balance totaled $38.4 million or more than 30% of spending and transfers out. Preliminary fiscal 2009 results include a modest decline of $515,000 in general fund reserves; town officials have minimized the impact of reduced revenues to date through cutbacks in personnel, capital outlays and other spending areas.

Located in the Phoenix metropolitan area, Gilbert witnessed dramatic growth over the past 15-20 years, with the population climbing from less than 30,000 in 1990 to more than 215,000 presently. It also witnessed an equally dramatic decline in the residential construction sector over the past 24 months. Single family building permits have plunged from a peak of nearly 4,800 in fiscal 2004 to slightly more than 1,000 in fiscal 2009. Home prices also have dropped significantly, with declines in existing home values over the past three years of more than 40% in certain sectors of Gilbert.

Not surprisingly, tax base growth in Gilbert also has slowed dramatically as the economy has decelerated. After a series of annual double-digit percentage gains, secondary assessed valuation (SAV) is expected to dip 3% for fiscal 2010 and town officials anticipate a decline of between 15%-25% for fiscal 2011. In addition to housing, commercial development also has slowed in recent months after a period of brisk growth fueled largely by major roadway improvements. Employment growth, which had been steady in recent years, dipped 3% from August 2008 to August 2009 and the unemployment rate climbed from low 3.1% to moderate 4.9% over the same period. Fitch notes that Gilbert's unemployment rate remains well below the state (9.3%) and national (9.6%) averages for the month.

Fitch notes that the Arizona state legislature retains the authority to alter the type and/or rate of fees that are deposited into the state highway user fund, as well as the allocation of such monies between state purposes and the distribution to cities, towns and counties. The legislature has made such alterations previously, and the current economic environment may spur legislators to consider additional changes. Likewise, legislative proposals to alter the formulas for allocation of state shared sales and income tax revenues are introduced from time to time; changes may occur that could affect how these monies are distributed in the future to local entities, including Gilbert.

Additional information is available at 'www.fitchratings.com'.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

    Source: Fitch Ratings

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