Fitch Rates Tempe, AZ's GOs 'AAA'; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)-- Fitch Ratings has assigned 'AAA' ratings to the following Tempe, Arizona general obligation (GO) bonds:

--$42.3 million GO bonds, series 2015A;

--$18.46 million GO refunding bonds, series 2015B.

The series 2015A and series 2015B bonds are scheduled for a negotiated sale the week of May 11, 2015. The series 2015A proceeds will fund city improvements and the series 2015B proceeds will refinance a portion of the city's outstanding GO debt for interest savings.

In addition, Fitch affirms the following ratings for Tempe:

--$399.3 million GO bonds outstanding (pre-refunding) at 'AAA'.

The Rating Outlook is Stable.

SECURITY: The series 2015A bonds are payable from an ad valorem property tax levied against all taxable property in the city unlimited as to rate or amount. The series 2015B bonds are payable from an ad valorem property tax levied against all taxable property in the city unlimited as to rate, but are limited by statute to the aggregate amount of principal and interest payable on the refunded bonds from the date of issuance of the series 2015B bonds to the final maturity of the refunded bonds. While the 2015 bonds are payable by ad valorem taxes, they may also be paid from any unrestricted funds of the city, although such amounts are not pledged to the bonds.

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: Healthy reserves, in the range of prerecession levels, reflect four consecutive years of sales tax gains and the city's conservative fiscal practices.

SOUND ECONOMY; GROWTH PROSPECTS: The city's mature economic base is broad and diverse with historically strong employment growth. Two years of strong taxable assessed valuation (TAV) growth follow a steep multi-year recessionary decline. Sizable downtown development projects position the city for ongoing growth.

MANAGEABLE DEBT BURDEN: Fitch anticipates overall debt levels to remain manageable based on affordable capital needs and rapid amortization. The burden of debt service, pension and other post-employment benefit (OPEB) contributions on the budget is moderate, although rising pension contributions may place additional pressure on the budget over time.

UTILITY SYSTEM DEBT SUPPORT: $236 million of the city's $399.3 million in outstanding GO debt was issued for utility system improvements and is repaid from system revenues. The utility system maintains healthy liquidity levels, and the city regularly reviews and adjusts rates to meet operational and debt obligations.

RATING SENSITIVITIES

FINANCIAL FLEXIBILITY: The rating is sensitive to shifts in the city's strong level of financial flexibility.

CREDIT PROFILE

Tempe is located in Maricopa County, the economic hub and population center of the state, with a population of 169,529. The city is home to Arizona State University (ASU), the largest university in the country, by student population.

MATURE ECONOMY SEES DEVELOPMENT AND GROWTH

Tempe's historically strong employment base benefits from participation in the broad Phoenix-area economy and a highly educated work force. A low unemployment rate of 5.3% as of January 2015 continued to trend below state and national averages of 6.6% and 6.1% respectively for the same period.

A significant rebound of taxable values reflects construction activity on a $600 million, five-building office project under development in the city's downtown. The 'Marina Heights' project is anchored by State Farm insurance regional headquarters and spans 20-acres north of Arizona State University's (ASU) Sun Devil Stadium. Construction is expected to be completed in August 2017. More recently, Northern Trust announced plans to open a new operating center within the city's Discovery Business Campus.

Fitch anticipates these and other projects, to further strengthen the local economy and tax base. The city's TAV increased 7.6% and 15.1% in fiscal 2015 and 2016 respectively, following four years of a cumulative 45% loss in value. While property tax revenues contribute only 9% to general fund operations, the city has progressively increased tax rates to mitigate tax base weakness since 2009. The upturn in values reflects the new commercial development and an improving residential market.

HEALTHY RESERVES HELP MITIGATE REVENUE CYCLICALITY

Fiscal 2014 sales tax receipts of $98.2 million are in the fourth year of consecutive growth and exceeded the prerecession 2007 peak of $86.9 million for the second consecutive year. The city's operations are supported predominantly by economically sensitive local sales and state shared revenues (income and sales taxes), which dropped precipitously during the recession.

Fiscal 2014 state shared revenues of $38.8 million realized their second year of post-recession improvement following a cumulative decline of 29% over four years. The lagged recovery of state shared revenues reflects a two-year state distribution cycle of monies to the city.

Fiscal 2014 unrestricted general fund reserves of $74.1 million represent a strong 41% of spending. Officials conservatively estimate 2015 unrestricted reserves of $70.1 million reflecting a planned application of reserves for capital, and report a structurally balanced fiscal 2016 budget. The five-year plan reflects ongoing improvement in local sales and state shared revenues, which Fitch considers reasonable, and that also helps to mitigate the loss of the temporary sales tax revenues.

Fitch anticipates the city to continue to achieve financial results favorable to its conservative budget and consistent with the five year financial plan. The city's long-range plan reflects maintenance of healthy reserve levels consistent with the city's policy which requires unassigned general fund reserves between 20% and 30% of general fund revenues and projected throughout the five-year forecast.

MODERATE DEBT WITH UTILITY SUPPORT; MANAGEABLE CAPITAL

Fitch anticipates the city's debt, 4.1% of market value, to remain moderate, based on a manageable capital plan and a rapid amortization rate of 79% in 10 years.

The city's $336 million, five-year capital plan includes water/wastewater (40%), general government (35%), transit (13%), and transportation (12%) projects. The city anticipates issuing up to $20 million in GOs and up to $25 million in excise tax revenue obligations annually over the planning horizon, a rate no greater than the debt repaid each year.

Approximately 59% of the city's $399.3 million in GO bonds outstanding are supported by revenues from the water and wastewater utility. The utility's financial position is sound, with fiscal 2014 liquidity of $82 million, representing about 559 days of operations. The city has established a track record of regular utility rate increases to meet increasing system needs and its water and waste water cost of service remains very competitive in relation to regional providers.

RISING STATEWIDE PENSION COSTS

The city participates in several state-sponsored pension programs, the two largest being the Arizona State Retirement System (ASRS) for non-public safety personnel, and the Arizona Public Safety Personnel Retirement System (PSPRS) for public safety employees.

The funding level for ASRS at June 30, 2013 is 75% but drops to a lower estimated 68% using Fitch's more conservative 7% investment return. The funding level for PSPRS at June 30, 2014 was roughly 41.9% (police) and 49.3% (fire); these levels assumed a 7.85% return, and funding drops to an estimated 38.3% (police) and 45.1% (fire) when a more conservative 7% return is assumed.

Management anticipates contribution rates for its pension programs will rise over the next several years, which will maintain pressure on operations and reports that it is exploring options to increase its funded ratio in the state PSPRS plan. Tempe's OPEB liability has shrunk considerably since the city elected to discontinue the benefit for recent hires in 2009 and to move from a defined benefit program to a defined contribution program in 2011, to which all participants were recently migrated.

The burden of the city's debt service, pension and OPEB contribution on the budget is an affordable 17.9% of fiscal 2014 government spending, with a positive trajectory reflecting anticipated increases in the state PSPRS contribution rates.

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, 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=983086

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Fitch Ratings
Primary Analyst
Rebecca Meyer, CFA, CPA, +1-512-215-3733
Director
Fitch Ratings, Inc.
111 Congress Ave., Ste. 2010
Austin, TX 78701
or
Secondary Analyst
Steve Murray, +1-512-215-3729
Senior Director
or
Committee Chairperson
Jessalynn Moro, +1-212-905-0608
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
[email protected]

Source: Fitch Ratings

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