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

AUSTIN, Texas--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AAA' rating to the following city of Tempe, Arizona obligations:

--$13.63 million general obligation bonds, series 2016A;

--$71.91 million general obligation refunding bonds, series 2016B.

Series 2016A and series 2016B bonds are scheduled for a negotiated sale the week of May 23. Proceeds from series 2016A bonds will fund street and storm drain improvements, acquisition of public safety equipment and improvements, park and community service improvements, and municipal infrastructure improvements in accordance with the bond authorization. Series 2016B will refund certain outstanding bonds for savings.

In addition, Fitch has affirmed the following ratings:

--Issuer Default Rating (IDR) at 'AAA';

--$398.7 million GO bonds outstanding (pre-refunded) at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The series 2016A 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 2016B bonds are payable from an ad valorem property tax levied against all taxable property in the city unlimited as to rate, but limited by statute to the aggregate amount of principal and interest payable on the refunded bonds from the date of issuance of the series 2016B bonds to the final maturity of the refunded bonds.

KEY RATING DRIVERS

The 'AAA' issuer default and general obligation ratings reflect the city's exceptionally strong operating performance, strong growth prospects and relatively low long-term liability burden.

Revenue Framework: 'aa' factor assessment

Tempe's revenue growth over the last 10 years compares favorably to national GDP and inflation. Fitch believes continued revenue growth prospects are strong based on a diverse and expanding commercial base, current new development and commercial development plans . Tempe has little ability to offset operating revenue volatility for operating purposes with tax rate adjustments.

Expenditure Framework: 'aaa' factor assessment

Fitch expects the pace of Tempe's spending to remain below that of revenues. Service level pressures are modest given a mature residential base.

Long-Term Liability Burden: 'aa' factor assessment

Tempe's moderate long-term liability burden reflects manageable capital needs and rapid debt amortization. Fitch expects the city to gradually reduce its unfunded net pension liability based on plans to increase its contributions and modest state-wide pension reforms.

Operating Performance: 'aaa' factor assessment

Fitch anticipates the city will demonstrate financial resilience during economic downturns, consistent with its history of gap-closing capability and robust reserves.

RATING SENSITIVITIES

Financial Flexibility: The rating is sensitive to a reduction in financial flexibility.

CREDIT PROFILE

Tempe is located in Maricopa County, the economic hub and population center of the state, with a population of 170,586. The city is home to Arizona State University (ASU), the largest university in the country, by student population. 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 4.1% as of January 2016 continues to trend below state and national averages. A significant rebound of taxable values reflects construction activity on sizable development projects, including the 2.1 million square foot Marina Heights project on Tempe Town Lake, the recently completed Hayden Ferry Lakeside mixed use project, and the Northern Trust regional operation center, as well as a broad range of mixed use, office, retail, residential and manufacturing development. Fitch anticipates a corresponding increase in employment as the city is accessible through a well-developed transportation infrastructure.

Revenue Framework

Tempe's healthy general fund revenue compound annual growth rate (CAGR) over the last 10 years of 4.1%, which is above that of the national GDP, reflects the city's expanding commercial base. 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 great recession but have since rebounded.

Local sales taxes contributed 50% to fiscal 2015 general fund revenues, followed by state shared revenues (22%), and property tax revenues (9%). The city's fiscal 2015 sales tax revenues reflect the sunset of a 0.2%, four-year temporary sales tax that had been generating $12 million per year. Despite loss of the temporary tax, strength of the sales tax base resulted in only a $4 million year-over-year sales tax decline. Overall fiscal 2015 revenues reflected modest overall growth.

Fitch expects the development currently underway and in the pipeline to strengthen the local economy and tax base.

Primary tax levies, used for operations, are limited to a 2% per annum increase over the maximum allowable levy in the prior year plus taxes on any property not subject to taxes in the prior year. Tempe's fiscal 2011 tax stabilization policy provides an automatic inflation adjustment to increase the primary tax levy by the 2% annual limit and to support adequacy of the secondary tax rate. There is no limitation on annual secondary levies used for voter-approved bond indebtedness.

Expenditure Framework

Public safety accounts for 56% of general fund expenditures.

The pace of spending is likely to remain below revenue growth. Fitch does not anticipate service level pressure as most of Tempe's growth is focused on the commercial properties.

Expenditure flexibility is derived from management's strong control over workforce costs and moderate carrying costs, 19.6% of fiscal 2015 governmental spending. Tempe's carrying costs reflect a rapid 10-year principal amortization rate of 66.1%. Fitch expects Tempe's carrying costs to remain sizable in light of the city's plans to increase pension contributions above the actuarially determined contribution. However, these costs should be affordable based on the city's ability and willingness to make spending cuts as reflected in a level of fiscal 2015 spending 3% below that in fiscal 2009.

Long-Term Liability Burden

Fitch expects Tempe's long term liabilities, currently 15.2% of personal income, to remain moderate based on the city's manageable capital needs and the rapid debt amortization rate. The city's fiscal 2016-2020 $418 million capital plan includes enterprise (42%), general government (33%), transit (12%), and transportation (12%) projects. The city anticipates issuing up to $25 million in GOs and up to $35 million in excise tax revenue obligations annually over the planning horizon, a rate generally in line with current amortization rates.

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 Public Safety Personnel Retirement System (PSPRS) for public safety employees.

Under GASB 67 and 68, the city reports a fiscal 2015 ASRS net pension liability (NPL) of $112.5 million, with fiduciary assets covering 69.5% of total pension liabilities at the plan's 8% investment return assumption (approximately 63% based on a lower 7% investment rate assumption). The NPL for the city's PSPRS police and fire plans are $147 million and $75 million respectively, with fiduciary assets covering a low 41.3% of total police plan and 48.6% of fire plan pension liabilities at the plan's 7.85% investment return assumption (approximately 37.3% and 44.4% based on a lower 7% investment rate assumption). Proposed legislation provides modest PSPRS reforms applicable to new hires and eliminates the automatic cost of living adjustments currently in place which Fitch anticipates could, if implemented improve long-term plan sustainability.

Operating Performance

Fitch expects Tempe to maintain a solid financial profile through an economic downturn, benefiting from its current robust reserve position. To help close the budget gap during the great recession, the city levied a four-year voter-approved .2% temporary sales tax, which has since sun-setted. The city maintains policy-directed general fund unassigned fund balances between 20% and 30% of annual revenues. Tempe's fiscal 2015 unrestricted reserves of $83.2 million represent a strong 45.8% of spending. The city's long-range forecast reflects maintenance of strong balances consistent with its operating history. Fitch considers strong reserve levels as a key credit mitigant to the city's economically sensitive revenues.

Tempe rapidly rebuilds reserves to maintain strong financial flexibility, while maintaining the city's infrastructure.

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

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1003524

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1003524

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20160428006771/en/

Fitch Ratings
Primary Analyst
Rebecca Meyer
Director
+1-512-215-3733
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Steve Murray
Senior Director
+1-512-215-3729
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty
New York
+1-212-908-0526
[email protected]

Source: Fitch Ratings

---

Serious News for Serious Traders! Try StreetInsider.com Premium Free!

---

You May Also Be Interested In

• Introducing Physical Superintelligence: The World's Most Advanced Physics Lab, Staffed by Virtual Physicists to Discover New Laws of the Universe
• Pivotree Announces Normal Course Issuer Bid For Common Shares
• Cooler Days, Cozy Cravings. Panera Season is Here with Fall Menu Drop of Seasonal Soups, Warm Sandwiches and Nostalgic Bakery Treats