Fitch Rates Scottsdale, AZ GOs 'AAA', Excise Tax Revs 'AA+'; Outlook Stable
Source: Business Wire
--$50.8 million general obligation (GO) bonds (projects of 2000), series 2010 - 'AAA';
--$75 million municipal property corporation (MPC) excise tax revenue bonds (water and sewer improvements project), series 2010 - 'AA+'.
Both series of bonds are scheduled to sell competitively on March 23, 2010.
In addition, Fitch affirms the following ratings:
--$551.5 million in outstanding GO bonds at 'AAA';
--$399.3 million in outstanding MPC parity excise tax debt at 'AA+'.
The Rating Outlook for both securities is Stable.
RATING RATIONALE:
--The city's financial profile remains sound despite recent weakness in various operating revenue sources.
--The local and regional economies continue to struggle with the effects of the residential housing market collapse and national recession, although Fitch anticipates stabilization and the start of a modest recovery over the next several years.
--The city has responded to declining revenues with significant expenditure reductions to preserve sufficient reserve levels.
--A higher than average debt per capita burden is mitigated by the city's high wealth levels.
--Debt service coverage on the MPC excise tax revenue bonds remains high, and coverage increases significantly when utility supported excise tax debt is excluded.
--Capital needs have declined as the economy has weakened, reducing planned borrowings and annual pay-go capital spending.
KEY RATING DRIVERS:
--Anticipated further declines in revenues and in taxable value will continue to pressure operations over the near term; the city's response in the form of additional spending and/or revenue adjustments to preserve satisfactory reserves and adherence to sound financial policies will be critical to maintaining the current ratings.
--While further weakness in pledged revenues for the excise tax revenue bonds is expected, debt service coverage levels should remain consistent with the rating category.
SECURITY:
The GO bonds are secured by an unlimited ad valorem tax levied against all taxable property in the city. The excise tax revenue bonds are special obligations of the MPC payable from payments made by the city. These payments will be provided and secured by a pledge of and lien on the city's excise taxes.
CREDIT SUMMARY:
Scottsdale's financial profile remains sound despite sharp reductions in various revenues resulting from the severe economic climate in the Phoenix metropolitan area. The most notable declines have been in local and state shared sales tax and development-related revenues. Collections of the city's 1% general sales tax plunged 18% in fiscal 2009 to $85.9 million, and the fiscal 2010 budget included another 12% drop in receipts. The city's response to this and other revenue declines has been prompt; cost saving measures that began in fiscal 2009 have included cancelled pay increases, a retirement incentive program, elimination of vacant positions, layoffs, departmental consolidations and various cutbacks in discretionary spending. The city faced operating budget gaps totaling more than $100 million for fiscal 2009 and 2010 combined on an annual budget of about $265 million, and as a result of their budgetary adjustments operating reserves have only been moderately affected. The fiscal 2009 unreserved general fund balanced totaled $59.6 million or nearly 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 healthy cushion.
The 1% local sales tax is the largest component of the basket of revenues that are pledged to the excise tax revenue bonds, and almost all of these revenue sources have exhibited weakness beginning in fiscal 2008. The combined excise taxes totaled $185.8 million in fiscal 2009, down 14% from the prior year and down 15% from the recent peak of $217.6 million collected in fiscal 2007. Despite the declines, projected annual debt service coverage on excise tax debt (including the series 2010 bonds) remains healthy at around 4.0 times (x) over the next several years using projected fiscal 2010 collections of roughly $169 million. Fitch notes that proceeds from the series 2010 excise tax revenue bonds will finance improvements to the city's water and wastewater utility system. The city plans to repay the bonds (as well as roughly $250 million in outstanding excise tax debt) from net system revenues on a subordinate basis to water and sewer utility revenue bonds, which Fitch rates 'AA+' (for more information see 'Fitch Affirms Scottsdale, AZ's Water and Sewer Revs at 'AA+',' dated March 5, 2010 at www.fitchratings.com).
Scottsdale is located adjacent to Phoenix in Maricopa County, the largest population center in the state. Population in the city has increased more than 80% since the 1990 census to roughly 243,000, accompanied by significant gains in residential and commercial development. The recent sharp decline in residential and commercial construction area-wide has also impacted development activity in Scottsdale. While the city did not witness the level of speculative building activity that has occurred in other parts of the Phoenix metropolitan area due to its relatively mature status, Scottsdale housing starts have dropped sharply from a recent peak of 1,722 in fiscal 2007 to less than 200 (estimate) in fiscal 2009. Fitch will continue to monitor the fallout from the housing crisis and the recession on the city, particularly as it relates to operating revenues and capital spending.
Unemployment rates in Scottsdale, while up in recent months, remain below state and national averages; the city's December 2009 rate of 6% trailed both the Arizona (8.8%) and U.S. (9.7%). Retail trade is a significant component of the local economy, as evidenced by retail sales per capita levels that are roughly double those of the state and nation. Likewise, wealth levels are well above state and national averages; per capita money income is twice the Arizona average and 185% of the U.S. average, and median household income is roughly 140% of both the Arizona and U.S. averages.
Applicable criteria available on Fitch's website at www.fitchratings.com:
--'Tax-Supported Rating Criteria,' dated Dec. 21, 2009;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Dec. 21, 2009.
Additional information is available at www.fitchratings.com.
Contact:
Fitch Ratings, Austin
Steve Murray, +1-512-215-3729
Julie Seebach, +1-512-215-3740
or
Cindy Stoller, +1-212-908-0526
(Media Relations, New York)
cindy.stoller@fitchratings.com
