AUSTIN--(BUSINESS WIRE)--Fitch Ratings has assigned the following ratings to Scottsdale, Arizona's general obligation (GO) bonds:
--$43.115 million GO refunding bonds, series 2011 'AAA'.
The bonds are scheduled for a negotiated sale the week of March 14th. Proceeds will refund a portion of the city's outstanding GO debt for interest savings.
In addition, Fitch affirms the following ratings:
--$600.7 million GO bonds (pre-refunding) at 'AAA'.
The Rating Outlook is Stable.
RATING RATIONALE:
--The city's financial profile remains sound despite recent weakness in various operating revenue sources.
--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 wealth levels, which are well above average.
--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 adjustments to preserve satisfactory reserves will be critical to maintaining the current rating.
--Projections of additional declines in housing prices in the Phoenix metro area would hamper the pace of economic recovery and exacerbate financial pressures on Scottsdale at a critical juncture.
SECURITY:
The GO bonds are secured by an unlimited ad valorem tax levied against all taxable property in the city.
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 $85.8 million, and fiscal 2010 receipts registered another 9% drop. The city's response to this and other revenue declines has been prompt; cost saving measures have included a 2% across the board pay reduction, cancelled pay increases, a retirement incentive program, elimination of vacant positions, layoffs, departmental consolidations and various cutbacks in discretionary spending. As a result of management's budgetary adjustments, operating reserves remain at healthy levels. Despite net general fund losses of more than $40 million from fiscal 2007-2010, the fiscal 2010 unreserved general fund balance totaled $51.5 million or roughly 20% 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.
Further weakness in various revenue sources is evident in fiscal 2011, but additional spending reductions are expected to keep the impact to operating reserves minimal at roughly $3 million. In response to an initial $28 million general fund gap that was identified for fiscal 2012, the proposed budget includes various spending and service reductions and revenue enhancements that effectively close the gap. Final adoption of a budget that satisfactorily addresses the shortfall will be critical to maintaining the city's current lofty credit standing.
Scottsdale's per capita debt levels are above average, but this factor is largely offset by the city's robust wealth levels. Fitch notes the fairly rapid pace of GO debt retirement (more than 60% in 10 years) as a credit positive. Proceeds from the series 2011 GO bonds will refund roughly $43 million in outstanding GO debt for annual interest savings. As with most Arizona cities, Scottsdale's capital needs have been scaled back due to the recession; five-year general government needs total roughly $555 million, down from $767 million in 2008.
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 about 150 through the third quarter of 2010. 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 2010 rate of 6.2% trailed both the Arizona (9.2%) and U.S. (9.1%). 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.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, LoanPerformance, Inc., and IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 16, 2010;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Oct. 08, 2010.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566
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