AUSTIN, Texas--(BUSINESS WIRE)--During the course of routine surveillance, Fitch Ratings affirms its 'AA' rating on the following bonds issued for various Peoria, AZ improvement districts:
--$4.1 million in outstanding District No. 0601 (Park West), improvement bonds, series 2007;
--$853,885 in outstanding District No. 8801 (North Valley Power Center Project), improvement bonds, series 1992;
--$913,061 in outstanding District No. 8802 (Bell Road Improvements) improvement bonds, series 1992;
--$159,887 in outstanding District No. 9601 (83rd Ave. Widening), improvement bonds, series 1997; and
--$271,590 in outstanding District No. 9603 (Arrowhead Fountains Center), improvement bonds, series 1997.
The Rating Outlook is Stable.
RATING RATIONALE:
--The bonds are a contingent liability of the city's general fund.
--Four of the five districts include a mature status of development.
--The pace of debt retirement is rapid and some prepayments have already occurred.
--The city has maintained its solid financial profile, characterized by sizable reserves, despite recent weakness in key operating revenues.
--The city has a heavy reliance on local sales tax revenues and state shared revenues for operations, and recent declines have forced the city to make a number of budget adjustments.
--Fitch considers the city's extensive planning, reporting and forecasting efforts a credit strength, with these practices proving critical as the city responds to recessionary pressures.
--Taxable values are declining as property value contraction is working through the multi-year assessment and appeal process, with management expecting a cumulative drop in values of nearly 50% over the next several years.
KEY RATING DRIVERS:
--While the city has some reduced flexibility due to the affects of the recession, it is unlikely the city would be unable to make up an assessment shortfall given the modest amount of improvement district debt outstanding.
--The weakened commercial real estate market may continue to put pressure on property owners and may affect assessment payment revenues.
SECURITY:
The bonds issued by each district are secured by assessments levied against benefiting properties within the boundaries of the respective districts. In addition, under state law, the city is required to make up any assessment delinquencies prior to scheduled debt service payments from the city's general fund; all property owners in the districts are current with assessment payments, according to the city.
CREDIT SUMMARY:
Part of the Phoenix metropolitan area, Peoria has a 2010 census population of more than 154,000. The city's population represents an increase of more than 40% from the 2000 census. Local wealth levels are above average and unemployment rates historically have tracked well below regional, state and national averages. For March 2011, the city's rate was 6.1%, compared to the 8.7% rate for metropolitan area and 9.3% and 9.2% for the state and nation, respectively. As is the case throughout the Phoenix metropolitan area, residential construction in Peoria virtually collapsed in 2008 and 2009; housing starts plummeted from a peak of 3,560 in fiscal 2005 to just 108 in fiscal 2010.
The five districts are primarily commercial/retail centers, with two of the five districts sharing a multifamily residential component. Four of the five districts have reached a mature status of development, with final debt maturity dates in January 2012 for district 9601 and 9603 and final maturity dates in January 2013 for district 8801 and 8802; the remaining debt for No. 0601 extends to 2022. Of the combined $21.7 million in debt originally issued by these districts $6.3 million remains outstanding, representing a manageable liability for the city in the unlikely event no additional assessment payments are made in any of the five districts. Overall, pledged revenue coverage was 1.17 (x) in fiscal 2010, down from the 1.4x-1.6x range in recent years due to scheduled debt service spike in 2010. In future years debt service declines, resulting in higher coverage.
No. 0601, the least developed of the five districts with $4.1 million of debt outstanding, is located one mile northwest of the University of Phoenix stadium and is comprised of a 56 acre mixed-use area, including 360,000 square feet (SF) of retail space, 250 multi-family residential units, 70,000 SF of office space and a 2.5 acre site for a possible hotel. To date 150,000 SF of the retail area has been constructed and includes several retailers and restaurants. In addition, the apartment complex is complete and tenant occupied. The office parcel is currently for sale, but the hotel planned for the site has not been constructed.
The city's financial profile continues to be sound, although operating pressures continue due to declining revenues. The general fund reported a second consecutive loss in fiscal 2010, posting a decline in fund balance of $6.9 million. This followed a $10.6 million drawdown the prior year. Despite the losses, reserves remain sound, with the fiscal 2010 unreserved general fund balance totaling $60.2 million, or roughly 56% of spending and transfers out. These drawdowns resulted from planned one-time expenditures and weakness in various revenues, most notably local sales tax, state shared sales tax, and licenses and permits. Local sales tax revenues dipped nearly 15% in fiscal 2009 and another 5% in fiscal 2010, while state shared sales revenues fell 13% and 8% during these years. Management responded to the deteriorating economic conditions with numerous spending adjustments beginning in fiscal 2009, including 66 positions eliminated, salary and vacant position freezes, a retirement incentive program, and operational consolidations.
Additional cost saving measures were incorporated into the fiscal 2011 budget, including a 7.4% cut in general fund outlays and the elimination of nearly 60 positions. The budget spared core services and included no property tax rate increase. On the revenue side, sales tax revenues were projected to register a modest 1.4% increase. Management reports that both revenues and expense are tracking budget projections and there have been no material mid-year budgetary adjustments. While operating reserves are forecast to decline $17 million by year-end (due to one-time capital outlays), Fitch notes that the city had planned the reduction in fund balance, but still expects to maintain reserves at 35% of the average actual general fund revenues for the preceding five fiscal years, which is in conformity with the city's reserve policy. Given Peoria's experienced financial management team and extensive forecasting practices, Fitch believes the city will continue to take the necessary measures to maintain a sound financial footing.
Despite capital and operating pressures stemming from growth, the city's debt load remains moderate. The current 10-year capital improvement plan totals $464 million, considerably less than the $1 billion plan in place two years ago as many growth-related projects were postponed or cancelled. Although the city has experienced tax base declines recently, the overall debt burden on citizens remains affordable at roughly $3,300 per capita and 3.5% of estimated full cash value (FCV). Tax base growth had been healthy in recent years, averaging more than 20% annual gains for the past five fiscal years. Fiscal 2010 witnessed a reversal of that trend with both secondary assessed value (SAV) and estimated FCV dipping more than 5%; SAV dropped another 15% in fiscal 2011 to $1.6 billion. Overall, the city is anticipating a cumulative tax base decline of more than 45% from fiscal 2010 to fiscal 2013.
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, Zillow.com, National Association of Realtors
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 16, 2010;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Oct. 8, 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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