AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA-' rating to the Pinal County (the county), Arizona's following obligations:
--$50.5 million pledged revenue obligations, series 2014;
--$40.8 million pledged revenue refunding obligations, series 2014.
The bonds are scheduled for a negotiated sale the week of Dec. 1, subject to market conditions. Proceeds of the revenue obligations will finance public safety and road improvements. The revenue refunding bond proceeds will refund the county's series 2006 revenue bonds for interest savings.
Additionally, Fitch affirms the county's implied unlimited tax general obligation (GO) rating at 'AA-' and the county's $54.6 million in outstanding certificates of participation (COPs) series 2004 at 'A+'.
The Rating Outlook is Stable.
SECURITY
The pledged revenue obligations are payable from a second lien pledge of the county general excise tax revenues in favor of the county's Third Loan Repayment Agreement and 2010 obligations, a third lien pledge of net state shared revenues in favor of the county's Second and Third Loan Repayment Agreements and 2010 obligations, and a first lien pledge of vehicle license tax (VLT) revenues. The COPs carry a pledge of lease payments from the county to the trustee, subject to annual appropriation by the county.
KEY RATING DRIVERS
IMPROVED PLEDGED REVENUE TRENDS: Pledged revenues reflect a third year of growth, following four years of recessionary decline; the gains were led by strong county-wide excise tax collections, and more recently, recovery of state shared revenues.
ROBUST COVERAGE; AVERAGE ABT: Debt service coverage on excise tax debt remains ample, as excise taxes constitute a significant source of operating revenues. The additional bonds test (ABT) is average at 1.5x maximum annual debt service (MADs).
SOUND FINANCES; BUDGET PRESSURES: The county has cut costs to maintain solid reserves throughout the recession. Near term budget pressure results from the loss of a federal prisoner contract, not entirely mitigated in the current budget. Officials plan to maintain reserves at the county's 15% target and continue to explore areas of cost mitigation that will be necessary to achieve that goal.
TAX-BASE RECOVERY: The tax base lost a significant portion of the value gained in the decade leading up to the regional housing collapse. Fitch expects the upturn in 2015 values to be followed by additional near term tax base growth, based on current economic conditions and the two-year assessment process.
MANAGEABLE DEBT; UNDERFUNDED PENSIONS: Fitch expects the county's overall debt levels to remain moderate based on a modest debt issuance plans. Fitch considers the potential for increased pension costs relating to two underfunded plans to be manageable in light of the county's currently low carrying costs.
RATING SENSITIVITIES
MAINTENANCE OF SOUND FINANCES: The rating is sensitive to the county's ability to restore structural balance and maintain sound reserves in accordance with its stated policy levels.
SOUND COVERAGE: The rating is also sensitive to maintenance of solid pledged revenue coverage levels. A material decline in coverage and coverage approaching the ABT would place pressure on the rating.
GO CAPS REVENUE RATING: The county's ULTGO rating of 'AA-' serves as a ceiling for the pledged revenue bond rating; any decline in the ULTGO rating would result in a downgrade for the pledged revenue bonds.
CREDIT PROFILE
Pinal County is adjacent to Maricopa County, southeast of Phoenix and north of Tucson. At an estimated 393,813, the county's population has grown 220% since 2000.
RECOVERY OF PLEDGED REVENUES; ROBUST COVERAGE
The county's pledged revenue obligations are payable from a second lien pledge of the county's general excise tax revenues, a third lien pledge of net state shared revenues and a first lien pledge of vehicle license tax (VLT) revenues. The first lien on county general excise taxes and first and second liens on net state shared revenues are closed.
The pledged revenues are economically sensitive. Following a multi-year decline of 32% in value, excise tax and net state shared revenues reflected modest improvement in fiscal 2011 and 2012 respectively. VLT revenues lost 10.5% during the recession before reflecting modest fiscal 2012 improvement. All three pledged revenue sources continue to strengthen through fiscal 2014 with solid gains.
Maximum annual debt service (MADS) coverage based on fiscal 2014 collections is a sound 2.2x and improves to 2.9x based on current year estimated collections. The city anticipates ongoing improvement in near term pledged revenues, which Fitch considers reasonable based on current trends and the two-year reporting lag associated with state shared revenues. A stress test indicates collections would need to drop by about 55% below fiscal 2014 levels to reach break-even MADS coverage. The additional bonds test is average at 1.5x MADS.
TAX-BASE CYCLICALITY; STABLE LOCAL ECONOMY
The county's peak fiscal 2010 primary assessed value of $2.9 billion represented a 10-year, five-fold increase, reflecting rapid regional development. Subsequent to a four year decline of 31%, fiscal 2015 values signaled stabilization with a modest increase of 1%.
The tax base reflects moderate concentration, with large taxpayers representing utility, mining, energy, retail, and telecom concerns. Fitch anticipates the tax base to realize additional near term growth based development underway and considering the two-year reporting lag.
The county's strategic location adjacent to Maricopa County and its large mass of developable land position it well for growth already underway. Median household income levels approximate those of the state. Unemployment trends moderately above the state and national levels; however, at 7.7% as of August 2014, the rate is improved from the 9% recorded a year prior due to job growth outpacing labor force gains. Large governmental and health services employers lend stability to the local economy.
SOUND FINANCES DESPITE REVENUE CYCLICALITY
Property tax revenues provide half of general fund support; economically sensitive excise taxes and intergovernmental revenues (largely state shared sales tax revenues) account for about 38% of total general fund revenues. The county has maintained solid reserves during the past several years through cost cutting and a hike in its primary ad valorem tax rate during fiscals 2011 and 2012 (to 3.99 cents from 3.2 cents).
Healthy fiscal 2013 unrestricted general fund reserves of $47.3 million (29.9% of spending) reflect ongoing cost containment and a modest decline in the primary tax rate to 3.79 cents. Unaudited fiscal 2014 results draw down reserves to $36.7 million (21.7% of spending) reflecting the tax base trough and modest public safety cost increases.
BUDGET CHALLENGES REMAIN
The fiscal 2015 budget includes increased judiciary costs and the loss of about $11 million associated with termination of an Immigration and Customs Enforcement (ICE) prisoner contract, not entirely offset by moderate gains in excise and intergovernmental revenues. The county has retained a consultant to study options for closing portions of the detention center, right size staffing, and continues to explore additional areas of saving.
Officials anticipate ending the year favorable to budget with reserves approximating the county's 15% policy target. Fitch will continue to monitor the county's ability to regain structural balance and maintain reserve adequacy, both key credit factors.
MODERATE DEBT/INCREASING PENSION COSTS
The county's overall debt is low at $1,224 per capita and moderate at 3% of fiscal 2015 market value. Amortization is moderate at about 62% in 10 years. The county has modest new money debt issuance plans over the next five years and anticipates refunding the series 2004 COPS for savings in the next six months.
The county participates in several state pension plans including the Arizona State Retirement System (ASRS), Public Safety Personnel Retirement System (PSPRS), and Corrections Officer Retirement Plan (CORP). The county fully funds the actuarially required contributions for all plans. ASRS is 75.4% funded, or an estimated weak 68% based on Fitch's more conservative 7% investment rate. PSPRS is also weakly funded at 66.5% (and an even lower estimated 60.8% when adjusted for Fitch's more conservative investment rate of 7%). CORP is adequately funded, although the dispatcher portion of CORP is weakly funded at an estimated 66.3% when adjusted for Fitch's more conservative investment rate assumption.
Carrying costs (debt service, state pension and related state plan post-retirement health benefit contributions) represent a low 11.4% burden on the county's governmental fund spending, reflecting low direct debt levels. While Fitch anticipates increased pension contributions based on projected rate increases in the PSPRS and CORP plans, these appear manageable at this time.
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=918675
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