Fitch Affirms Chandler, AZ HURF Bonds at 'AA'; Outlook Stable.
AUSTIN, Texas -- Fitch Ratings has affirmed its 'AA' rating on the $25.7 million outstanding street and highway user revenue bonds of Chandler, Arizona.
The Rating Outlook is Stable.
The bonds are secured by a first lien on revenues derived by the city from highway user taxes, including all taxes, fees, and charges collected by the state and returned to the city for street and highway purposes as prescribed by law.
KEY RATING DRIVERS
HEALTHY COVERAGE: Debt service coverage is sound, and the highway user revenue fund (HURF) maintains ample liquidity.
DECLINING REVENUE STREAM: Pledged revenues have declined the past several years, due to weakening economic conditions and recent state legislative action to redirect state highway user revenues.
SOUND FINANCIAL PROFILE: Chandler maintains strong financial stewardship, characterized by conservative financial policies and extensive planning, forecasting and reporting practices.
NO ADDITIONAL LEVERAGING: The city has no near-term borrowing plans for highway user tax revenues.
DECLINING BUT SATISFACTORY REVENUES
Highway user tax revenues consist of motor vehicle fuel taxes, motor vehicle registration fees, motor vehicle licenses taxes, motor carrier fees, motor vehicle operator's license fees, and other miscellaneous fees and revenues. Highway user tax revenues are collected by the state and deposited into the state highway user fund until distributed. Arizona cities and towns receive 27.5% of highway user tax distributions. One-half is distributed to cities and towns on the basis of population in proportion to all cities and towns in the state. The remaining one-half is distributed, first, on the basis of county origin of sales of motor vehicle fuels within the state, and second, to cities and counties on the basis of population in proportion to all cities and towns in the county. Arizona cities with populations exceeding 300,000 also receive a 3% allocation for certain street and highway purposes.
Fitch notes that the Arizona state legislature retains the authority to alter the type and/or rate of fees that are deposited into the state highway user fund, as well as the allocation of such monies between state purposes and the distribution to cities, towns and counties. The legislature has made such alterations during recent legislative sessions, and the current economic environment may spur legislators to consider additional changes. Management reports the city has lost a cumulative $3.7 million in pledged revenues due to legislative action since fiscal 2009.
Pledged revenues have declined in three of the past four fiscal years, the result of a weakened economy and periodic legislative action that has re-directed a portion of highway revenues for state highway department use. Fiscal 2011 pledged revenues totaled nearly $13.3 million, which represented a modest increase of 1.3% from fiscal 2010 totals but a roughly 20% decline from the peak of $16.5 million in fiscal 2007. The city has budgeted a 13.5% drop in pledged revenues for fiscal 2012 due to legislative action in the 2011 session. Despite the weaker revenue totals, projected maximum annual debt service (MADS) coverage remains sound. Using budgeted fiscal 2012 revenue totals of $11.5 million, MADS coverage is 2.46 times (x), and a stress test reducing revenues by 15% from the fiscal 2012 total still generates coverage of more than 2.0x. All street and highway user revenue bonds outstanding mature by 2019.
ADEQUATE LEGAL PROVISIONS
Legal provisions provide adequate bondholder protections. They include an additional bonds test of 1.5x MADS, and if projected MADS coverage is less than 2.0x the proposed bonds must be rated 'A' or higher by at least one nationally recognized rating agency. In addition to debt service payments, highway user tax revenues are used for capital projects and for staffing, maintenance and contractual expenses related to Chandler streets and highways. Fitch notes the healthy liquidity in the city's HURF as a positive credit factor; cash and investments at fiscal 2011 year-end totaled $13.8 million, down only moderately from a recent peak of $16.3 million reported in fiscal 2008 and roughly equal to maintenance, capital and debt service spending for the year.
Despite the rapid population growth experienced in Chandler over the past decade, including the associated operational and capital pressures, solid financial policies and practices enabled the city to fund its various needs and develop sizeable reserves. This cushion proved critical when the recession hit in 2007, enabling the city to complete several major capital projects and adjust spending levels gradually as certain revenues shrank. The city responded to pressures resulting from declines in economically sensitive revenues (e.g. local and state sales taxes, building permits and fees) with various cost cutting measures over the past several years, and the fiscal 2012 budget continues this trend with $2 million in general fund cost savings and efficiencies identified.
SOUND CITY FINANCES
The unrestricted general fund balance for fiscal 2011 totaled roughly $160 million, equaling more than 75% of expenditures and transfers out for the year. Fiscal 2011 results included a $36 million decline in operating reserves, the second consecutive year of reduced reserves. These declines were primarily the result of planned use of monies for large capital projects, and management expects to continue with this practice for the next several years. However, Fitch anticipates that reserves will remain healthy and consistent with the city's 'AAA' GO bond rating.
Located in the Phoenix metropolitan area, Chandler has a 2010 population of 236,123. The city has experienced dramatic population growth in recent years, more than doubling since 1990. Chandler is home to various technology-related companies, and more than 75% of local manufacturing jobs are in high technology. Intel employs nearly 10,000 at its fabrication facility, and has begun a $5 billion expansion project (its second multi-billion dollar expansion in the past several years). Microchip Technology, Orbital Sciences and Freescale Semiconductor (formerly Motorola) are other large technology employers.
Full-time employees of the city are covered by one of three state-administered pension programs. Annual city contributions are equal to the required contribution amounts, and while funding levels of the programs remain satisfactory they fall below 70% for general employees and police when a more conservative 7% investment return is assumed. The city's other post-employment benefit liability is limited to an implied subsidy.
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, and the National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria