Fitch Rates Tucson, AZ's $35.4MM GOs 'AA'.

AUSTIN, Texas -- Fitch Ratings assigns an initial 'AA' rating to the $35.4 million general obligation refunding bonds, series 2004, of Tucson, Arizona. Additionally, Fitch assigns an 'AA' rating for the city's $273.9 million in general obligation bonds outstanding. The refunding issue is scheduled to price the week of Nov. 8 via negotiation to RBC Dain Rauscher. The Rating Outlook is Stable.

The bonds are payable from an ad valorem tax to be levied annually on all taxable property located within the city, unlimited as to rate, but limited to an amount not to exceed the aggregate amount of debt service on the bonds being refunded. Bond proceeds will refund general obligation bonds outstanding for interest cost savings.

The 'AA' rating is based upon the solid local economy, moderate direct debt profile, and the recent measures enacted to shore up general fund financial operations and reserves. Also reflected in the rating is the reliance upon state and local sales tax collections to fund operations, revenues that are susceptible to prevailing economic conditions. Services, military, and government are the prominent employment sectors that provide economic stability and breadth. At the end of fiscal 2003, the unreserved general fund balance had been depleted significantly; however, the financial plan implemented through the fiscal 2005 budget, as well as the results of an emerging economic recovery, will restore the fund balance to a more viable level.

To address a continuing general fund budget imbalance, city leadership adopted several measures to provide structural changes that increased financial flexibility. The most significant action was to implement a $14 per month fee for residential refuse collection and transfer that activity from the general fund to an enterprise fund. The fee is anticipated to generate $20 million annually and be sufficient to fund landfill requirements, as well. This move will allow the release of some $18 million previously designated to landfill closure mandates to the unreserved portion of the general fund balance.

Additional revenue increases related to user charges, as well as funds from the settlement of tax litigation will restore balanced fiscal operations and raise the unreserved general fund balance to an estimated $33.2 million, or 7.5% of expenditures, at the end of fiscal 2005. The projected ending general fund balance for fiscal 2004 is $10.9 million.

Direct debt levels are moderate at $999 per capita and 2.6% of the estimated full cash value of property within the city. Amortization of tax-supported debt is average at 45% retired within 10 years, and the city has $54.1 million in general obligation authority remaining at this time. The $592 million five-year capital improvement plan (CIP) identifies $254 million in water projects, $182 million for transportation, and $98 million for streets. Fitch rates the city's water system revenue debt 'AA'. The overall debt burden is also moderate at $1,913 per capita and 5% of estimated full cash value.

Tucson is the second largest city in Arizona, with an estimated population of 502,100 for 2004 and was the 30th largest city in the nation according to the 2000 Census. The military presence in the Tucson area is substantial, with the U.S. Army Intelligence Center, Fort Huachuca, and Davis-Monthan Air Force Base employing over 19,000. The combined state and local government employment totals more than 22,000 and public and higher education, including the University of Arizona main campus, employs approximately 17,700. Raytheon Missile Systems is the largest private employer in Tucson, with a staff of 10,200, which is its largest facility in the state. Retail trade, manufacturing, and tourism are also important components of the local economy.

The tax base has performed well, registering a 5.7% average annual rise in assessed valuations for each of the past five years. In the same time period, an average of $550 million in building permit values has been added each year. Due to a recent annexation, approximately 52% of the city is available to be developed; it is estimated that complete buildout will require about 35 years. Residential activity has been brisk with over 2,700 new housing starts annually since calendar 1996.