Fitch Rates Tempe, Arizona's $56MM GOs 'AAA'
Source: Business Wire
Repayment security is provided from an unlimited ad valorem tax levied on all taxable property within the city. Proceeds of the bonds will be used to finance water and wastewater system, streets, public safety, and parks and community services improvements, and to pay issuance costs.
The 'AAA' rating reflects the city's sound financial position, strong financial stewardship, moderate debt burden, and the diversity of Tempe's economy. Sizable cash reserves and prudent financial management and policies are important characteristics of the city's high credit quality. Both the general and water and wastewater funds have large available reserves, providing a substantial cushion to counter the current difficult economic environment. While near-term operating reserves are expected to decline materially due to revenue shortfalls, Fitch expects fund balance levels to remain satisfactory, and further expects management to make the necessary adjustments to preserve financial flexibility and maintain the city's strong credit quality.
With an estimated population of 172,000, Tempe is located in Maricopa County, the economic hub and population center of the state. The city is home to several major employers, including Arizona State University (ASU), US Airways, and numerous computer technology manufacturing concerns. While government employment is significant, the services and trade sectors dominate.
For fiscal year 2008, the general fund posted a roughly $4 million reduction in fund balance. This result, which was below budget projections, was driven largely by reduced local sales tax receipts. Local sales taxes are the largest operating revenue source, typically contributing between 45-50% of total general fund revenues. Collections for the year totaled $83.1 million, down nearly 5% from fiscal 2007 totals. Despite the loss, reserves remained very healthy with the unreserved general fund balance at $92.4 million, or 48% of expenditures and transfers out. The city's formal financial policies require an undesignated general fund balance of 25% of anticipated revenues.
Current projections for fiscal year 2009 indicate continued weakness in local sales tax revenue, along with anticipated declines in state shared revenues (sales and income tax). Local sales tax receipts are forecast to fall short of budget projections by more than 8%, while state shared revenues are expected to miss the budgeted target by 5.5%. The city has responded to the weakened economy in various ways, including a hiring freeze, deferral of equipment purchases, reductions in discretionary spending, and cancellation of planned salary increases. Nonetheless, the city expects to record a general fund shortfall for fiscal 2009 of roughly $16 million.
Tempe officials anticipate that fiscal stress will continue through fiscal 2010, with the weak local and regional economies continuing to pressuring various revenue sources. Current projections assume little improvement in sales tax collections and additional weakness in state shared revenues, the combination of which is expected to contribute to another operating loss of roughly $16 million to $20 million. City efforts to minimize the impact on its financial position will continue, as outlined in a recently adopted budget balancing plan. Measures planned for fiscal 2010 include the elimination of 50 vacant positions, implementation of a voluntary retirement/resignation program, no salary increases and employees benefit adjustments. The city also plans to eliminate another 70 positions by July 1, 2010. Fitch observes that projected general fund reserve levels, while smaller, will remain satisfactory over the near term. Fitch will monitor the city's efforts, noting that any further significant deterioration in reserves and extensive delay in restoring budgetary balance and financial flexibility may have negative credit implications.
Of the city's approximately $408 million in GO bonds outstanding, nearly 75% are supported by revenues from the water and wastewater utility. The utility's financial position is sound, with fiscal 2008 liquidity of more than $95 million, exceeding 900 days of operations. The city has established a track record of regular utility rate increases to meet increasing system needs, and a rate study currently nearing completion is expected to call for additional rate hikes. The city's five-year capital plan appears manageable at roughly $473 million. Transit and general government projects comprise about 56% of the total, with enterprise systems utilizing the remaining 42%. Of the total projected cost, roughly two-thirds is expected to be funded with bonds. GO debt is amortized at an above-average rate, with about 60% retired in ten years. Including $267 million in outstanding and proposed excise tax debt, both direct and overall debt ratios are slightly above average.
Tax base growth, as measured by secondary assessed value (SAV) has been solid at more than 9% annually over the past five fiscal years. However, the impact from the current residential slowdown has yet to show up in SAV totals. While the preliminary SAV for fiscal 2010 shows a 4% increase, city officials caution that the following year is likely to include a decline of more than 5% in SAV. While the single family residential market in Tempe is relatively mature, condominium construction has been very active in recent years. According to city officials, the recent bankruptcy filing by the developers of a major condominium project has stalled construction on that project. Overall, that sector remains weak with a large number of units reportedly for sale.
Not surprisingly, the current slowdown has eroded employment totals in Tempe in recent months, and the local unemployment rate has climbed. However, the city's rate of 6.2% for March 2009 remained below regional, state and national averages. Recent positive economic developments include the initiation of light rail service in December, 2008 from downtown Phoenix to Tempe and ASU and the opening of Tempe Marketplace, a 1.3 million square-foot retail center adjacent to downtown Tempe and the Tempe Town Lake waterfront. ASU is the largest university in Arizona, with a fall 2008 enrollment of more than 67,000. Fitch has noted during past recessions that large universities serve as a stabilizing influence on a local economy; ASU is expected to serve in this capacity for Tempe during the current economic downturn.
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