Fitch Ratings upgrades the rating on the Surprise,
Arizona (the city) general obligation (GO) bonds and the Surprise
Municipal Property Corporation (the corporation) excise tax revenue
bonds to 'AA-' from 'A+'. This action affects $2.2 million in
outstanding GO debt and $52.6 million in outstanding excise tax debt.
The Rating Outlook is Stable.
Fitch cites the city's strengthening financial position, sound management practices and policies, and continuing tax base and population growth as primary factors in the rating upgrade. Also reflected in the rating are the city's reliance on excise tax revenues to fund operations and the vulnerability of this revenue stream to changing economic conditions. In addition, the ongoing rapid growth generates both operational and capital pressures on the city. However, these negative factors are mitigated largely by the city's conservative budgeting practices, sizeable operating reserves, efficient operations and practice of substantial pay-as-you-go capital financing from development fees.
The torrid pace of residential construction has eased slightly from a recent peak of 7,700 starts in 2004, but the city still is forecasting an average of 4,000-5,000 new homes annually over the near term. The city's population is expected to jump from a 2005 estimate of 78,295 to roughly 165,000 by 2010. Surprise is located in Maricopa County roughly 20 miles northwest of downtown Phoenix.
Maintenance of adequate reserves is a key credit consideration, given the city's heavy reliance on excise tax revenues. The city has managed to increase general fund reserves over the past three fiscal years, thanks to larger than expected revenues and conservative budgeting efforts. The fiscal 2005 total general fund balance was a robust $56.8 million, or more than 105% of expenditures and transfers out; this total was up from $38.5 million or 99% reported in fiscal 2004. Projections for fiscal 2006 anticipate another larger operating surplus. However, city officials anticipate that fund balance levels will decline to approximately $40 million due to planned sizeable transfers out for capital outlays.
Excise taxes include transaction privilege (sales) taxes, state-shared revenues (consisting of state-shared sales taxes and state revenue sharing), charges for services, permits and fees, and fines and forfeitures. The city sales tax is the largest component, comprising nearly 58% of total excise tax revenues in fiscal 2005. Charges for services (26%) and state revenue sharing (6% in fiscal 2004) are the next largest components.
Both sales tax and overall excise tax revenues have increased sharply in recent fiscal years, reflecting additional retail activity and residential growth. Sales taxes in fiscal 2005 increased nearly 50% from the prior year to $37.8 million, and the average annual increase since fiscal 2002 is more than 33%. Likewise, total excise tax revenues increased nearly 37% to $64.6 million in fiscal 2005; the average annual increase over the past three fiscal years is more than 28%. Preliminary fiscal 2006 totals suggest comparable results, with sales taxes expected to climb more than 30% from last year.
The city's capital needs are sizeable at $642 million through fiscal 2010. The largest spending category is transportation at more than $290 million. However, the largest transportation project is improvements to Loop 303, and the city is anticipating grant funding of approximately $220 million for this project. General capital ($125 million) and wastewater ($96 million) are the next largest spending categories.
Fitch views positively the city's aggressive use of development fees, which are applied to a range of capital projects and reduce borrowing needs. Development fees are projected to generate more than $230 million for capital spending through fiscal 2010. Other significant revenue sources for capital include interfund transfers of roughly $145 million (which include 75% of sales tax receipts on construction projects), and $80 million from a recently instituted 1.5% sales tax on new construction that is earmarked for transportation projects. Debt is expected to finance only $65 million of capital needs through fiscal 2010.
The city's explosive growth is reflected in recent valuation increases. The secondary assessed value (SAV) for fiscal 2006 is nearly $600 million, which represents a gain of 24.5% from last year. The average annual increase in SAV since fiscal 2001 is a strong 28%. Full cash value for fiscal 2006 is $5.3 billion; the city has added more than $1 billion in total value for each of the past two fiscal years.
Development continues at a number of master planned residential communities in Surprise. The city reports that more than 25,000 residential lots have been platted and approved, and that another 100,000 are in design or conceptual stages. The city's extensive planning area (more than 300 square miles) suggests development will continue for the foreseeable future. Construction continues at Surprise Center, a new downtown that will feature a new city hall, library, recreation complex and courts. The center also is home to Surprise Stadium, the spring training facility for the Kansas City Royals and Texas Rangers.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Fitch cites the city's strengthening financial position, sound management practices and policies, and continuing tax base and population growth as primary factors in the rating upgrade. Also reflected in the rating are the city's reliance on excise tax revenues to fund operations and the vulnerability of this revenue stream to changing economic conditions. In addition, the ongoing rapid growth generates both operational and capital pressures on the city. However, these negative factors are mitigated largely by the city's conservative budgeting practices, sizeable operating reserves, efficient operations and practice of substantial pay-as-you-go capital financing from development fees.
The torrid pace of residential construction has eased slightly from a recent peak of 7,700 starts in 2004, but the city still is forecasting an average of 4,000-5,000 new homes annually over the near term. The city's population is expected to jump from a 2005 estimate of 78,295 to roughly 165,000 by 2010. Surprise is located in Maricopa County roughly 20 miles northwest of downtown Phoenix.
Maintenance of adequate reserves is a key credit consideration, given the city's heavy reliance on excise tax revenues. The city has managed to increase general fund reserves over the past three fiscal years, thanks to larger than expected revenues and conservative budgeting efforts. The fiscal 2005 total general fund balance was a robust $56.8 million, or more than 105% of expenditures and transfers out; this total was up from $38.5 million or 99% reported in fiscal 2004. Projections for fiscal 2006 anticipate another larger operating surplus. However, city officials anticipate that fund balance levels will decline to approximately $40 million due to planned sizeable transfers out for capital outlays.
Excise taxes include transaction privilege (sales) taxes, state-shared revenues (consisting of state-shared sales taxes and state revenue sharing), charges for services, permits and fees, and fines and forfeitures. The city sales tax is the largest component, comprising nearly 58% of total excise tax revenues in fiscal 2005. Charges for services (26%) and state revenue sharing (6% in fiscal 2004) are the next largest components.
Both sales tax and overall excise tax revenues have increased sharply in recent fiscal years, reflecting additional retail activity and residential growth. Sales taxes in fiscal 2005 increased nearly 50% from the prior year to $37.8 million, and the average annual increase since fiscal 2002 is more than 33%. Likewise, total excise tax revenues increased nearly 37% to $64.6 million in fiscal 2005; the average annual increase over the past three fiscal years is more than 28%. Preliminary fiscal 2006 totals suggest comparable results, with sales taxes expected to climb more than 30% from last year.
The city's capital needs are sizeable at $642 million through fiscal 2010. The largest spending category is transportation at more than $290 million. However, the largest transportation project is improvements to Loop 303, and the city is anticipating grant funding of approximately $220 million for this project. General capital ($125 million) and wastewater ($96 million) are the next largest spending categories.
Fitch views positively the city's aggressive use of development fees, which are applied to a range of capital projects and reduce borrowing needs. Development fees are projected to generate more than $230 million for capital spending through fiscal 2010. Other significant revenue sources for capital include interfund transfers of roughly $145 million (which include 75% of sales tax receipts on construction projects), and $80 million from a recently instituted 1.5% sales tax on new construction that is earmarked for transportation projects. Debt is expected to finance only $65 million of capital needs through fiscal 2010.
The city's explosive growth is reflected in recent valuation increases. The secondary assessed value (SAV) for fiscal 2006 is nearly $600 million, which represents a gain of 24.5% from last year. The average annual increase in SAV since fiscal 2001 is a strong 28%. Full cash value for fiscal 2006 is $5.3 billion; the city has added more than $1 billion in total value for each of the past two fiscal years.
Development continues at a number of master planned residential communities in Surprise. The city reports that more than 25,000 residential lots have been platted and approved, and that another 100,000 are in design or conceptual stages. The city's extensive planning area (more than 300 square miles) suggests development will continue for the foreseeable future. Construction continues at Surprise Center, a new downtown that will feature a new city hall, library, recreation complex and courts. The center also is home to Surprise Stadium, the spring training facility for the Kansas City Royals and Texas Rangers.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.