Fitch Ratings has assigned its 'AA-' rating to Tucson, Arizona's (the city) $27.6 million certificates of participation (COPs), series 2009, and $21 million refunding certificates of participation, series 2009. In addition, Fitch affirms its 'AA-' rating for the city's $151.4 million COPs outstanding and the 'AA' rating on the $269.1 million in general obligation bonds (GOs) outstanding. The COPs are scheduled to sell via negotiation on or about May 19th. The Rating Outlook on both the COPs and GOs is revised to Negative from Stable.
The COPs are payable from lease payments from the city to a trustee; the lease payments are subject to annual appropriation. With the exception of outstanding series 1997 COPs, all of the city's COPs (including these offerings), are based on a master lease indenture that was adopted in 1999. The indenture requires the city to make one budget line item appropriation annually to cover the city's multiple base rental obligations. The trustee's security interest allows it to repossess and re-let the leased projects in the event of default.
The series 2009 COP proceeds will be used to finance the construction, renovation, and improvement of environmental services, public safety, and other facilities. The series 2009 refunding COP proceeds will be used to refund a portion of the city's outstanding COPs for near-term debt service savings.
The 'AA-' rating for the COPs reflects Tucson's diverse and generally sound local economy, moderate direct debt profile and sound lease structure. The Outlook revision for both the COPs and GOs results from a weakened financial profile, the result primarily of significant declines in major operating revenue sources. Both local sales tax and state shared revenues have registered sizeable drops in recent months, and the city is anticipating further weakness into fiscal 2010. Tucson's reliance on state and local sales tax collections and state income tax revenues to fund operations makes the city susceptible to changing economic conditions, and the current recession is presenting a significant challenge to elected officials and administrators. The city's unreserved general fund balance declined by roughly 40% in fiscal 2008, and the expectation is for another decline in fiscal 2009. The city has taken a number of steps to reduce spending and identify additional revenue sources in an effort to stabilize its financial position. Fitch will monitor these efforts, and notes that any further deterioration in the city's overall financial profile, as well as less than prompt restoration of reserves to the city's 10% policy target, would not be consistent with the current rating category and likely would result in a rating downgrade.
Tucson is the second most populous city in Arizona, with an estimated population of nearly 545,000, and was the 30th largest city in the nation according to the 2000 U.S. census. At more than 50% built-out, growth of the city's residential base has slowed from its peak in 2001, when it recorded 3,800 single-family home permits; only 638 new housing permits were issued in 2008. Although the Tucson housing market experienced less rapid rates of price appreciation than other Arizona municipalities, the median single-family home price in the city has dropped measurably in recent months, by roughly 25% since 2006. The most recent residential delinquency and foreclosure rates, however, are below the national averages.
The general fund reported a net loss for fiscal 2008 of $23.2 million, and the unreserved fund balance dropped to $31.1 million, or 6% of spending, from $51 million (10%) the prior year. Liquidity also declined sharply in fiscal 2008, although this decline was driven largely by the transfer out of unspent COP proceeds for capital spending. General fund cash and investments at June 30, 2008 totaled only $1.2 million, down from $87.9 million the prior year. The city is anticipating another draw on operating reserves for fiscal 2009, with the unreserved general fund balance expected to decline by more than $16 million; at this level, the unreserved balance would be less than 4% of spending, well below the city's 10% policy.
Significant drops in both local sales tax revenue and state shared revenues (sales and income taxes) are the primary factors in the city's weakening financial profile. Local sales tax receipts dipped more than 3% in fiscal 2008, and the projection for fiscal 2009 is for a 13% decline to roughly $170.5 million. Local sales tax revenues comprised more than 40% of general fund revenues in fiscal 2008. State shared revenues, which in fiscal 2008 comprised roughly 30% of general fund revenues, are projected to register a 3% decline in fiscal 2009 to $143.3 million.
The city has responded on a variety of fronts to the revenue losses, including continuation of a retirement incentive program that was instituted in 2006, a freeze in all positions except public safety and mission critical areas, and a reduction in operating subsidies/transfers. The proposed fiscal 2010 budget continues with these efforts, with a 7% cut in all department budgets (except public safety, with a proposed 2.5% cut), a freeze on all vacant positions, a reduction in paid holidays from 10 to 5, and a decrease in city contributions for employee benefits. City staff also has proposed new business taxes and fees that if adopted could generate up to $17 million in additional revenue. The city to date has chosen to avoid employee layoffs, but further economic deterioration may require such action at some point. The proposed fiscal 2010 budget assumes further declines in both local sales tax revenues and state shared revenues, but is projecting a modest increase in reserves due to the planned spending reductions.
Including street and highway user revenue debt and certificates of participation, both direct and overall debt levels of the city are moderate. In addition, amortization of GO debt is well above average at nearly 80% retired in 10 years. The city's $1 billion five-year capital improvement plan is slightly less than the previous plan; the major spending categories are transportation ($588 million) and water ($276 million). Grants and contributions comprise the major funding sources at more than $615 million.
Services, military, and government are the area's prominent employment sectors. The military presence in the Tucson area is substantial with U.S. Army Intelligence Center, Fort Huachuca, and Davis-Monthan Air Force Base employing more than 14,000. Government employment totals more than 20,000, and public and higher education, including the University of Arizona main campus, employs more than 25,000. Raytheon Missile Systems is the largest private employer in Tucson, with a staff of roughly 11,000. Retail trade, manufacturing, and tourism also are important components of the local economy. Unemployment levels historically have been below those of the state and nation. The March 2009 rate of 7.7% was up significantly from the same period last year, and was consistent with the state average but below the national average for the month. Also, local personal income levels traditionally have trailed those of the state and nation.
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Fitch Ratings
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Karen
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Cindy Stoller,
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cindy.stoller@fitchratings.com