Fitch Affirms Casa Grande, AZ’s GOs and Excise Tax Bonds at ‘AA’; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)-- As part of its continuous surveillance efforts, Fitch Ratings affirms the following ratings for Casa Grande, Arizona (the city):

-- $27.2 million in outstanding general obligation (GO) bonds at 'AA';

-- $33.9 million in outstanding excise tax revenue bonds at 'AA'.

The Rating Outlook is Stable.

RATING RATIONALE:

-- Fitch rates these separate securities on par as the credit fundamentals of both securities are similarly affected by the economically sensitive nature of the excise taxes; the city relies substantially on the broad-based excise taxes to fund general services.

-- The city's financial position remains solid as evidenced by the maintenance of large financial reserves and ample liquidity that have allowed the city to withstand the economic downturn and subsequent revenue declines.

-- The area economy continues to demonstrate weaknesses, characterized in high unemployment and above-average home foreclosures and delinquency trends. Local wealth levels are below average.

-- While debt service coverage levels have declined due to the recent weakening of the excise tax revenue streams, it remains healthy at more than 3 times (x); sound legal provisions include a rate covenant that requires 3x coverage.

-- Historically large annual gains in the tax base slowed in fiscal 2010 and reversed in fiscal 2011; another moderate loss of taxable values is projected in the next fiscal year. Tax base concentration remains moderate.

-- Direct debt levels remain moderate, supported by utility revenues and the city's practice of pay-go capital spending. Principal amortization of tax-supported debt is average.

KEY RATING DRIVER:

-- The continued conservative management of the city's financial resources is key to maintaining credit quality.

SECURITY:

The GO bonds are direct obligations of the city, payable from an unlimited ad valorem tax levied on all taxable property in the city. The excise tax revenue bonds are secured by a first lien on the city's excise tax and state-shared revenues.

CREDIT SUMMARY:

Casa Grande is the largest city in western Pinal County and a regional retail/commercial hub, located approximately halfway between Phoenix and Tucson at the junction of two major interstate highways. Now with nearly 49,000 residents, the city has experienced high levels of population growth since 2000, due largely to affordable residential development within commuting distance to the larger metropolitan employment bases. Such development drove much of the city's double-digit tax base growth that occurred from fiscal years 2006-2009, which has now weakened along with prices and new home building in the area. Growth in secondary assessed valuation (SAV; which lags changes in market value by two years) slowed in fiscal 2010 and dropped a sharp 12% in fiscal 2011, bringing SAV down to a modestly-sized $406 million and closer to its pre-fiscal 2009 level. Another moderate SAV decline of nearly 9% is projected for fiscal 2012; while not insignificant, these declines are not as severe as those experienced by many Phoenix-area cities. Overall economic conditions have weakened-not surprisingly given the relative severity of the recession and housing bust in Arizona the past several years. At 10.5% in March 2011, city unemployment levels have declined on a year-over-year basis but remain elevated and above the state and national levels of 9.3% and 9.2% respectively. Local wealth levels are below average.

The city relies largely on excise taxes to fund general fund operations; it is a broad base of revenue sources, including local sales taxes, state shared sales and income taxes, franchise fees, license and permits, and fines and forfeitures. Property taxes comprise less than 10% of total general fund operating revenues. Management prudently accumulated a portion of the large excise tax revenue gains made in earlier growth years, particularly local construction sales tax revenues, and dedicated much of it towards future, one-time capital spending rather than expanding ongoing spending levels. The previously sizeable annual gains in excise tax revenues began slowing in fiscal 2008 and reversed in fiscal 2009, declining nearly 14% from the prior year. A continuation of diminished spending patterns and housing activity in light of the economic downturn along with reductions in state-shared revenues due to the state's own budget woes brought the city's excise tax revenues down another 13% in fiscal 2010 to a total of roughly $30 million. Assisted by local sales tax performance that has declined more modestly on a year-over-year basis, management currently projects a less severe 7% drop in total excise tax revenues to roughly $28 million by the close of fiscal 2011.

The city maintained strong general fund reserves in fiscal years 2009 and 2010 despite these revenue pressures, which provides the city with additional financial flexibility to accommodate a slow economic recovery. Management reduced expenditures by nearly 5% in fiscal 2010 and while the unreserved fund balance declined by about $5 million from the prior fiscal year (due largely to one-time capital spending), it remained solid at $25.3 million or roughly 63% of spending; this total is well above the stated fund balance policy target of 50% of spending. Substantial liquidity has also been maintained in the general fund with cash/investments totaling nearly $25 million at fiscal 2010 year-end, equal to over seven months of operating expenditures. For fiscal 2011, the $39 million general fund budget included additional spending reductions and anticipated a nearly $4 million drawdown on reserves for one-time capital and operational spending. As the year's revenue performance somewhat lagged budgeted expectations, management made additional mid-year spending cuts of around $2 million and now expects to close the fiscal year better than budget with a smaller $1.5 million reserve drawdown.

Legal provisions for excise tax revenue bondholders are solid; the city covenants to levy new or increase existing excise taxes if the minimally required coverage level of 3x is not maintained. Based on estimated fiscal 2011 excise tax revenue numbers, Fitch conservatively calculates coverage for the outstanding excise tax bonds and the Water Infrastructure and Financing Authority (WIFA) loan that is secured in part by excise tax revenues (and which has a parity excise tax pledge) at a solid but reduced 4.0x maximum annual debt service (MADS). However, once wastewater revenues are considered as the sole support of WIFA debt service repayment (which is the city's practice), MADS coverage on the excise tax debt rises to a very strong 7.8x.

Direct debt levels remain moderate, supported by utility revenues and the city's practice of pay-go capital spending; direct debt is about 2% of market value and $1,370 on a per capita basis. Principal amortization of tax-supported debt is average at almost 50% in 10 years. Fitch anticipates that the city's capital needs will remain significant, given further economic and population expansion expected over the intermediate term. The current five-year capital plan totals approximately $577 million.

Casa Grande participates primarily in two pension plans that also provide death, disability and health insurance benefits: the Arizona State Retirement System (ASRS or the system) for general employees and the Arizona Public Safety Retirement System (PSPRS) for firefighters and police officers. The actuarial funded position for the ASRS system as of June 30, 2010, improved slightly from the prior year and remained solid at 80.5%. The city has made 100% of its annual required contribution (ARC) for fiscal years 2008-2010. In PSPRS, the city's funded position of 58.4% as of June 30, 2009 for police officers and 62.7% for fire fighters is relatively weak. The funding level has stayed fairly level despite large mandated increases to employer contribution rates over the past three fiscal years. However, management reports that recently approved state legislation that incorporates multi-year increases to employee contribution rates and future benefit changes is projected to improve the city's (and plan's) funded position over time.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's report 'Tax-Supported Rating Criteria', this action was additionally informed by information from Creditscope, University Financial Associates, LoanPerformance, Inc, and IHS Global Insight.

Applicable criteria and Related Research:

-- 'Tax-Supported Rating Criteria' (Aug. 16, 2010);

-- 'U.S. Local Government Tax-Supported Rating Criteria' (Oct. 8, 2010);

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605

U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566

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Fitch, Inc.
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Associate Director
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Analyst
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Senior Director
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cindy.stoller@fitchratings.com

Source: Fitch Ratings