Fitch Affirms Chandler, AZ's GOs & Excise Tax Revs at 'AAA'; Outlook Stable
Fitch Ratings affirms the following ratings on the Chandler, Arizona (the city's) debt obligations:
--$439 million general obligation (GO) bonds at 'AAA';
--$47.4 million excise tax revenue obligations at 'AAA'.
The Rating Outlook is Stable.
The GO bonds are secured by an unlimited ad valorem tax levied against all taxable property in the city. The excise tax revenue obligations are secured by a pledge of the city's excise tax revenues.
KEY RATING DRIVERS
FINANCIAL FLEXIBILITY: Conservative fiscal management and strong performance have generated substantial reserves, a sizable portion of which the city has applied to one-time expenditures over the past couple of years. Consistent with historical performance, the five year financial plan reflects adequate general fund levels despite the use of reserves for infrastructure improvements, economic development and debt retirement.
IMPROVED EXCISE TAX REVENUES: Excise tax collections are stabilizing following several years of decline. Performance is aided by strong sales tax collections associated with construction of Intel's $5 billion plant expansion, which boosted underlying growth trends within the city. Near term recovery of the state shared revenues is evidenced by recent data which is based on a two-year lag in distributions to the city.
MANAGEABLE DEBT LEVEL: Overall debt is moderate, with no additional GO issuance anticipated in the near term. The city's governmental capital plan remains heavily focused on infrastructure maintenance, supported by general fund reserves.
ROBUST COVERAGE: Debt service coverage on excise tax debt remains very high, as expected since excise taxes constitute a primary revenue source for the city's operations.
SOUND LOCAL ECONOMY: A highly skilled workforce concentrated in high tech manufacturing contributes to the city's relatively high income and low unemployment levels. Adverse effects of the slowly recovering and devastatingly severe housing collapse are somewhat reduced by a steady inflow of commercial and industrial relocations and expansion activity.
Chandler is located in the southeastern portion of Maricopa County with an estimated 2011 population of approximately 240,000. The city has experienced dramatic population growth in recent years, more than doubling since 1990. With 75% of local manufacturing jobs in high technology, Intel is the leading employer with about 9,500 workers; Microchip Technology, Inc. and Freescale Semiconductor employ nearly 1,500. Intel's $5.2 billion computer chip manufacturing plant expansion when complete in 2013 is widely reported to add 1,100 additional jobs to the city; a more recently announced $300 million expansion is expected to add another 350 new high-paying jobs.
In addition to technology, major economic sectors in the community include government, financial services, and healthcare. Employment outside the technology sector is led by Bank of America, Wells Fargo Bank, Verizon Wireless, and Chandler Regional Hospital. The city's unemployment rate of 6.1% as of July 2012 is improved from a year earlier and remains well below regional, state and national averages.
SLOWLY RECOVERING RESIDENTIAL DEVELOPMENT ACTIVITY
Both residential and commercial building permit totals have trended down sharply over the past five years, falling victim to both recessionary pressures and approaching residential build out in the city. Residential permit values bottomed out at $124 million in fiscal 2009 from a recent peak of more than $775 million in 2004, and have since improved to $209 million in 2012. While commercial development had also slowed, the city reports a number of corporate relocations and expansions of existing companies that have lessened the recessionary impact and produced a decline in the commercial vacancy rates to among the lowest in Maricopa County.
The slowed development activity and declines in existing values have combined to pressure Chandler's taxable value as measured by secondary assessed value (SAV). After climbing an average of more than 18% annually from fiscal 2005-2009, SAV (reflecting a two year lag) registered a modest 1.5% increase in fiscal 2010 before declining a cumulative 40.6% through fiscal 2013 to $2.3 billion. Recently reported data (reflecting a two-year lag) suggests that further weakness is expected through fiscal 2014 before leveling out in fiscal 2015. Fitch notes this trend is generally consistent within the region and that property taxes comprise a relatively small portion of the city's total operating revenues.
STRATEGIC APPLICATION OF RESERVES
The fiscal 2011 unrestricted (sum of committed, assigned and unassigned) general fund balance remains healthy at $160.6 million (47.5% of spending) despite several years of budgeted draws to fund one-time expenditures for a new city hall, downtown redevelopment, and street improvements.
Officials estimate an $11 million addition to fiscal 2012 unrestricted general fund balance on the strength of sales tax revenues combined with the carry forward effects of fiscal 2011 cost reductions. Representing the primary operating revenue source for the city, fiscal 2012 sales tax collections increased by 12.7%, following growth of 4.2% the prior year. A balanced fiscal 2013 operating budget is based on conservative assumptions which do not include the sales tax impacts of the Intel expansion. (By policy the city does not rely on nonrecurring revenue for ongoing operations.)
Projected general fund balances remain substantial and consistent with Fitch's highest rating despite the use of substantial reserves for infrastructure, economic development and debt retirement purposes within the city's five year plan. Fitch views positively the historic conservatism of the city's planning.
Debt levels are moderate, and the pace of GO debt retirement is above average with roughly 60% repaid in 10 years. Despite SAV declines, management does not anticipate an increase in the city's secondary (debt service) tax rate over the near term; officials plan to apply a portion of the city's large reserves to retire outstanding debt and improve the city's debt service position over the next five years. Not surprisingly, the city's capital budget has been cut significantly. The five year capital plan through fiscal 2017 totals roughly $570 million (three-quarters of which is enterprise spending), down from $1 billion three years ago. Chandler officials describe near term general government projects as focusing on maintenance of existing facilities.
Full time employees of the city are covered by one of three state-administered pension programs. Annual city contributions are equal to the required contribution amounts, and funding levels of the programs remain satisfactory. The city's other post-employment benefit liability is limited to an implied subsidy, as retirees pay 100% of an actuarially determined blended premium rate. The city's carrying costs, representing fiscal 2011 debt service, pension contribution and other post-employment benefits, represent a manageable 15.7% of general fund expenditures and transfers out.
STABILIZED PLEDGED REVENUES
The city's excise tax revenue obligations are secured by a basket of revenues, including local sales tax, state shared revenues, franchise fees, licenses and permits, and fines and forfeitures. Excise tax revenues peaked in fiscal 2008 at $162.9 million before declining a cumulative 16% to $136 million in fiscal 2011, with state shared revenues muting otherwise stronger performance due to the two year lag in distributions. Maximum annual debt service coverage based on fiscal 2011 collections is a healthy 17.5x, which reflects the fact that excise tax collections comprise the city's largest source of operating funds. Fiscal 2012 estimated total collections are up more than 9%; conservatively forecast fiscal 2013 collections are close to flat, but with gains in the state shared components making up 30% of total collections.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
-- 'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
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