2010-02-17 17:22:06 -
Fitch Ratings assigns an 'AA-' rating to the following Chandler, Arizona street and highway user revenue bonds.
--$10.235 million refunding bonds, series 2010.
The bonds are expected to sell via negotiation no earlier than the week of Feb. 22.
In addition, Fitch affirms its 'AA-' rating on the city's outstanding parity highway user revenue debt.
--$21.35 million (post refunding).
The Rating Outlook is Stable.
RATING RATIONALE.
--Debt service coverage is sound, and the highway user revenue fund (HURF) maintains ample liquidity.
--Pledged revenues declined in fiscal 2008 and 2009, due to weakening economic conditions and recent state legislative action to redirect state highway user revenues.
--Chandler maintains strong
financial stewardship, characterized by conservative financial policies and extensive planning, forecasting and reporting practices.
--The city has no near term borrowing plans for highway user tax revenues.
--In addition to shifts in fuel consumption, pledged revenues are vulnerable to changes in the city's proportional population position.
KEY RATING DRIVERS.
--Further declines in pledged revenues will reduce debt service coverage, but bondholder risk is low given current coverage levels.
--Fewer highway user revenues also likely will affect the pace of street-related capital spending and may pressure HURF liquidity levels.
SECURITY.
The series 2010 bonds and outstanding parity bonds are secured by a first lien on revenues derived by the city from highway user taxes, including all taxes, fees, and charges collected by the state and returned to the city for street and highway purposes as prescribed by law.
CREDIT SUMMARY.
The rating reflects solid debt service coverage and no near term plans for additional borrowing from this source. Coverage remains healthy despite declines in pledged revenues in fiscal 2008 and fiscal 2009, as weak economic conditions have impacted gasoline tax and motor vehicle registration and license fees. City officials also anticipate little growth in revenues over the next several years as demand is expected to remain muted. Also considered in the rating is the population and point of origin consumption-driven distribution formula for highway user tax revenues. Given its relatively mature status, Chandler expects to experience less rapid population growth as compared to other Arizona cities, which will result in decreasing point of origin sales revenue going forward.
Highway user tax revenues consist of motor vehicle fuel taxes, motor vehicle registration fees, motor vehicle licenses taxes, motor carrier fees, motor vehicle operator's license fees, and other miscellaneous fees and revenues. Highway user tax revenues are collected by the state and deposited into the state highway user fund until distributed.
Arizona cities and towns receive 27.5% of highway user tax distributions. One-half is distributed to cities and towns on the basis of population in proportion to all cities and towns in the state. The remaining one-half is distributed, first, on the basis of county origin of sales of motor vehicle fuels within the state, and second, to cities and counties on the basis of population in proportion to all cities and towns in the county. Arizona cities with populations exceeding 300,000 also receive a 3% allocation for certain street and highway purposes.
Fitch notes that the Arizona state legislature retains the authority to alter the type and/or rate of fees that are deposited into the state highway user fund, as well as the allocation of such monies between state purposes and the distribution to cities, towns and counties. The legislature has made such alterations during recent legislative sessions, and the current economic environment may spur legislators to consider additional changes.
Fiscal 2009 pledged revenues totaled nearly $13.9 million, which represented a decline of more than 12% from fiscal 2008 totals; fiscal 2008 results were down a more modest 4% from the previous year. The city is anticipating little change in pledged revenues for fiscal 2010.
Despite the weaker revenue totals, projected maximum annual debt service (MADS) coverage remains sound. Using fiscal 2009 revenue totals, MADS coverage is 2.96 times (x), and a stress test reducing revenues by 15% from the fiscal 2009 total still generates coverage of more than 2.5x.
All street and highway user revenue bonds outstanding mature by 2019.
The series 2010 bonds will refund a portion of the outstanding parity debt for interest savings that will be concentrated in 2010 and 2011.
Legal provisions provide adequate bondholder protections. They include an additional bonds test of 1.5x MADS, and if projected MADS coverage is less than 2.0x the proposed bonds must be rated 'A' or higher by at least one nationally recognized rating agency. In addition to debt service payments, highway user tax revenues are used for capital projects and for staffing, maintenance and contractual expenses related to Chandler streets and highways. Fitch notes the healthy liquidity in the city's HURF as a positive credit factor; cash and investments at fiscal 2009 year-end totaled $14.9 million, down only marginally from a recent peak of $16.3 million reported in fiscal 2008.
Despite the rapid population growth experienced in Chandler over the past decade, including the associated operational and capital pressures, solid financial policies and practices have enabled the city to fund its requirements and develop sizeable reserves. The unreserved general fund balance for fiscal 2009 totaled nearly $195 million, equaling more than 85% of expenditures and transfers out for the year; this result was consistent with results from the prior two years. Also, liquidity is healthy with fiscal 2009 general fund cash and investments totaling more than $215 million. City officials report that general fund balances will decline by more than $40 million in fiscal 2010, the result primarily of the application of available funds for construction of a new city hall.
Despite the anticipated drawdown, operating reserves will remain healthy at approximately $180 million. Like most communities in the Phoenix area, Chandler is contending with reductions in various revenue sources, including sales taxes and development related revenues. Officials to date have made significant spending modifications in order to balance ongoing revenues with expenditures and Fitch believes these and future actions will be sufficient to maintain the city's solid financial profile.
Located in the Phoenix metropolitan area, Chandler has an estimated 2009 population of more than 250,000. The city has experienced dramatic population growth in recent years, more than doubling since 1990.
Chandler is home to various technology-related companies, and more than 75% of local manufacturing jobs are in high technology. Intel employs 10,000 at its fabrication facility, and Microchip Technology, Orbital Sciences and Freescale Semiconductor (formerly Motorola) are other large technology employers.
Applicable criteria available on Fitch's website at www.fitchratings.com :
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--'Tax-Supported Rating Criteria,' dated Dec. 21, 2009.
--'U.S. Local Government Tax-Supported Rating Criteria', dated Dec.21, 2009.
Additional information is available at www.fitchratings.com :
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Fitch Ratings, AustinSteve Murray, +1-512-215-3729Julie
Seebach, +1-512-215-3740Media Relations, New YorkCindy
Stoller, +1-212-908-0526
cindy.stoller@fitchratings.com : mailto:cindy.stoller@fitchratings.com
