AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings upgrades the following bonds of the Prescott Valley
Municipal Property Corporation, AZ (MPC):
--$12.9 million municipal facilities revenue refunding bonds, series
2011 to 'AA+' from 'AA-'.
Fitch also upgrades the Prescott Valley, AZ (the town) Issuer Default
Rating (IDR) to 'AA+' from 'AA-'.
People are also reading…
The Rating Outlook has been revised to Stable from Positive.
SECURITY
The MPC bonds are payable from rental payments made by the
town to the corporation which are secured by a first lien on excise tax
revenues collected by the town.
KEY RATING DRIVERS
The upgrade of Prescott Valley's IDR to 'AA+' from 'AA-' is based on the
continuation of positive credit trends, with structural budget balance
and post-recessionary reserve replenishment. The town has a low
liability burden and significant control over revenues and spending.
Fitch expects that the town will maintain solid financial resilience
throughout a normal economic downturn. The rating on the MPC bonds is
capped by the town's IDR; the upgrade of the bond rating to 'AA+' is
based on the upgrade of the IDR.
Economic Resource Base
Prescott Valley, with a population of about
42,000, is located approximately 90 miles northwest of Phoenix, along
State Routes 69 and 89A. The local economy includes industry,
manufacturing, retail, trade and service sectors. The town's location
along state transportation routes provides tourism traffic contributing
to the town's sales tax base.
Revenue Framework: 'aaa' factor assessment
Fitch anticipates that
Prescott Valley's revenues will continue to outpace U.S. GDP based on
the town's participation in strong regional growth trends. The ability
to raise the local sales tax rate is subject only to council approval,
and therefore entirely within the town's independent legal control.
Expenditure Framework: 'aa' factor assessment
Fitch expects the
town's spending to grow at or below the pace of revenues. Expenditure
flexibility resides in the town's discretion with regard to labor costs
and its moderate carrying cost profile, characterized by rapid
amortization and limited debt plans.
Long-Term Liability Burden: 'aaa' factor assessment
Long-term
liabilities are 9% of personal income. Fitch expects these to remain
consistent with an 'aaa' assessment based on population and income
trends relative to regional debt needs. Additionally, the town's net
pension liability is modest. With the exception of police, employees
participate in the town's defined contribution plan.
Operating Performance: 'aaa' factor assessment
Fitch believes that
the town would cut costs and increase its tax rate to offset the impact
of a moderate recession on its economically sensitive revenue base. The
town is rebuilding reserves which had declined considerably during the
Great Recession.
RATING SENSITIVITIES
Solid Financial Cushion: The rating is
sensitive to Prescott Valley's maintenance of a solid financial cushion,
as an additional tool to provide financial flexibility in light of
above-average exposure to economically sensitive revenues.
CREDIT PROFILE
Prescott Valley experienced solid 3.8% average annual population growth
from 23,500 in fiscal 2000 to over 42,000 today. A resurgence of
residential construction is expected to continue to spur the town's
retail and commercial sales tax base.
Revenue Framework
Economically sensitive local sales tax and
intergovernmental revenues, including state shared revenues, provide
about 90% of the town's general fund operating revenues.
Fitch expects population and economic expansion underway in Prescott
Valley to drive local sales tax revenue through the medium term horizon
at a pace that continues to exceed the rate of U.S. GDP. Growth
prospects for the town's share of state income and sales tax revenues
are similarly strong based on state-wide trends.
As a home rule town, Prescott Valley has the unlimited ability to adjust
its local sales tax rate. The town increased its sales tax rate by 1/2 a
cent to 2.83% effective Jan. 1, 2016. Local sales tax rates in the state
range from .25% to 5.3%, averaging 2.1% in 2016.
Expenditure Framework
The town's general fund budget supports
police, parks, roads, recreation, and library services. Fire service is
provided by the Yavapai Fire District.
Fitch expects the town's spending trajectory to remain aligned with or
below revenue growth based on expected population and revenue growth
trends.
Prescott Valley participates in a meet-and-confer process with police
employees. However, the meet and confer process defers ultimate
decision-making authority for work rules and pay to the town. The town's
moderate carrying costs, 13.4% of fiscal 2015 spending (primarily in the
form of debt service), are likely to decline as virtually all debt is
scheduled for repayment within 10 years and the town has limited debt
issuance plans. The town's pension and other post-employment benefit
contributions to the Public Safety Personnel Retirement System
(PSPRS-Police) are likely to increase over time, but represent a modest
portion of overall carrying costs.
Long-Term Liability Burden
The town's long-term liability burden,
9% of estimated personal income, is expected to remain moderate given
the area's limited expected capital needs and the town's modest unfunded
pension liabilities. The town's budget identifies sales tax revenues and
impact fees as the primary funding sources for its capital program which
is largely funded on a pay-as-you-go basis.
The town participates in PSPRS for police employees. Under GASB 67 and
68, the town reports a net pension liability of $6.8 million, with
fiduciary assets covering 66% of total plan liabilities at the plan's
7.85% investment rate assumption (approximately 60.5%, for an $8.7
million unfunded liability, at a lower 7% investment rate assumption).
The NPL is relatively modest in relation to the town's net overall debt
($99.5 million). Proposed legislation provides modest PSPRS reforms
applicable to new hires and eliminates the automatic cost of living
adjustments currently in place which Fitch anticipates could, if
implemented, improve long-term plan funded ratios.
Operating Performance
Fitch expects the town to maintain solid
financial resilience through a moderate economic downturn given its
sales tax rate capacity, considerable expenditure flexibility, and sound
reserve position.
Fiscal 2015 unrestricted reserves of $10.5 million represent a high
39.5% of spending. Prescott Valley expects to increase annual sales tax
revenues by $3 million through its 1/2 of 1% rate hike effective in
January 2016. The increased revenues will be used to fund street
maintenance ($2 million) and police services ($1 million). The town also
expects to improve its financial cushion during fiscal 2016 and 2017
taking advantage of growth associated with the economic expansion
underway. The assessment reflects Fitch's expectation that the town will
maintain its unassigned reserves at or above its 25% of revenue minimum
target.
Operating performance typically outperforms the town's conservative
budgeting and the town rebalances operations and replenishes reserves
during expansionary phases of the economy.
Dedicated Revenue Stream Details
The excise tax revenues pledged to
the bonds grew by 4.9% on average between fiscal 2004 and 2014. An
expanding population and economy are expected to spur ongoing pledged
revenue growth consistent with historical trends and in excess of U.S.
GDP.
Pledged revenues consist of local sales tax revenues, state shared
income and sales taxes, licenses and permits, and fines and forfeitures.
Legal provisions provide adequate bondholder protections. They include
an additional bonds test (ABT) of 2.5x maximum annual debt service
(MADS; using an historical test), for bonds outstanding plus bonds to be
issued.
To evaluate the sensitivity of the dedicated revenue stream to cyclical
decline, Fitch considers both revenue sensitivity results (using a 1%
decline in U.S. GDP scenario) and the largest decline in revenues over
the period covered by the revenue sensitivity analysis. Fitch's
analytical sensitivity tool (FAST) generates a 3% scenario decline in
pledged revenues. The largest actual cumulative decline in historical
revenues is a steep 25.3% decline from fiscal 2007-2011. The pledged
revenues have been sensitive to economic downturns as reflected in the
historical analysis.
Assuming issuance up to the 2.5x ABT, well below actual current
coverage, debt service would be covered with a 60% drop in revenues, 20x
the scenario results and 2.4x the largest actual revenue decline in the
review period. Fitch believes that these results are consistent with an
'AA+' rating that can withstand a normal economic downturn (noting that
the fiscal 2007-2011 performance reflected a more severe economic
stress). A recurrence of that severe revenue volatility, while not
presently anticipated, could put negative pressure on the rating.
Fiscal 2015 pledged revenues of $27.2 million were up for the fourth
consecutive year and cover MADS (2023) a very high 7.3x. The pledged
revenues comprise the majority of general fund revenues and therefore
Fitch does not anticipate that the town will issue to the ABT.
The special tax bond rating is limited by the town of Prescott Valley's
'AA+' IDR as Fitch does not believe that the security insulates the
bonds from the general credit of the issuer. Fitch does not view the
pledged excise tax revenues as special revenues under section 902(2)(B)
of the bankruptcy code, which defines 'special excise taxes imposed on
particular activities or transactions' as special revenues.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the applicable
criteria specified below, this action was informed by information from
Lumesis and InvestorTools.
Applicable Criteria
U.S. Tax-Supported Rating Criteria (pub. 18 Apr
2016)
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation
Status
Endorsement
Policy
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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 MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE
RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR
RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY
CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH
WEBSITE.
Contacts
Fitch Ratings
Primary Analyst
Rebecca Meyer
Director
+1-512-215-3733
Fitch
Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary
Analyst
Steve Murray
Senior Director
+1-512-215-3729
or
Committee
Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media
Relations
Elizabeth Fogerty, New York, +1 212-908-0526