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

Fitch Ratings affirms its 'AA' rating on the following Casa Grande, Arizona (the city) debt:

--$28.1 million in outstanding unlimited tax general obligation (ULTGO) bonds;

--$28.3 million in outstanding excise tax revenue bonds.

The Rating Outlook is Stable.

SECURITY: The excise tax bonds are secured by a first lien on the city's excise tax revenues. The GO bonds are secured by an unlimited ad valorem tax levied on all taxable property in the city.

KEY RATING DRIVERS

STRONG DEBT SERVICE COVERAGE: Fiscal 2013 pledged revenues provide higher coverage on outstanding excise tax bonds of over 10x debt service and 9.3x maximum annual debt service (MADS) excluding debt repaid with utility system revenues given recent revenue gains realized from an improving economy and increased state-shared revenues.

MODERATELY PACED ECONOMIC RECOVERY: Increased levels of residential development activity, consumer spending, and local commercial investment point to a strengthening economy. Nonetheless, unemployment remains above state and national averages. Fitch anticipates a continued, moderate pace of economic recovery although growth may not return to pre-recessionary levels over the near term.

SOLID RESERVE LEVELS PRESERVE FINANCIAL FLEXIBILITY: Management maintains a large financial cushion in accordance with its policy. Use of very high reserve levels above that floor in conjunction with spending cuts allowed the city to withstand the downturn and resulting three-year decline in city excise taxes.

MULTI-YEAR TAX BASE DECLINES: Historically large annual gains in the tax base reversed sharply beginning in fiscal 2011. Annual tax base declines since then have moderated as this metric lags the market by about two years. Taxpayer concentration is moderately high.

BELOW-AVERAGE PENSION FUNDED POSITION: The city consistently contributes 100% of the actuarially determined annual pension contribution (APC) as required by its pension plans. Nonetheless, Fitch anticipates the city's APC will steadily rise in order to improve the pensions' below-average to weak funded positions. This anticipated cost driver is somewhat offset by the city's measured debt and capital program. Fitch believes the city will maintain a moderate fixed carrying-cost burden despite funding its growth-related capital needs over the intermediate term.

EXCISE TAX BOND RATING CAPPED ON PAR: Pursuant to Fitch's criteria, the rating on the excise tax bonds is capped at the level of the city's ULTGO rating.

RATING SENSITIVITIES

SHIFT IN FUNDAMENTALS: The ratings are sensitive to changes in fundamental credit characteristics including excise tax performance, currently solid coverage levels, and the city's sound debt and financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely over the near term.

CREDIT SUMMARY:

SOUTH OF PHOENIX ALONG MAJOR INTERSTATE

Casa Grande has a population of about 50,000 in western Pinal County. It is a regional retail/commercial hub located approximately halfway between Phoenix and Tucson at the junction of two major interstate highways.

RAPID EXPANSION REALIZED PRE-RECESSION; PACED ECONOMIC RECOVERY

The city's population base has nearly doubled since 2000 due largely to the affordable residential development within feasible commuting distance to the larger metropolitan employment bases. Rapid population growth fed the housing construction boom, which drove much of the city's double-digit tax base growth that occurred from fiscal 2006-2009 along with rapid rates of price appreciation, but ultimately resulted in the collapse of the housing market that was largely realized statewide. The state's housing market deterioration and home value declines were some of the most severe in the nation and, in conjunction with the recession, weakened the local economy over much of fiscals 2009-2012.

Nonetheless, recent housing data reflect moderately improving home values that have steadily recovered since the trough of the recession. Increased residential development activity, consumer spending, and local commercial investment remain below pre-recessionary peaks but also point to moderate economic improvement in the city, inclusive of a large, multi-functional products and trade center, Phoenix Mart. The development is slated to break ground in 2014 and will reportedly add 3,000 jobs to the community according to its investment guidelines. Unemployment remains elevated, consistent with historical trends. Year-over-year unemployment declined to 9.8% in August 2013, due in part to labor force loss, from 10.5% in August 2012. The August 2013 rate remained above state and national rates of 8.7% and 7.3% respectively. Median household income and advanced educational attainment are below state and national averages.

TAX BASE DECLINES HAVE MODERATED

Growth in secondary assessed valuation (SAV; which lags changes in market value by two years) began to reflect the substantial home price declines in fiscal 2011 with a significant 12% decline in SAV. Annual declines since then have moderated, reflective of reduced deterioration in values over time. SAV remains closer to its pre-2009 level at about $333 million in fiscal 2014 and the top 10 taxpayers comprise a moderately high 14.8% of SAV, led by an electric utility and an outlet mall, each at 3%. Management's preliminary expectations are for a return to at least flat performance in fiscal 2015 given development underway and planned as well as improving home values.

Proposition 117 was approved by Arizona voters in November 2012 as a constitutional amendment, and is expected to minimize some volatility in valuations by limiting annual increases in locally assessed existing property values to 5%, beginning in fiscal 2016 (2014 real property valuations). Fitch will continue to monitor the evolving impact of Proposition 117, as it reflects a significant change to the property assessment process.

EXCISE TAXES ARE KEY TO GENERAL OPERATIONS

The city relies largely on excise taxes to fund general fund operations. The excise tax is provided by 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 make up 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. After a three-year period of decline in its excise tax revenues, the city has recently realized two years of gains over fiscals 2012-2013. This was largely a result of both growth in the city's state-shared revenues based on its higher population count and strengthened local sales tax. Pledged excise tax revenues grew about 11% in fiscal 2012, exceeding management's prior expectations, and additional growth of nearly 8% was recorded per unaudited fiscal 2013 results.

IMPROVED EXCISE TAXES PROVIDE SOLID BOND COVERAGE

Legal provisions for excise-tax revenue bondholders are strong; the city covenants to levy new or increase existing excise taxes if the minimally required coverage level of 3x is not maintained, although the critical need for excise taxes to fund operations guards against over-issuance. Fitch conservatively calculates coverage based on the $32.7 million in excise taxes received in fiscal 2013 for the outstanding excise tax bonds and the full Water Infrastructure and Financing Authority (WIFA) loan, a portion of which is secured by excise tax revenues (and which has a parity excise tax pledge) at a solid 4.0x MADS. However, assuming wastewater revenues, which are the intended repayment source for the WIFA loan (and which is the city's practice), continue to be sufficient to cover debt service, MADS coverage on the excise tax debt rises to a very strong 9.3x.

STRONG FINANCIAL CUSHION MAINTAINED

Developed from multiple fiscal years of strong revenue growth prior to the recession, the city's financial cushion peaked in fiscal 2008 with an unreserved general fund balance of $30.6 million or nearly 83% of spending. Management judiciously built a very high level of reserves over time (to be maintained at no less than 50% of general fund spending according to policy) in order to offset some of the risk associated with the economically sensitive excise tax revenues that provide the bulk of funding general operations.

In response to recessionary pressures on operating revenues, management reduced spending levels in fiscals 2010 and 2011 thru a variety of operating efficiencies as well as used some of the financial cushion available with the drawdown of roughly $4.5 million in both years. The years' drawdowns were largely for one-time capital spending but also included ongoing operating expenditures, although a large reserve cushion was maintained at year-end. Results for fiscals 2012 and 2013 reflect both management's conservative spending practices and the area's and state's positive economic trends in its key revenue streams. Budget projections were largely improved upon at year-end and the city expects to add a modest $578,000 to reserves at fiscal 2013 year-end, bringing unrestricted general fund reserves up slightly to $19.8 million or about 52.5% of spending.

The adopted fiscal 2014 $40.8 million budget grew by about 6% from the prior year's budget due to both one-time pay-go capital spending that is expected to draw modestly on reserves by about $1.3 million as well as salary and pension cost increases that totaled around $1.1 million. Operations are structurally balanced. Management reports year-to-date revenue and spending trends generally remain in line with budgeted numbers and, as supported by the city's stable and moderately growing economic climate, year-end fund balance is expected to remain stable.

MODERATE OVERALL DEBT/PENSION FUNDING LIKELY TO DRIVE LONG-TERM LIABILITIES

Overall debt levels are moderate, approximating $2,510 on a per capital basis and 4.5% of market value. The city's direct debt levels are supported by utility revenues and the city's practice of pay-go capital spending. Principal amortization of tax-supported debt is rapid at about 78% in 10 years. Management indicates its large, planned capital improvement program (CIP) over the next five fiscal years (fiscals 2014-2018), which includes sizeable pay-go capital spending, remains flexible. The only tax-supported debt needs projected in the near term include issuance plans for the remaining $16 million in GO bond authority for a community center. Nonetheless, Fitch expects much of the CIP will eventually be implemented over time given the city's growth-related capital needs and will likely follow management's history of maintaining a measured debt and capital program that should allow the city to maintain a moderate fixed carrying-cost burden.

WEAK PUBLIC SAFETY PENSION FUNDED POSITION

The city contributes to two pension plans, as well as for disability, death and healthcare benefits. The general employee pension plan is through the Arizona State Retirement System, a cost-sharing, multiple-employer plan. The city has made 100% of its APC in fiscals 2011-2013. The plan's funded position is satisfactory at 75.7% at June 30, 2012, although it would fall to an estimated 68% after adjusting for a more conservative 7% investment rate of return.

The city also makes its full APC to the Arizona Public Safety Personnel Retirement System (PSPRS), an agent, multiple-employer plan for police and firefighters. Both the fire account and police account pension funded positions are weak. This is despite recent state legislation that incorporates multi-year increases to employee contribution rates and future benefit changes, which are projected to improve the city's (and plan's) funded position over time. The police pension program is funded at 54% as of the most recent actuarial valuation (June 30, 2011) while the fire pension position is at 60% for the same period. The funded position of both accounts would drop to 52.6% (fire) and a very low 47.5% (police) assuming a 7% rate of return.

The city has contributed 100% of its annual required contribution for other post-employment benefits (OPEB) over fiscals 2011-2013, although the OPEB funded position is not yet reported separately from the pension system. Carrying costs (debt service, pension, and OPEB costs, net of self-supporting debt) totaled a relatively modest 14% of governmental spending in fiscal 2013 assisted by sizeable self-support of debt from its enterprise systems and conservative leveraging practices. Fitch believes the city's carrying costs over the near- to intermediate-term will likely rise to a moderate level but remain manageable given a modestly rising debt service schedule and probable increases required by the state to the employer's APC as well as expectations of future debt issuances.

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, Case-Shiller, and IHS Global Insight.

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=816660

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