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

-- $22.7 million in outstanding unlimited tax general obligation (ULTGO) bonds;

-- $25.5 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 2015 pledged revenues provide higher coverage on outstanding excise tax bonds of over 10x maximum annual debt service (MADS) due to recent revenue gains realized from an improving economy and increased state-shared revenues.

MODERATELY IMPROVING ECONOMY: Evidence of a strengthening local economy is demonstrated by steady gains in economically sensitive revenues, modestly rising home values, and increased development activity. Fitch anticipates a continued, moderate pace of economic recovery.

SOLID RESERVE LEVELS PRESERVE FINANCIAL FLEXIBILITY: City management maintains a large financial cushion in accordance with its policy. Maintenance of very high reserve levels in conjunction with spending cuts allowed the city to withstand declines in excise taxes during the most recent recession.

UNDERFUNDED PENSIONS, MANAGEABLE DEBT: Because Arizona state pension plans are underfunded, the city's contributions for the state-sponsored general government, police and fire plans are large and increasing. This ongoing cost driver is somewhat offset by the city's moderate debt and minimal capital needs, resulting in a moderate fixed carrying-cost burden.

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

RATING SENSITIVITIES

MAINTENANCE OF FINANCIAL AND DEBT FLEXIBILITY: The ratings are sensitive to changes in inherent credit characteristics including excise tax performance, currently solid debt service 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 PROFILE

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

PACED ECONOMIC AND TAX BASE RECOVERY

The city's economy has shown improvement since the recession, during which secondary assessed values (SAV) declined sharply. After a three-year decline of 20% between fiscals 2011-2013, fiscal 2015 SAV stabilized with a modest increase of 3.5%. Fiscal 2016 SAV is likewise expected to increase by about 2%. Arizona AVs lag market-value changes by roughly two years due to the appraisal appeal process.

The tax base is concentrated, with the top 10 taxpayers making up a high 20% of SAV - led by an electric utility and an outlet mall at 3% each. Fitch anticipates the tax base will realize additional near-term growth, given recent development activity and no planned changes to the city's top sales-tax generators.

The unemployment rate for the city has been steadily improving. The November 2015 rate of 5.9% is on par with the state's rate although above the national average of 4.8% for the month. Median household income is below state and national averages.

INCREASING EXCISE TAXES PROVIDE SOLID COVERAGE

Fitch calculates MADS coverage on 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) conservatively, at a solid 4.7x MADS; this calculation is based on the $36.7 million in excise taxes received in fiscal 2015. However, assuming the intended and actual repayment source for the WIFA loan of wastewater revenues continues to be sufficient to cover debt service, MADS coverage on the excise tax debt climbs to a very strong 10.5x.

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.

STRONG FINANCIAL CUSHION MAINTAINED

The city's reserves have consistently been sizable. In fiscal 2015, the unrestricted general fund balance climbed to a high $24.3 million or 63% of spending. Management judiciously built up a very high level of reserves over time (to be maintained at no less than 50% of general fund spending, as per policy) to offset some of the risk associated with the economically sensitive excise tax revenues that fund the bulk of general operations.

Excise taxes are composed of 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. After declines in excise tax revenues during the most recent recession, the city has realized four years of gains over fiscals 2012-2015. The gain was largely a result of strengthened local sales taxes. Pledged excise tax revenues grew about 9% in fiscal 2015.

Together with an overall improving economic picture, the city has posted positive general fund operations since fiscal 2013. Continuing the trend of solid operating performance, fiscal 2015 ended with a $4.5 million surplus. For fiscal 2016, management is projecting another surplus, given that year-to-date revenues are 3% higher than the same period last year.

MODERATE DEBT BURDEN; UNDERFUNDED PENSIONS

Overall debt levels are moderate, at approximately $1,927 on a per capita basis and 3.5% of market value. Amortization is above average at 62% in 10 years. The city's capital needs are modest and management does not anticipate any near-term debt issuance plans.

The city participates in two state pension plans - the Arizona State Retirement System (ASRS) and Public Safety Personnel Retirement System (PSPRS). The city fully funds the statutorily required contributions for all plans. Funding levels (using Fitch's more conservative 7% investment return assumption) are low, especially for PSPRS. For ASRS, reported net assets cover approximately 60% of the total pension liability. For PSPRS, assets cover only 50% and 35% of pension liabilities for the fire and police plans, respectively.

In response to the declining actuarial funding of these plans, the state in fiscal 2015 took steps to increase contributions and improve funding by adjusting the actuarial assumptions for PSPRS. Although these adjustments resulted in a notable increase to the city's pension contributions, management projects that these increases will normalize over the next several years (as pension actuarial funded positions improve).

Partially offsetting concerns about increasing pension costs is the city's manageable carrying cost. Total carrying costs (debt service, state pension, and related state-plan post-retirement health benefit contributions) represent a low 16% of fiscal 2015 governmental spending. Fitch anticipates that carrying costs over the immediate term will increase due to larger pension contributions but will remain manageable.

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

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by the end of the first quarter of 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

Applicable Criteria

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=997779

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=997779

Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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