Fitch Rates Yuma County Free Library Dist., AZ GO Rfdg Bonds 'AA '; Outlook Stable
--\\$11.3 million GO refunding bonds, series 2016.
The bonds are scheduled for negotiated sale as early as May 5. Proceeds will be used to refund a portion of the district's outstanding GO bonds for debt service savings.
Fitch has also upgraded \\$40.5 million in outstanding GO bonds (pre-refunding) to 'AA+' from 'AA-' and assigned a long-term Issuer Default Rating (IDR) of 'AA+'.
The Rating Outlook is Stable.
The bonds are payable from an unlimited ad valorem tax levied against all taxable property within the district.
KEY RATING DRIVERS
The rating upgrade to 'AA+' reflects the district's strong revenue-raising ability, ample flexibility to cut expenditures, and solid reserves. This significant financial flexibility offsets modest expectations for tax base gains, and debt levels are expected to remain low with no planned borrowing. Under Fitch's revised criteria for U.S. Tax-Supported Ratings, Fitch's analysis of the economy is more focused in conjunction with the recognition of the strong operating environment for U.S. local governments.
Economic Resource Base
The district economy is limited and relies on local and federal government employment, including military. Socioeconomic indicators are below average and unemployment is very high. Market values have resumed modest growth in recent years, following a period of significant declines.
Revenue Framework: 'aa' factor assessment
Property tax revenues are expected to yield growth in line with inflation absent policy action. The district's independent legal ability to raise tax revenues is unlimited.
Expenditure Framework: 'aa' factor assessment
Planned spending is expected to somewhat outpace revenue growth in the absence of tax rate increases. However, carrying costs are moderate and the district maintains significant expenditure flexibility with no contractual obligations.
Long-Term Liability Burden: 'aaa' factor assessment
Debt and pension liability levels are modest relative to personal income and capital needs are limited.
Operating Performance: 'aaa' factor assessment
The combination of the district's expenditure-cutting flexibility and solid reserve funding levels leave it well positioned to address cyclical downturns.
Financial Flexibility: Fitch's expectation of rating stability is based on continued revenue and spending flexibility, as well as the district's solid reserve levels.
The Yuma County Free Library District is a single-purpose district coterminous with Yuma County, which has a 2016 population of 206,024. It is located in the southwest corner of Arizona, sharing borders with both Mexico and California. The district is governed by the full board of five county supervisors.
Property taxes comprise approximately 95% of district revenues. Management raised the fiscal 2016 operating tax rate by \\$0.05 per \\$100 of limited property value (LPV) or 10%, and Fitch expects revenue increases in line with inflation in the absence of policy action.
The district's general fund revenues have grown at a rate in excess of both the U.S. GDP and CPI over the past 10 years, in spite of recently sluggish tax base growth. However, this growth is largely due to rate increases.
The district's property tax rate for operations is unlimited and can be increased as needed to meet operating requirements.
The district's tax base is somewhat concentrated, with the top 10 taxpayers comprising 15.6% of LPV. However, potential revenue volatility is tempered by the large presence of utility providers, which have historically demonstrated less sensitivity to economic cycles. Additionally, LPV is expected to exhibit modest, stable growth, which is limited by state law to 5% per year.
Library operations, including payroll, comprise the bulk of general fund spending. The district also funds some annual capital outlay for maintenance and repairs (0%-3% in recent years).
Fitch expects expenditure growth would slightly outpace revenue growth absent policy actions, but recognizes the district's high level of expenditure control based on available resources.
The district's carrying cost burden is moderate, with debt service and pension contributions equaling 22% of fiscal 2015 governmental expenditures. Annual debt service is relatively level, and the district has no plans for medium-term debt issuance. Management retains flexibility in staffing levels given modest prospects for population growth, and the district has no labor contracts or wage pressure.
Long-Term Liability Burden
The district's outstanding debt consists of bonds issued in 2006 and 2007 for the construction of new library facilities, which met all identified capital needs of the district. Management has no plans for additional borrowing.
The district participates in the Arizona State Retirement System (ASRS), a cost-sharing multiple employer pension system, and regularly makes 100% of its required contribution for library employees. Under GASB 67 and 68, ASRS's assets cover 69.5% of liabilities as of fiscal 2015, a ratio that falls to 62.6% using a more conservative 7% return assumption. The combined burden of overall debt and pension liabilities is modest, representing 2.6% of personal income.
The district has maintained a strong financial cushion despite planned draws on general fund balance in the past three years. The district retains ample revenue and expenditure flexibility to manage well through economic downturns. General fund balance has been maintained well in excess of the district's policy level of 15% of spending; audited fiscal 2015 reserves accounted for a robust 52% of spending (\\$5.9 million). Given the district's inherent budget flexibility, Fitch's 'aaa' assessment of operating performance would still be stable at the policy reserve level.
The district has demonstrated a commitment to supporting financial flexibility. Budgets are conservative, and management plans to incrementally increase the operating tax rate to maintain healthy reserves in the medium term.