OREANDA-NEWS. Fitch Ratings has assigned an 'AA' rating to the following securities of Pima County, AZ (the county):

--\$13.8 million street and highway revenue refunding bonds, series 2015.

The bonds are scheduled for a negotiated sale in mid-March 2015. Proceeds will refund a portion of outstanding street and highway revenue bonds for interest savings.

In addition, Fitch affirms the following county bonds at 'AA':

--\$128.8 million outstanding street and highway revenue bonds (pre-refunding).

The Rating Outlook is Stable.

SECURITY
The bonds are secured by an irrevocable lien on and first pledge of all revenues received by the county from a statutory allocation of street and highway taxes, fees, and charges, and state motor vehicle license taxes (VLTs) collected by the state and returned to the county for street and highway purposes.

KEY RATING DRIVERS

SOUND DEBT SERVICE COVERAGE: Pledged revenues in fiscal 2014 generated solid debt service coverage on maximum annual debt service (MADs) of 2.6x.

ECONOMICALLY SENSITIVE PLEDGED REVENUES: Fiscal 2014 pledged revenues rose moderately for a second consecutive year following five years of significant decline associated with the weakened Arizona economy.

ADEQUATE ADDITIONAL BONDS TEST: The additional bonds test (ABT) is ample, requiring 2x MADS coverage. Near-term issuance is not expected to reduce current MADs coverage.

LARGE, DIVERSE REGIONAL ECONOMY: The local economy remains a positive long-term credit consideration, with its diverse and stable elements providing a sound foundation.
HURF LEGISLATION: The Arizona legislature has directed a portion of state-wide VLTs in recent years to fund the State Department of Public Safety and retains the ability to enact legislation to modify highway user fund distributions in the future. Fitch does not believe the diversions are likely to have a material adverse impact on the county's sound debt service coverage based on constitutional limitations on the use of street and highway taxes and the modest historical use of diversions made by the state.

RATING SENSITIVITIES

EROSION OF COVERAGE: Reduction of debt service coverage to the ABT limit of 2x through additional issuance, revenue declines, or state diversions, could create downward rating pressure.

CREDIT PROFILE
Pima County is home to Tucson, Arizona's second largest city with an approximate population of 1 million.

SOLID DEBT SERVICE COVERAGE; ONGOING NEEDS

Fiscal 2014 pledged revenues of \$49.2 million reflect a two-year 9.6% increase following a five-year 23% slide. Despite the weak revenue performance, projected MADs coverage remains sound. Using unaudited fiscal 2014 revenues, pro forma MADS coverage for all outstanding highway user revenue bonds (including this issue) is 2.6x.

The county plans to issue about \$15 million of its \$73.4 million in highway user revenue bond authorization during fiscal 2016, although officials do not anticipate a decline in MADs coverage given the rapid repayment schedule and manageable capital needs. Current amortization is very rapid, 95% in 10 years, with all street and highway user revenue bonds mature by 2028. The transportation bonds will fund several transportation projects.

STATE HIGHWAY USER FUND SOURCES

Highway user tax revenues include 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 counties currently receive 19% of the monthly revenue distributions, and the state Department of Transportation, the cities and towns and other state uses receive the remaining 81%. Of the money distributed to counties in the state, 72% is distributed in proportion to the sale and consumption of fuel within each county, and the remainder is distributed on the basis of the proportionate population within the unincorporated areas of each county.

Legal provisions provide adequate bondholder protections. They include an ABT of 2x MADS (using an historical test) for bonds outstanding plus bonds to be issued. After debt service payments, residual highway user tax revenues are used by the county for capital projects and for staffing, maintenance and contractual expenses related to county streets and highways.

The county's transportation fund maintains healthy reserves, with total balances ranging from 16% to more than 59% of annual spending over the past five fiscal years. Intergovernmental (state) revenues typically comprise more than 95% of annual transportation fund revenues.

The rating incorporates the possibility of future diversions of highway revenues by the state of Arizona that would reduce distributions to municipalities, although the amount being diverted is on the decline. Additionally, the state legislature retains the authority to alter the rate of fees that are constitutionally required to be deposited into the state highway user fund, as well as the allocation of such monies between state purposes and the distribution to local governments. However, the Arizona Supreme Court has indicated that these revenues cannot be reduced in a manner which impairs an issuer's ability to meet debt service requirements on the bonds.

LARGE, DIVERSE REGIONAL ECONOMY

The county's historically diverse economy features higher education, healthcare, government, technology, tourism and manufacturing as primary anchors. The top 10 taxpayers represent retail, healthcare, utility and mining sectors, comprising a modest 7.2% of total fiscal 2015 assessed valuation. Fiscal 2015 market value per capita of \$64,000 is down from the recent fiscal 2010 peak of \$81,000, reflecting a cumulative 21% loss of assessed value over the past five years.

Management is anticipating modest tax base growth in fiscal 2016 after a series of recessionary declines, and this projection appears reasonable to Fitch based on new commercial development in the county. A 2012 state constitutional amendment will limit increases in existing real property for taxation purposes to 5% annually beginning in fiscal 2016. The limit excludes real growth. Fitch does not anticipate any near-term negative impact for Pima County from this new limitation.

Major southern Arizona employers include the University of Arizona, Raytheon Missile Systems, Davis-Monthan Air Force Base, state and local government, Wal-Mart Stores Inc., Tucson Unified School District, U.S. Customs & Border Protection/U.S. Border Patrol, Freeport-McMoRan Copper, and UA Healthcare.

An unemployment rate of 6.3% as of November 2014 is favorable to the state average of 6.8%, but remains above the national average of 5.5% for the same period. The county's housing market continues to strengthen as evidenced by a reported uptick in permits and housing starts. County wealth levels are moderately below state and national averages.