OREANDA-NEWS. Fitch Ratings has affirmed the following Yuma, AZ (the city) improvement bonds and city Municipal Property Corporation (MPC) excise tax revenue bonds:

--\$2.2 million improvement district no. 68 improvement bonds, at 'A+';
--\$23.7 million municipal facilities revenue bonds, series 2007B at 'AA-';
--\$47.1 million municipal facilities revenue bonds, series 2007D at 'AA-';
--\$25.5 million municipal facilities revenue bonds, series 2010B at 'AA-'.

In addition, Fitch affirms the city's implied unlimited tax general obligation (ULTGO) rating at 'AA-'.

The Rating Outlook is Stable.

SECURITY:

The MPC bonds are payable from tax and fee derived payments made by the city. The payments on the series 2007B and 2010B are parity obligations, backed by a pledge of a first lien on the city's excise taxes. Payments on the series 2007D bonds are backed by a pledge of and lien on a 0.5% road sales tax and a subordinate pledge of city excise taxes.

The improvement district bonds are payable from special assessments imposed upon certain parcels of land within the improvement district for the costs and expense of improvements within the district. The improvement district bonds also carry an unconditional pledge of the city to make a temporary loan should there be a deficiency in the funds collected from the assessments to pay debt service when due. The city covenants to make a temporary loan on or before Dec. 31 and June 30 in each of the years in which the principal and interest are due, on Jan. 1 and July 1, respectively.

KEY RATING DRIVERS:

IMPLIED ULTGO RATING: The 'AA-' implied ULTGO rating reflects the city's underlying credit fundamentals, including a sound financial profile, moderate debt burden, and weak economic indicators. The rating on the MPC bonds is capped at the implied ULTGO rating.

ECONOMICALLY SENSITIVE REVENUE DEPENDENCE: City finances are highly dependent on economically sensitive excise tax revenues, largely local sales tax and state-shared sales and income tax revenues. Local sales tax and state-shared receipts have recently performed positively, but the city remains vulnerable to their potential volatility.

SOUND RESERVES MAINTAINED: The city's financial profile has remained sound despite revenue shortfalls in recent years. Reserves have been maintained at adequate levels and are expected to remain so.

MODERATE DEBT BURDEN: Overall moderate debt levels are expected to remain manageable even with planned additional debt issuance. Amortization of direct debt is rapid. Overall carrying costs (debt service and retirement-related costs) as a percentage of spending are moderate. However, these costs are expected to grow due to increases in required pension contributions resulting from the current, low pension funding levels.

WEAK ECONOMIC INDICATORS: Area unemployment is historically high due to the large number of seasonal migrant workers. Wealth levels are below state and national averages. The military is a major part of the local economy, and the city is expected to benefit from the ongoing expansion of military facilities in the area.

HEALTHY DEBT SERVICE COVERAGE: Debt service coverage on MPC bonds remains strong. Coverage is protected by sound legal provisions as well as the city's reliance on the surplus revenues for general fund operations.

IMPROVEMENT BONDS BENEFIT FROM CITY PLEDGE: The rating on the improvement district bonds reflects the unconditional pledge of the city to fund any revenue deficiency in the event assessments collected within the district are insufficient to meet debt service requirements.

RATING SENSITIVITIES

MAINTENANCE OF FINANCIAL STABILITY: The rating is sensitive to the maintenance of stable financial operations, including adequate reserves, as the city addresses spending pressures from deferred spending in recent years and increased pension costs. Fitch believes adequate reserves at close to current levels are necessary to offset the city's dependence on economically sensitive revenue sources.

CREDIT PROFILE

Yuma is located in southwestern Arizona at the confluence of the Colorado and Gila Rivers and serves as the county seat for Yuma County. The 2013 population estimate is about 91,923, which represents growth of 19% since 2000, though recent years have seen modest declines.

SOUND FINANCIAL PROFILE; ADEQUATE RESERVES DESPITE DRAW-DOWNS

The city's financial profile remains sound despite recent year revenue and expenditure pressures, aided by management's careful budgeting. In fiscal years 2010 and 2011, management reduced spending by about 17% in response to a contraction in revenue. Reductions included attrition savings, the use of furlough days, elimination of merit raises, and general departmental cuts. As a result, general fund reserves remained very healthy through the recession with an unrestricted balance at nearly 40% of spending. Starting in fiscal 2012, management began to reverse some of the deep cuts and closed the year with a \$3 million deficit, reducing reserves to a still solid 31.3%. A surplus (\$1.3 million) and deficit (\$1.9 million) followed in fiscal years 2013 and 2014, respectively. Fiscal 2014 ended with a general fund unrestricted ending balance of \$17.7 million or 28% of spending.

The city now faces deferred capital, staffing and salary needs, some of which it has begun to address as its revenue picture has been improving. Both fiscal 2015 and proposed 2016 budgets include salary increases and increased staffing. City finances have also been challenged by increased public safety pension costs. Current estimates for fiscal 2015 indicate a deficit of about \$1.5 million (2.3%), which would result in a still adequate ending balance of about \$16.5 million or about 26%.

Preliminary budget considerations for fiscal 2016 indicate another \$2.6 million deficit, with the unassigned ending balance budgeted at about 20%. However, management has indicated that the draw down is likely to be lower due to historic trends of lower than budgeted spending and the fiscal 2016 budget's over \$1 million in contingency appropriations/ set asides not expected to be needed in fiscal 2016. The proposed fiscal 2016 budget includes a property tax increase to the statutory maximum (from \$1.83 per \$100 of assessed value to \$2.24), which is estimated to add about \$2 million to property tax collections. The additional revenues will be applied to increased public safety pension costs. The tax rate increase has not yet been approved, but management has indicated that in the absence of a rate increase, expenditure cuts would be made to help balance the budget.

MODERATE DEBT BURDEN

Yuma's overall debt levels are average at about \$2,141 per capita and 4.3% of estimated market value in fiscal 2014. Debt service as a percentage of operating expenditures is above average at 13.8%, but somewhat offsetting this is a rapid pace of principal amortization, with about 72% retired in 10 years. The city plans on issuing excise tax backed debt later this year to refund the MPC series 2007 bonds for debt service savings, and to provide new funding for an athletic complex (\$13 million) and for fleet services (\$9.5 million). Debt levels should remain moderate, even with the additional issuance.

The city contributes to two major pension systems: the Arizona State Retirement System (ASRS) and the Public Safety Personnel Retirement System (PSPRS) for police and fire personnel. The city consistently makes 100% of its actuarial annual required contribution for each system. The funding level for ASRS as of June 30, 2013 is 75.4%, but drops to an estimated 68% using Fitch's more conservative 7% investment return. The funding levels for PSPRS police and fire plans as of June 30, 2013 were 59.2% and 49.8% or 54.1% and 45.6%, respectively, when adjusted for Fitch's more conservative investment rate assumption.

Carrying costs, including debt service and pension/other post-employment plan contributions currently place a moderate 21.9% burden on governmental spending. Required pension contributions have been increasing and, given low pension funding levels, are likely to continue to rise and will challenge city budgeting. A significant increase in carrying costs could pressure the rating, in Fitch's view.

WEAK ECONOMIC INDICATORS

The area's climate has fostered a significant agricultural base while also attracting tourists from both the U.S. and Mexico. The economy is also anchored by two major military bases, the U.S. Marine Corps Air Station and the U.S. Army Yuma Proving Ground, which employ more than 8,000 workers combined. The air station is designated as the home to a new joint strike fighter squadron, which continues to bring in additional troops and has spurred economic activity related to base infrastructure improvements. Recent economic development also includes growth at the Yuma Regional Medical Center, which has expanded its operations, adding an additional wing for a new surgical center.

As is common among heavily agricultural areas, unemployment rates have historically trended significantly higher than state and national rates. The city unemployment rate for March 2015 was 10.9%, down from a year prior (13.5%), but well above the comparable state (5.4%) and national (5.6%) rates. City income and wealth levels are below state and national averages.

The city's taxable assessed value registered strong growth before contracting, starting in fiscal 2012. Annual declines have recently slowed, with the fiscal 2016 decline at less than 1%, vs 3.9% in fiscal 2015 and 9.2% in fiscal 2014. The city expects modest near-term growth, as home values have been increasing. However, overall growth may be moderated in light of the recent change to the property assessment process. Proposition 117, which was approved by Arizona voters in November 2012 as a constitutional amendment, limits annual increases in existing property values to 5% beginning in fiscal 2016 (2014 real property valuations), excluding increases associated with any new construction.

STRONG DEBT SERVICE COVERAGE

The excise taxes pledged to the MPC bonds are composed of a number of components, including sales taxes, state-shared revenue (income and sales taxes), building permits and inspection fees, and auto in-lieu taxes. Led by the local sales tax component, total excise tax receipts declined sharply as a result of the economic downturn, about 7% annually in fiscal years 2009 through 2011 before flattening out in fiscal 2012. Revenues grew strongly in fiscal 2013 (14.4%), largely reflecting the addition of a new ambulance service fee, with a modest decline in fiscal 2014 (1.4%) reflecting inclusion of three additional months of ambulance fee revenues in fiscal 2013 from fiscal 2012. Projections for fiscal 2015 show a solid 5.3% increase, with continued growth projected for fiscal 2016 (2.3%).

Coverage of maximum annual debt service (MADS) on all debt carrying a pledge of excise tax revenues, including 2003A, 2003B, 2007B, 2010B bonds (senior lien) and 2007D bonds (subordinate lien) is solid at over 4x. The 2007D bonds are additionally backed by road sales tax revenues, which alone cover 2007D MADS by about 2.0x. Fitch expects coverage to remain solid as surplus excise taxes are needed for general fund operations.

IMPROVEMENT BONDS BENEFIT FROM CITY PLEDGE

The 'A+' rating on the improvement district bonds is one notch below the city's implied ULTGO rating of 'AA-', reflecting the city's obligation to appropriate any amounts necessary for payment of principal and interest on the bonds.