Fitch Affirms Tolleson, AZ's GO Bonds at 'AA-'; Outlook Stable
--$10.3 million GO bonds, series 2006.
The Rating Outlook is Stable.
The bonds are payable from an unlimited ad valorem tax levied against all taxable property in the city.
KEY RATING DRIVERS
STRATEGIC LOCATION: Manufacturing, warehousing and distribution businesses have located in Tolleson to take advantage of its favorable location in the larger Phoenix metropolitan statistical area (MSA) along a major interstate.
STABILIZATION OF NFCAV: Net full cash assessed value (NFCAV) declines were sizeable post-recession, but the tax base has returned to growth as of fiscal 2015. Prospects for future near-term growth in the city's large industrial/commercial tax base appear likely given projects underway.
SALES TAXES BOOST SOLID RESERVES: Strong growth in the city's sales taxes point to an improving regional economy and management's conservative budgeting and spending practices, and have boosted the city's already healthy reserve levels.
ELEVATED DEBT BURDEN: Debt levels are elevated due in part of overlapping school district debt and rapid amortization. Capital needs are minimal and carrying costs have come down as debt has been retired.
CONTINUED REVENUE RESILIENCY: The rating is sensitive to the city's exposure to the economically sensitive sales tax. Further evidence of resiliency in sales tax collections while maintaining solid reserve levels could lead to positive rating action.
PHOENIX METRO CITY
The city is located 10 miles west of downtown Phoenix along Interstate 10 and encompasses approximately six square miles and 7,000 residents. Its central location in the Phoenix MSA and ready access to major interstate highway and rail corridors has made the city an attractive location for transportation intensive enterprises.
The local economy has been transformed from a historically agricultural base to a manufacturing, warehouse and distribution center that provides employment to the larger MSA. Improving economic conditions in the MSA have led to fairly steady declines in unemployment, down from a recessionary high of 9.7% in 2010. Year-over-year unemployment declined to 5.8% in August 2015 from 6.4% due to employment growth outpacing labor force growth.
NFCAV STABALIZATION; CONCENTRATION REMAINS
The city's property tax base grew by a high 17% annually in fiscals 2006-2010 before realizing a period of 12% annual contraction from fiscals 2011-2014. Fiscal 2015 marked the first year of growth since 2010 at 3.8%, and fiscal 2016 values were very strong, up 18.6%, due mostly to the expansion and addition of various commercial operations to the tax base. Potential for future growth is likely given current development underway and the city's ability to attract business interests to the area.
The top 10 taxpayers comprise a fairly stable list of large manufacturing, distribution, real estate and service firms. Tax base concentration has declined somewhat over time but remains high at 27% of NFCAV in fiscal 2015, led by a regional supermarket chain at 5.5%.
SALES TAX PERFORMANCE KEY
Sales taxes comprise a high 66% of fiscal 2014 revenues, up from 56% in fiscal 2008. Strong commercial and industrial expansion largely offset the recessionary impact on sales tax revenues, as evidenced by only one year of modest decline in that revenue stream (2%) since 2009. Management reports sales tax collections for the year ending June 30, 2015 exceeded the budget by $1.9 million, or a very strong 13% increase from the previous year's actual results. Collection results are 15% over budget for the two months of fiscal 2016. Concern over the city's dependence on sales tax revenue is mitigated by management's conservative budgeting of the revenue stream as well as industry diversification initiatives that include retail, wholesale, communications and utilities, and construction businesses.
Audited fiscal 2014 results show an operational surplus, but the year ended with a $1.2 million draw on fund balance due to a $3.5 million transfer out of the general fund for one-time capital projects. Despite the draw, balances were high at $7.6 million or 40% of spending at year-end. Management reports unaudited fiscal 2015 results will be substantially break-even after transfers due to the use of excess sales tax revenues for one-time spending, typical for the city. The fiscal 2016 adopted budget is largely in line with prior years, continuing the practice of conservative budgeting of sales tax revenues, and does not include any significant capital spending.
ELEVATED DEBT; LIMITED CAPITAL NEEDS
Debt levels have come down from higher levels recently due to tax base expansion and currently represent a slightly elevated 5.4% of market value. The city's debt amortization is rapid with 80% of principal repaid in 10 years, and the city reports no near-term plans to issue new money bonds given the city's preference for pay-go for capital spending.
FULL FUNDING OF LEGACY COSTS
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 consistently makes 100% of its annual pension cost (APC). The plan's funded position is satisfactory at 81.5% at June 30, 2014, although it would fall to 76.3% after adjusting for a more conservative 7% investment rate of return.
The city also makes its full APC payments through contributions to the Arizona Public Safety Personnel Retirement System (PSPRS), an agent, multiple-employer plan for police and firefighters. While the fire account is currently satisfactorily funded at 81.5% at June 30, 2013, the police funding level was a weak 61.9% for the same period. The funded position of both accounts would drop to 75.2% (fire) and 57.2% (police) assuming a 7% rate of return.
The city contributes 100% of its annual required contribution for other post-employment benefits (OPEB) and has a funded ratio of 61.8%. Carrying costs (debt service, pension, and OPEB costs, net of self-supporting debt) totaled a low 9% of governmental spending in fiscal 2014.