OREANDA-NEWS. Fitch Ratings affirms the following Marana Municipal Property Corporation (MPC), Arizona revenue bonds at 'AA-':

--$25.5 million series 2008A.

The Rating Outlook is Stable.

SECURITY
The bonds are payable by a closed, first lien pledge of excise taxes (sales taxes, state-shared revenues, license and permit fees, and fines and forfeitures that the town collects or that are allocated or apportioned by the state of Arizona) from the town of Marana (the town).

KEY RATING DRIVERS

STRONG REVENUE BOND COVERAGE: Pledged revenues are volatile but relatively diverse and reflect a recent trend of solid growth. All-in coverage on the revenue bonds is strong with MADS covered over 6 times (x) by actual fiscal 2015 pledged revenues, largely due to the general fund's reliance on these revenues for operations.

SOUND FINANCIAL PROFILE: Continued general fund operating surpluses driven by modest economic improvements have further enhanced already high reserve levels. Sufficient reserves are particularly important to offset inherent volatility in the town's economically sensitive revenues.

ELEVATED DEBT BURDEN: Overall debt ratios are above average, although the cost of servicing the town's long-term liabilities, inclusive of debt, pension, and other post-employment benefits (OPEB) remains manageable. The town participates in various state-administered pension plans.

MODERATELY-PACED ECONOMIC EXPANSION: The mostly residential town benefits from moderate residential and commercial development, above average income levels, and favorable unemployment rates.

RATING SENSITIVITIES

FISCAL CUSHION: Management's ability to maintain sound reserves that provide sufficient cushion for the next downturn is an important rating determinant.

CREDIT PROFILE
The town of Marana is located in the northwestern part of the Tucson metropolitan area along interstate 10. It is about 25 miles north of Tucson and 90 miles south of Phoenix. Major employers include public sector entities, retailers, and industrial companies.

HISTORICALLY RAPID POPULATION GROWTH

The town was primarily rural and agricultural historically, but experienced rapid growth. Population expanded by an average of nearly 10% annually between 2000 and 2014, reaching approximately 40,000 residents, while commercial and industrial developments also took off. The local economy remains largely residential in nature and enjoys above average income levels (with median household income equivalent to 150% of state and 140% of national levels) in addition to relatively low unemployment rates (4.3% as of November 2015, versus 5.8% statewide and 4.8% nationally).

Employment and economic trends in the larger Tucson MSA continue to improve, but generally lag the growth of the Phoenix MSA. Nonetheless, Marana continues to be one of the leading area communities for residential development. The local housing market remains active; town management expects to issue about 600 building permits again in fiscal 2016, roughly comparable to the prior two fiscal years. The median home value was $221,000 in Dec. 2015, which was up by a modest 2% year-over-year according to Zillow and much improved from the lowest point in 2012, although still below pre-recession highs. The newly opened Tucson Premium Outlets (Simon Properties) should further contribute to the expansion of the town's retail and sales tax base.

VOLATILE SALES TAX, HIGH COVERAGE MARGIN WITH CLOSED SENIOR LIEN

Pledged revenues increased by 4% and 9% from previous years in fiscal 2014 and 2015 respectively. Debt service coverage is strong at over 9x in fiscal 2015. Future all-in maximum annual debt service (MADS) coverage is also expected to remain strong at over 6x when factoring in actual fiscal 2015 pledged revenues. This coverage level does not consider management's plan to support a portion of debt service with wastewater revenues. Pledged revenues can withstand an 84% decline while retaining coverage at 1x, assuming no further debt issuance. In contrast, revenues fell an aggregate 33.2% from fiscal 2007-2010 before returning to positive growth.

Local sales tax, the largest component of the pledged revenues, is cyclical by nature. Despite consistent annual gains since fiscal 2011, fiscal 2015 local sales tax is still about 7% below its previous peak level. Local sales tax also exhibits a moderate level of concentration, with the top 10 retailers accounting for 23% and the top 10 contractors accounting for 18% in fiscal 2015. This concentration may be heightened in the near term, dependent upon evolving trends at the outlet mall. The volatility and concentration are inherent risks both to debt service coverage and the town's budget. The town does not levy a property tax for operations, although the legal ability exists. Local sales tax comprises approximately 60% of total general fund revenues, with the remainder largely stemming from other economically sensitive sources.

SOUND FINANCIAL RESULTS, STRONG RESERVE LEVELS

Fiscal 2015 marked the sixth consecutive year of surpluses from operations due to a steadily improving economy. The town generated a net operating surplus of nearly $1 million in fiscal 2015, ending the year with $22.3 million, or 60% of spending in unrestricted general fund reserves. Reserves have consistently exceeded the 25% minimum fund balance requirement, which Fitch considers a prudent practice given the budget's dependence on largely economically sensitive revenue streams. However, it appears likely reserves may fall closer to the minimum reserve threshold in the near term given budget plans to use a sizeable portion for pay-go capital.

The general fund balance sheet continues to reflect a slowly diminishing loan payable from the airport fund ($2.2 million at the end of fiscal 2015.) Adjusting for this loan, the effective unrestricted general fund balance remains very high at around $20 million, or 54% of general fund spending. Fitch does not presently view this airport fund loan as a key credit concern since it is a smaller amount as compared to prior years and general fund reserve levels should remain high even if the loan was written off.

The general fund continues to face cost pressures as a result of the town's population gains over time, stemming largely from public safety needs and increasing labor costs. However, as there has been steady economic momentum since the recession, and given past conservative fiscal management, Fitch expects the town will continue to manage costs within its means.

The $40.8 million fiscal 2016 general fund budget was adopted as structurally balanced. Local sales taxes are projected to increase by a strong 8% or $1.6 million year-over-year from not only sales recorded at the new outlet mall, but from a temporary, 0.5% sales tax rate increase put into place at the start of the fiscal year. Town council approved this increase to fund the design and construction of a new public safety facility; the increased sales tax rate is expected to remain in place over the next few years until $18 million has been collected.

Management plans to drawdown around $10 million largely for pay-go capital projects while preserving $15 million in reserves (32% of budgeted spending) in line with established policy. Revenue and expenditure trends are generally running comparable to budget according to management; a net operating surplus of about $1 million is projected and should serve to soften the year's drawdown.

WEAK LONG-TERM LIABILITIES PROFILE

Marana consistently meets its actuarially and statutorily determined pension annual contributions, which has generally ensured a relatively stable ratio of assets to liabilities in its two major pension plans.

Most employees participate in a cost-sharing, multiple-employer pension plan, the Arizona State Retirement System (ASRS). Under GASB 68, the town reports its share of the ASRS net pension liability (NPL) at $19.2 million, with fiduciary assets covering 69.5% of total pension liabilities at the plan's 8% investment rate assumption (approximately 63% based on a more conservative 7% investment rate assumption).

The ratios of assets to liabilities in the agent pension plan, Public Safety Personnel Retirement System (PSPRS) is 60.5% in fiscal 2015, although using Fitch-adjusted 7% rate of return, the ratio drops to approximately 55%. Fitch expects the town will continue to make full actuarial and statutory contributions given past practices, although recognizes a period of rapid, state-directed employer contribution rate increases in the future could lend added budgetary pressure. The town's other post-employment benefits (OPEB) liabilities are manageable. Total debt, pension and OPEB carrying costs are equivalent to a moderate 19% of total governmental spending in fiscal 2015.

The town's five-year CIP (fiscal 2016-2020) ambitiously programs about $198 million in capital projects, somewhat expanded in light of an improved economic climate. Road, bridge, wastewater needs and the public safety facility comprise the bulk of the key projects, although flexibility is maintained. Plans for a park (totaling $12 million in fiscal 2016) have been pushed out until new funding can be identified. Resources include town impact fees, transportation sales tax funds (a dedicated 75% of town's construction sales tax revenue), and other local government funding partnerships (e.g.-$19 million from Pima Regional Transportation District).

Overall debt ratios are above-average at $4,500 per capita, or 4.6% market value. The town has no immediate debt plans, although the likelihood of some modest amount of debt issuance for its wastewater plant is possible in the near to medium term.