Fitch Rates Buckeye, AZ's Series 2016 Excise Tax Revs 'AA-'; Outlook Stable
--\\$12.335 million excise tax revenue refunding obligations, series 2016.
The obligations are scheduled for a negotiated sale the week of March 7. Proceeds will be used to refund outstanding obligations for savings.
In addition, Fitch has affirmed the following Buckeye ratings:
--\\$58.3 million in outstanding excise tax revenue obligations at 'AA-';
--Implied unlimited tax general obligation (ULTGO) at 'AA-'.
The Rating Outlook is Stable.
The excise tax revenue obligations are payable from purchase payments made by the city to the trustee, payable from a pledge of the city's excise taxes and state shared revenues. Purchase payments are not subject to annual appropriation.
KEY RATING DRIVERS
SOUND FINANCES; REVENUE VOLATILITY: Strong expenditure controls support ample reserves, despite exposure to revenue volatility. The ratings incorporate the city's reliance on economically sensitive city privilege (sales) tax and state-shared tax revenues to support operations.
MANAGEABLE LONG-TERM LIABILITIES: The city's debt burden is elevated due to sizable overlapping debt. Carrying costs (debt service, pension and other post-employment benefit [OPEB] costs) place a manageable burden on the budget.
HIGH GROWTH PHOENIX SUBURB: Buckeye has experienced very rapid growth, increasing six fold during the past decade, although more moderately during the last five years. Additional rapid growth may pressure the city's finances and debt profile.
RATING CAPPED: The implied GO and excise tax ratings have limited upside potential in the near term based on revenue volatility and the city's exposure to additional rapid growth. Positive rating action is premised on manageable growth trends and the maintenance of strong finances.
The city of Buckeye is located in Maricopa County, 30 miles west of Phoenix with an estimated 2015 population of 58,745, up from 6,537 as recently as 2000.
RISK OF ECONOMICALLY SENSITIVE REVENUES MITIGATED WITH SOUND RESERVES
Buckeye's operations are supported primarily by economically sensitive revenues. Local sales taxes and state shared revenues contributed 63.9% of the city's fiscal 2015 total general fund revenues, followed by property taxes (10.3%).
The city maintained adequate reserves during the revenue declines of the recent recession by aggressively cutting costs, including staff and salaries. As revenues have strengthened over the past several years the city has added to reserves, realizing a net surplus in each of the past four years.
A fiscal 2015 net surplus of \\$0.8 million (1.33% of spending) contributed to unrestricted reserves of \\$19.6 million, a solid 33.3% of spending. The city projects fiscal 2016 year-end reserves of \\$12 million, consistent with the final adopted budget and reflecting application of general fund monies for capital and other one-time expenditures. The city's fiscal 2017 budget is structurally balanced and the city anticipates maintaining reserves consistent with its 25% fund balance policy.
ELEVATED DEBT; MANAGEABLE LONG-TERM LIABILITIES
Overall debt subsequent to the city's \\$55 million issuance in July 2015 to fund acquisition of a water system is elevated at 6.3% of market value and \\$3,770 per capita, due to sizable overlapping debt. The city plans for debt service on the series 2015 obligations to be funded by the new water system operations. Fitch will monitor the system's ability to support the series 2015 debt service on a consistent basis and provide self-supporting credit once a trend is established.
The city participates in state-administered defined benefit pension plans including the Arizona State Retirement System (ASRS), a cost-sharing multiple-employer plan and the Arizona Public Safety Personnel Retirement System (PSPRS) for public safety employees, an agent multiple-employer plan.
The Arizona legislature annually establishes the ASRS contribution rate, generally equivalent to the legislatively determined actuarially-determined rate (although by statute the legislature can establish a contribution rate that differs from the actuarially-determined rate). The PSPRS rate is also actuarially based.
Under GASB 67 and 68, the city reports a fiscal 2015 ASRS net pension liability (NPL) of \\$22.5 million, with fiduciary assets covering 69.5% of total pension liabilities at the plan's 8% investment return assumption (approximately 60% based on a lower 7% investment rate assumption). The NPLs for the city's PSPRS plan are \\$7.6 million and \\$1.3 million, respectively, for police and fire. Fiduciary assets cover 64.7% and 91.8% of total pension liabilities for police and fire, respectively, at the plan's 7.85% investment return assumption (approximately 57.7% and 81.8% for police and fire based on a lower 7% investment rate assumption).
The NPL of the plans represent a very small .7% of the city's fiscal 2015 market value. In addition, the unfunded OPEB liability is de minimus. The city's fiscal 2015 carrying costs, including debt service, pension and OPEB contributions are high at 26.9% of fiscal 2015 governmental spending with an upward trajectory, due largely to the city's slow 29% 10-year principal amortization rate.
SOUND COVERAGE; ADEQUATE ADDITIONAL BONDS TEST
Fiscal 2015 pledged revenues of \\$35.7 million cover annual fiscal 2016 debt service by a healthy 7.9x and maximum annual debt service (MADS) of \\$5.4 million (2022) by a strong 6.6x. Although not expected, a 33% decline in pledged revenues (the precipitous multi-year decline during the great recession) would still produce adequate MADS coverage of 4.7x.
High coverage levels reflect the city's reliance on excise tax revenues for operations. By policy, the city applies the more volatile construction component of local sales tax revenues to capital and nonrecurring expenditures.
Pledged revenues include transaction privilege (sales) taxes, state-shared revenues (consisting of state-shared sales taxes and state-shared income taxes), franchise fees, parks and recreation fees, fines and forfeitures and licenses and permits. Pledged revenues reached a recent peak in fiscal 2008 of \\$27.4 million before losing 33% of their value by fiscal 2010. Between fiscal 2005 and 2008, construction activity accounted for the majority of local sales taxes.
Fiscal 2010 through 2015 pledged revenues realized a strong 14.4% compound annual growth, during which time construction accounted for a reduced 20% to 27% of local sales tax revenues. Although overall growth has moderated, Fitch anticipates additional pledged revenue gains based on current trends.
RURAL PHOENIX SUBURB
Buckeye is the westernmost suburb in the Phoenix metropolitan area. The city participated in explosive regional growth between 2000 and 2010, as well as the subsequent housing collapse. Fiscal 2014 and 2015 new housing permits are double those of the recessionary trough, but remain substantially below earlier peak levels.
The city's fiscal 2016 taxable assessed valuation realized strong growth for the second consecutive year, subsequent to a multi-year slide associated with the recession and regional housing market collapse; the limited property value totals \\$320.2 million for the year. The city's employment base has continued to expand over the past several years, as reflected in an improved unemployment rate of 5.7% as of Dec. 2015; the local rate is moderately above the state and U.S. averages of 5.5% and 4.8% for the same period.