OREANDA-NEWS. Fitch Ratings has affirmed the following Sierra Vista Municipal Property Corporation (MPC), AZ's bonds, issued on behalf of the city of Sierra Vista (the city):

--$12.03 million municipal facilities revenue bonds affirmed at 'AA-';
--$6.18 million municipal facilities revenue refunding bonds affirmed at 'AA-'.

Additionally, Fitch has affirmed an implied unlimited tax general obligation rating for the city at 'AA-'. The city currently has no general obligation bonds outstanding.
The Rating Outlook is Stable.

SECURITY

The bonds are payable from lease payments made by the city to the MPC. The city has pledged a first lien on its excise taxes to make the lease payments, which are not subject to appropriation.

KEY RATING DRIVERS

SOLID FINANCIAL PERFORMANCE: The city's financial position remains steady, marked by structurally balanced operations, conservative budgeting, and adequate reserves.

PLEDGED REVENUE GROWTH, SOLID COVERAGE: Pledged revenues increased over the last three years through fiscal 2015, generating robust debt service coverage. The healthy coverage also reflects the city's use of excise tax revenues for operations.

CONCENTRATED ECONOMY: The local economy is closely linked to the economic activities of Fort Huachuca. Additionally, the city serves as a regional retail and commercial hub given its proximity to the Mexican border.

AFFORDABLE DEBT, RETIREE LIABILITIES: The city's debt profile is positive, characterized by very low debt levels, rapid principal payout rate, and no plans to further leverage the pledged revenue stream. Annual contributions to generally poorly funded pension programs do not impose a significant burden on operations.

RATING SENSITIVITIES

DECLINE IN COVERAGE: A material decline in pledged revenues and coverage, although not expected, could pressure the rating.

CREDIT PROFILE

Sierra Vista is located in southeastern Arizona, 70 miles southeast of Tucson and 10 miles from the U.S.-Mexico border. The current population estimate is 46,351. The city is home to Fort Huachuca (the fort), which was established in 1877. While historically dependent on fort-related activities, the local economy continues to diversify with expansion in the retail and healthcare industries.

STRONG COVERAGE

The excise taxes pledged to the bonds consist of local sales taxes, state shared income and sales taxes, licenses and permits, franchise fees, public utility taxes, and user fees and charges. Excise taxes are the primary revenue stream of the city's general fund and account for about three quarters of total operating revenue. Consequently, leverage of these revenues is modest and debt service coverage on the bonds is strong, in excess of 8x for fiscal 2015, well above the 3x required by the bond indenture. Maximum Annual Debt Service Coverage (fiscal 2017) is also solid at 8.36x.

Fiscal 2015 pledged revenues of $28.7 million were up 5% from the prior year and grew at an average annual rate of 3.75% over the last three years; collections remain below the 2008 peak of $29.5 million, however. Pledged revenues are projected to increase to by 2% for fiscal 2016. State shared income and sales tax revenue have registered gains, mirroring state-wide economic recovery. Fiscal 2016 pledged revenues also will benefit from a recent 2/10 of a cent sales tax rate increase effective November, 2015. The city anticipates additional gains in pledged revenues over the next several years associated with ongoing economic expansion. Fitch considers the growth projection reasonable given recent trends.

LOCAL ECONOMY LINKED TO FORT HUACHUCA

The fort houses the U.S. Army Information Systems Command, U.S. Army Intelligence Center, and U.S. Army Electronic Proving Ground. It is the city's largest employer with 8,745 full-time military and Army civilian workers, a decrease of 5% from a year prior due to defense spending cuts. Management states no further defense spending cuts are expected to impact fort staffing levels.

Credit concerns over the military concentration in the local economy historically have been mitigated by the fort's high profile mission within the military, which includes operating air-borne drones in military operations. Fitch will continue to monitor the impact of defense spending trends on the local economy.

Health care, retail and tourism sectors supplement the city's economy. Proximity to the border draws a significant influx of Mexican nationals who account for a sizable portion of the city's retail activity. Officials report new retail and commercial development as well as expanding medical facilities. The city's unemployment rate decreased to 6.1% as of November 2015 (need more current unemployment numbers) compared to 6.4% in the prior year, reflecting a moderate employment gain.

SOUND FINANCIAL POSITION

The city's financial profile remains notably steady and reserves are adequate, benefiting from conservative fiscal management. The city's unrestricted general fund balance at fiscal year-end 2015 was about $4 million, or 14% of spending. Although the city is exposed to economically sensitive revenues, it has historically adjusted its spending to maintain structural balance and retains ample flexibility in its cost structure. As of February 2016, privilege tax receipts were 1.0% ahead of the prior year and management expects operating results at fiscal year-end to be balanced.

LOW DEBT

Fitch considers the city's debt profile a positive credit factor, with overall debt at only $460 per capita (.7% of market value). The pace of debt repayment is very rapid with 100% of principal retired within 10 years. The city's outstanding debt of roughly $18 million consists mostly of MPC borrowings, and any near-term capital needs for public works appear manageable and will be funded for the most part with grant and development fee monies.

BELOW-AVERAGE PENSION FUNDING

Under GASB 67 and 68, the city reports a fiscal 2015 ASRS net pension liability (NPL) of $16.5 million, with fiduciary assets covering 69.5% or a lower 62.6% based on Fitch's 7% investment rate assumption. The NPLs for the city's PSPRS plans are $19.3 million for police and $10.7 million for fire. Fiduciary assets cover 42.2% and 55.6% respectively, or 38.6% and 50.8% based on a Fitch's lower 7% investment rate assumption. The NPL of the plans represent a modest 1% of the city's fiscal 2015 market value.

The city provides other post-employment benefits (OPEB) through a single employer defined benefit plan, and the city's fiscal 2015 contribution to the plan was $3 million, or a low 1.8% of government spending. Total carrying costs, including of debt service, actual pension cost, and OPEB contribution, comprised a manageable 17.6% of fiscal 2015 governmental spending.