Fitch Rates Pima Co., AZ 2009A COPs 'A+'; Affirms GOs & Hwy Revs at 'AA-'; Outlook Stable

Fitch Ratings has assigned an 'A+' rating to Pima County, Arizona's (the county) $20 million certificates of participation (COPs), series 2009A. Additionally, Fitch assigns an 'A+' rating to the county's outstanding $24.4 million series 2008 and series 2009 COPs and affirms the 'AA-' rating on the county's GO bonds and street and highway revenue bonds. The series 2009A COPs are scheduled to sell via negotiation in early December. The Rating Outlook for all securities is Stable.

The 'A+' rating on the COPs reflects the county's general credit characteristics, a covenant by the county to include in the annual budget sufficient funds to make all lease payments when due, the essential nature of the leased property and the county's historical use of this financing vehicle for capital improvements. The rating further incorporates the requirement for the county to pay all maintenance expenses and taxes and to maintain property and liability insurance on the leased property for the duration of the lease, and the county's ownership of the leased property at the end of the lease term. These elements are consistent with Fitch's lease rating criteria and support a one-notch rating distinction below the county's general obligation (GO) rating. Fitch currently rates the county's GO debt 'AA-' with a Stable Outlook.

The COPs are payable from lease payments from the county to U.S. Bank National Association (the trustee); the lease payments are subject to annual appropriation. The series 2009A COPs (as well as the series 2008 and series 2009 COPs) are issued pursuant to a lease-purchase agreement originally dated June 1, 2008 between the county and the trustee, and all three series also are governed by a trust agreement originally dated June 1, 2008 between the county and trustee. The trustee's security interest allows it to repossess and sell or re-let the leased property in the event of default. The leased property consists of certain interests in major portions of the county public works building and garage, and the county legal services building. The series 2009A COP proceeds will be used to finance technology improvements for several county departments. The estimated value of the leased property at more than $50 million exceeds the outstanding amount of the three COP series.

The county recorded a string of positive general fund results from fiscal 2005 to fiscal 2008, and the unreserved fund balance nearly doubled from $33 million to $65 million during that period (although transfers in for debt service contributed significantly to the increase); the fiscal 2008 unreserved balance represented nearly 13% of spending and transfers out. In recognition of the weakening economy, county administrators in the fiscal 2009 budget reduced departmental spending by 5% (with the exception of the sheriff) and followed this move with an additional 2.5% administrative spending reduction and a mid-year across-the-board 2.5% cutback in all general fund departments. The result of these actions was year-end results that met original budget targets. The anticipated fiscal 2009 unreserved general fund balance, which was adjusted for a nearly $30 million transfer out for debt service, is satisfactory at $35.8 million or about 7% of spending.

Fitch credits the county with extending the fiscal 2009 spending reductions into the fiscal 2010 budget, which along with other cost saving measures enabled officials to propose a nearly eight cent reduction in the primary (operations) tax rate and set aside $15 million in a budget stabilization fund to pay for additional healthcare-related outlays. These steps were taken as projections of intergovernmental revenues from the state continued to drop. Intergovernmental monies, which are the second largest general fund revenue source, peaked in fiscal 2007 at more than $152 million and by fiscal 2009 had shrunk to $132 million; the budgeted amount for fiscal 2010 was less than $129 million, or roughly 15% below the fiscal 2007 total. Given the ongoing recessionary pressures in Arizona, Fitch believes the close monitoring and prompt action displayed by county administrators during fiscal 2009 will be critical over the next several years to preserving adequate reserves and maintaining the current rating level.

County overall debt ratios are moderate at about $1,500 per capita and 1.9% of fiscal 2010 market value. Payout of GO debt is rapid with more than 80% repaid in ten years. General government capital needs through fiscal 2014 appear manageable at roughly $380 million, which is less than the $490 million included in the previous plan. County officials expect 85% of the needs to be debt-funded. The county plans to sell $113.1 million series 2009A GO bonds and $23.3 million series 2009 street and highway revenue bonds later this month.

With a population of more than one million, Pima County is home to Tucson, Arizona's second largest city. Fitch cites as a positive credit factor the area's historically diverse economy, featuring higher education, healthcare, government, technology, tourism and manufacturing as primary anchors. Major southern Arizona employers include Raytheon Missile Systems (11,500 employees), the University of Arizona (10,575), the State of Arizona (9,300), Davis-Monthan Air Force Base (7,500), the U.S. Army Intelligence Center & Fort Huachuca (6,500), and Freeport-McMoRan Copper & Gold Inc. (6,000).

After a series of annual increases dating back to 2000, county employment levels dipped 1% in August 2009 compared the prior year period, and unemployment jumped from 5.8% to 8.2%; this level remained below the state and national averages, however. While the housing sector has weakened considerably, residential foreclosure and delinquency numbers are below U.S. averages and well below those of the Phoenix market due to less speculative building in the Tucson area over the past decade. County tax base growth, which has been steady in recent years, is expected to register declines of around 4% in each of the next two fiscal years as eroding property values impact the tax roll. Full cash value for fiscal 2010 is $80.7 billion, up 1.8% from the prior year.

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