Fitch Rates Pima County, AZ GOs 'AA-'; Outlook Stable

The series 2009 bonds and outstanding parity bonds are direct and general obligations of the county, payable from an unlimited ad valorem tax levied against all taxable property in the county. Series 2009A proceeds will be used to finance various municipal improvements and to refund a portion of the county's outstanding GO debt for annual debt service savings.

The 'AA-' rating reflects the county's satisfactory financial profile, moderate debt position, and the historically sound and diverse regional economy. In assigning the rating Fitch also considered the financial pressures being generated by the ongoing recession and the likelihood of additional pressures due to continuing state budgetary challenges and expected tax base declines. Fitch believes that the county's recent prompt responses to deteriorating revenues suggest that further action, if necessary, will be timely and will help maintain the county's financial footing.

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.

Series 2009 proceeds include $90 million for various municipal projects, including public health, public safety, flood control, parks and recreation, open space preservation, and solid waste. The remaining proceeds will refund $23 million in outstanding GO debt for annual interest savings. County officials anticipate a manageable $0.09 tax rate impact over a period of years from this offering. 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 10 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.

With a population of more than 1 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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Fitch Ratings
Steve Murray, +1-512-215-3729
Rebecca Moses, +1-512-215-3739 (Austin)
Cindy Stoller, +1-212-908-0526 (New York)
cindy.stoller@fitchratings.com