DALLAS - Arizona's affluent resort city of Scottsdale will take its triple-A credit rating for a test drive next week, with a pair of competitive bond deals worth $230 million.
The bond issues are likely to be Scottsdale's only offering in 2008, said chief financial officer Craig Clifford.
"We have just under $1 billion in our current capital improvement program," he said. "About half of that is pay-as-you-go."
The issues include $120 million of general obligation bonds split into two series. Series A for $100 million will be used for general city improvements, including parks and streets. Series B will provide $20 million for to buy land for and make improvements to the McDowell Sonoran Preserve.
On the same day, the city will issue another $110 million of revenue bonds for water and sewer projects. Those bonds are rated AAA by Standard & Poor's but AA-plus by Fitch Ratings,and Aa1 by Moody's Investors Service.
"The rating is based on Scottsdale's very strong local economy ('AAA' general obligation rating), which is characterized by very high income levels, strong tourism and sales tax trends, and robust residential and commercial development," said Standard & Poor's credit analyst Paul Dyson.
With a flight to quality affecting the market, Clifford expects a good response to the city's offering.
"Ordinarily, we're highly competitive because we're an excellent credit," he said. "We usually get a lot of bidders. But the market's been a little strange lately, so we don't really know for sure."
Scottsdale's top credit is also a factor in its decision to sell debt competitively, according to Clifford.
"We've found it to be the best value for our citizens," he said. "Most of our deals are pretty straightforward."
Piper Jaffray & Co. serves as the city's financial adviser.
The water and sewer bonds will be sold by the Scottsdale Municipal Property Corp.
With an estimated population of 241,750, Scottsdale is both a suburb of Phoenix and a destination resort. Population has grown more than 80% since the 1990 census. The city has the highest per-capita income in the state at $48,293, with a median family income of $95,361.
The rating agencies said credit strengths include a substantial and growing economic base, a long trend of strong financial performance, exemplary fiscal management, and favorable debt profile, along with the city's well-established record of carefully monitoring revenues and expenditures, implementing timely budget adjustments, and reducing pay-as-you-go capital spending as necessary.
Analysts noted that Scottsdale's debt levels are above average, but observed a number of favorable trends, including high wealth levels, rapid debt amortization, and the narrowing timeframe until the city is built out and shifts from a period of expansion to ongoing maintenance.
"Our peak household construction was in the mid-to-late 90s," Clifford said. "That's one reason we have not been as affected by the housing crisis."
Surveys show that fewer new homes and condos are being built in Scottsdale, but that interest in commercial projects and home remodeling has continued to increase.
The city issued 1,356 construction permits last year for new single-family and multifamily construction, including apartments, condos and town homes. That's about 600 permits less than in 2004, or a 31% decrease.
City quarterly growth reports show permits have declined from 1,970 in 2004 to 1,465 in 2005. They slightly up to 1,512 in 2006 before dropping again to 1,356 in 2007.
Meanwhile, a growing number of new offices and other commercial ventures has boosted total permits. Major employers include the Mayo Clinic, Allied Waste, Web address registrarGoDaddy, Cold Stone Creamery, and Taser.
The Scottsdale Airport, opened in the 1960s, contributes about $3 billion per year to the economy with more than 50,000 jobs in the area.
Tourism, a mainstay of Scottsdale's economy, benefitted from the 2008 Super Bowl in Glendale and gains consistent support from annual events such as the Arabian Horse Show, the Barrett Jackson Classic Car Auction, and the Cactus League spring training camps for Major League Baseball teams.
Water is always a critical issue for the desert cities of Arizona, so the water and sewer debt will be used to acquire water rights from the Gila Indian Reservation.
"This will provide us a 100-year assured water supply," Clifford said. "We're in good shape for our water needs."
With numerous golf courses at resorts in the city, water conservation is improved through reuse of water that is non-potable. In the spring and summer, the courses are watered with so-called gray water, and in the winter, the recycled water is used to recharge the aquifer, Clifford said. The resorts invested their own money in the recycling system, he said.
The water and sewer system's capital improvement program totals more than $500 million through fiscal 2012 and will be funded through a combination of debt, available cash, and development fees charged to new customers.
"Although annual development fee revenue is down from previous years due to the housing slowdown, city officials still anticipate that these fees will finance a significant portion of total capital needs through the CIP period," Fitch analysts noted.
Debt levels on the water system are above average at around $2,500 per customer for fiscal 2007. With anticipated additional borrowing to fund the CIP, Fitch expects customer debt levels to remain relatively high through fiscal 2012.
With the intensive development over the years, Scottsdale made a concerted effort to preserve open land at the urging of the nonprofit McDonald Sonoran Conservancy.
In 1993, the city created the McDowell Sonoran Preserve Commission and appointed five MSC board members to the commission's nine-member board.
In 1994, the city dedicated the preserve with three parcels of land covering about five square miles. The next year, voters approved a 0.2 cent tax for 30 years to purchase land for the preserve.
