No-Growth Phoenix Hangs In There

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DALLAS - The most unusual thing happening in Phoenix this year is what's not happening.

"On our plan of finance, we actually assume we will have no growth this year," says the city's interim chief financial officer, Jeff Dewitt. "We're projecting flat growth for the next two years."

For a city that has challenged Las Vegas for the title of the nation's fastest growing over the past decade, the change ranks as a dramatic economic indicator. A 23% growth rate since 2000 made Phoenix the nation's fifth-largest city with a population of 1.63 million.

But Arizona's Valley of the Sun was hit early and hard by the collapsing housing market.

In the past year alone, median home sales prices dropped 34% in Phoenix, compared to 33% in Las Vegas, about 30% in parts of California, and 29% in Miami. According to Standard & Poor's Case-Shiller Home Price Index, home values in the survey's 20-city composite are back to where they were in 2003.

"Clouding the economic picture, job markets tend to be the worst in these communities, with 2008 employment down by 35,000 jobs, or 2%, in Phoenix," according to S&P analysts.

To manage the financial crisis, city government this year cut $270 million, or 20%, of its $1.2 billion general fund. The cuts were the largest in Phoenix's history.

"Somewhat easing the pain, in our view, is that, where prices have dropped the most, sales of existing homes are beginning to pick up as buyers are seeing value again in Arizona, California, Florida, and Nevada and taking advantage of lower mortgage rates," analysts wrote last month.

On top of that, the city's conservative fiscal management has allowed it to keep its AAA rating from Standard & Poor's. That rating will apply to $532 million of revenue bonds for water and sewer projects selling today and should help the city get a good price for the deal.

Under senior manager Goldman, Sachs & Co,, the issue is expected to consist of $442.6 million of Series 2009A junior-lien water system revenue bonds and $88.8 million of Series 2009B junior-lien water system revenue refunding bonds, both of which mature from 2010 to 2039. The bonds carry ratings of Aa3 from Moody's Investors Service. Moody's rates the city Aa1.

"While Phoenix is in the midst of a severe economic downturn, which has halted growth and offers little hope for a quick recovery, the city's water utility remains financially stable due primarily to strong management practices which revolve around careful planning, conservative forecasting and regular rate increases," Moody's analysts noted.

The sale will begin with a retail order period today, followed by institutional orders tomorrow, according to Dewitt.

"We're going to give special emphasis to Arizona retail," the CFO said. "We think that with the triple-A from Standard & Poor's we'll do very well. It's a good, strong credit."

Dennis Waley, senior managing consultant at financial adviser PFM Asset Management, noted an underwriter's estimate that over 73% of the bonds sold in the primary market this year have carried ratings equivalent to Moody's Aa3 or better.

"I think buyers still want high-grade paper," he said. "Phoenix is probably [this week's] largest transaction, so I anticipate a significant amount of interest in this sale."

Although the Series 2009B refunding portion of the issue is optional, Waley said, "I fully expect to do the refunding." City officials anticipate saving about 7% on interest by refunding a 1998 series that is callable July 1.

The Series 2009A bonds will refund about $200 million of bond anticipation notes for projects already underway, with $250 million financing upgrades and new projects in existing neighborhoods.

Issued by the Phoenix Civic Improvement Corp., the bonds will carry junior-lien status with about $1 billion of parity bonds outstanding.

The debt is secured by city payments from a junior-lien net revenue pledge of its water enterprise. There are no senior-lien bonds outstanding, and none are expected to be issued.

The Phoenix Water Department serves 403,754 accounts in a 540 square-mile area and a population of 1.63 million.

The system's capital improvement plan totals approximately $1.1 billion for fiscal years 2009 through 2014, which was scaled back 40% last year to accommodate the recession.

"A substantial 72% of CIP funding is expected to be provided from pay-as-you-go cash contributions with bond proceeds representing the remaining 28% of funding," Moody's said. "While the system's 2008 debt ratio is modest at 46.9%, planned borrowings in 2011 and 2013 will drive the system's debt ratio to a somewhat higher, but still manageable level."

While money may be tight, water supplies are healthy after previous years of drought. The city's principal water sources are the Salt and Verde rivers, which supply roughly 49% of the system's needs, and the Colorado River through the Central Arizona Project, which provides 43%; reclaimed and groundwater provide the remaining 8% of supply.

"Current supplies are expected to meet the system's growth needs until 2025," Moody's reported. "The city's agreement with the Salt River Project to supply the Salt and Verde river water was approved in December 2001 for a 100-year term with substantially the same provisions as the previous contract."

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