S&P Drops Tucson, Ariz., GO Rating to AA-Minus

DALLAS - Standard & Poor's lowered its general obligation rating and underlying rating on Tucson one notch to AA-minus from AA, based on the Arizona city's continuing financial distress and falling revenues.

"Tucson has seen a recent downturn in sales taxes, a significant revenue source, and the city projects they will fall further in fiscal 2010," said analyst Matthew Reining. "Moreover, the city is experiencing structural financial pressure, with a city-estimated $25.8 million general fund difference between revenues and expenditures in fiscal 2009, as well as another budget gap to be addressed in fiscal 2010."

Standard & Poor's also assigned an A-plus rating to the city's Series 2009 certificates of participation and Series 2009 refunding COPs. The outlook is stable.

Moody's Investors Service maintains a rating of Aa3 on Tucson's GO debt and A1 on its COPs. Fitch Ratings rates Tucson's GOs AA and its COPs AA-minus. Fitch yesterday revised the outlook on both the COPs and the city's GOs to negative from stable.

Officials report that general fund revenues for fiscal 2009 have dropped $42 million between the September and April versions of the budget. The city has been hardest hit by falling sales tax revenue. Based on the first nine months of the fiscal year, Tucson's sales tax income has fallen nearly $26 million, or 13%, after falling 3.1% in fiscal 2008. Sales tax revenue makes up 42% of the general fund.

The city earlier this year cut spending by $56 million by reducing vacant staff positions and also through attrition. General fund expenditures have also grown annually by 3.2% in fiscal 2008 and 2.5% in fiscal 2009 based on the city's most recent projections. It has restructured debt, and is considering a tax amnesty program to raise additional revenue.

Without considering the potential tax amnesty revenue - estimated at $4 million - the city projects a $14.6 million fund balance that Standard & Poor's said it considers adequate at 3.2% of expenditures.

With a population of 544,000, Tucson is the seat of Pima County and home to the University of Arizona. Like other parts of Arizona, growth of Tucson's residential base has slowed from its peak in 2001, when 3,800 single-family home permits were issued. Fewer than 1,400 new housing starts were reported in 2007, and the city recorded fewer than 1,000 permits for 2008.

The economic woes come as the city works with Pima County to redevelop downtown Tucson as the Rio Nuevo Multipurpose Facilities District, financed in part with $77.6 million of subordinate-lien sales tax bonds issued last year. Issued by the Tucson-Pima County Industrial Development Authority, in January the debt earned a three-notch upgrade from Standard & Poor's to AA-plus from A-plus based on "extremely strong debt-service coverage" of revenues running 20 times debt service payments for fiscal 2007 and 17.3 times for fiscal 2008. The Rio Nuevo bonds were rated A-minus by Fitch and A2 by Moody's.

The Rio Nuevo district's master plan includes cultural, residential, commercial, office and mixed-use developments. Proceeds from the Series 2008 bonds went toward parking, a science center, a history museum, a children's museum, civic center projects, and partial repayment to the city for funds advanced for the projects.

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