DALLAS — Facing the same revenue squeeze choking every Arizona city, Tucson took a hit to its strong credit ratings as it prepares to market $100 million of certificate of participation next month.
Fitch Ratings dropped Tucson’s general obligation bonds to AA from AA-plus and attached a negative outlook, meaning further downgrades could be in store going forward. Standard & Poor’s, which downgraded the debt to AA-minus last year, also assigned a negative outlook ahead of the upcoming deal. Moody’s Investors Service has not yet issued its opinion.
“The downgrade reflects a continued weakening in the city’s financial profile, with shrinking local sales tax and state shared revenues pressuring operations and reserve levels,” Fitch analysts noted.
Fitch also downgraded the city’s certificates of participation, including the upcoming issue, to AA-minus from AA. Standard & Poor’s rates the COPs A-plus.
“If city officials were to address the budget and bring the city’s final performance into a more structurally balanced position, we could revise the rating outlook to stable,” Standard & Poor’s analyst Matthew Reining wrote.
Arizona’s second-largest city plans to issue $38 million of taxable COPs under the Build America Bond program, $8.5 million of tax-exempt certificates and another $15 million of tax-exempt COPs to refund a 1998 issue.
Possibly the same week, Tucson plans to issue $38 million of water system revenue bonds, a mix of $34 million of taxable direct-pay BABs and $4 million of tax-exempt revenue bonds that carry the city’s GO rating.
Amid the negative rating outlooks, city officials fear a downgrade if voters reject a half-cent city sales tax increase in November.
Statewide, voters approved a one-cent sales tax hike last week, but voters in three Arizona cities rejected local sales tax increases, with only the Phoenix suburb of Tempe giving the nod.
Tucson’s ratings could also affect plans to finance a $192 million convention hotel through the Rio Nuevo Multipurpose Facilities District. While the bonds would be issued in the name of Rio Nuevo, they would carry the city’s credit rating. Standard & Poor’s last week also shifted the outlook on Rio Nuevo’s COPs to negative from stable. The lease-revenue debt is rated A-plus.
The Rio Nuevo district board is expected to decide next month whether to go forward with the hotel.
Current plans call for Rio Nuevo to invest $1.5 million per year for the hotel that would be managed by the Sheraton Hotels & Resorts chain. The city of Tucson would provide $4.5 million of tax breaks.
Piper Jaffray & Co. is financial adviser for the Rio Nuevo deal.
In developing the project, Rio Nuevo is relying on a February market analysis by HVS Convention, Sports and Entertainment that showed the hospitality industry stabilizing in 2011. The convention hotel could break even by 2015, the report indicated, provided the city is able to expand its convention facility. However, the report was submitted before the announcement of a national boycott of Arizona in reaction to the state Legislature’s passage of SB 1070 requiring local enforcement of federal immigration laws.
A feasibility study of the convention hotel project last week from Piper Jaffray & Co. indicated that dedicated revenue would be only 1.4 times annual debt service coverage, which is below the standard figure of 1.5 times.
Kelly Gottschalk, director of finance for Tucson, said the city would provide a $4.5 million reserve account and a pledge to support the bonds from general fund revenue.
The Piper report said that support from the development district and the city should translate to an interest rate of 5.51%.
Before the call for a national boycott, Arizona’s tourism industry was seeing signs of recovery from the deep slump of 2009. Credit analysts have cautioned that the boycott could lead to declining sales tax receipts for state and local governments.
Voters approved the creation of the Rio Nuevo tax increment district in 1999 to redevelop downtown Tucson. But the district did not begin producing sufficient revenue to service debt until 2004. In 2006, the Legislature approved an extension of the district’s revenue authority.
Meanwhile, Pima County, of which Tucson is the county seat, still enjoys a stable outlook as it prepares to issue $166 million of sewer system revenue bonds.
Standard & Poor’s affirmed it’s A-rating on the subordinate-lien bonds while maintaining a AA-minus on the county’s GOs. Fitch affirmed its AA-minus rating on the sewer bonds along with its AA GO rating. Moody’s lowered the county’s sewer bond rating from A1 to A2 in April 2009 but has not issued a report on the upcoming deal. Last year, Moody’s gave Pima a GO rating of Aa3.
The Pima County bonds are expected to price next week in two series, including $130 million of direct-payment BABs and $36 million of tax-exempt bonds.
The county provides wastewater service to the Tucson area as well as separate outlying areas in eastern Pima County, for a total population of about one million.
The county completed a regional master plan in November 2007 that called for $812 million of capital projects over the next five years. One of the largest projects is replacement of the 50-year old Roger Road treatment facility with a new water reclamation campus. The new plant is scheduled to be in operation by 2015.
Like the larger city of Phoenix 118 miles to the north, Tucson has been struggling to cut costs to keep pace with falling revenue, particularly sales tax and shared state revenue.
Among measures the city has taken are elimination of more than 600 positions, salary freezes, benefit adjustments, city-wide department spending cuts and various revenue-enhancement measures. Analysts have applauded the city’s aggressive fiscal management.
Debt restructurings and the sale of four city-owned land parcels are among one-time measures designed to see the city through the year.
With an estimated population of nearly 545,000, Tucson was the 30th largest city in the nation, according to the 2000 U.S. Census. At more than 50% built-out, growth of the city’s residential base has slowed from its peak in 2001, when it recorded 3,800 single-family home permits, according to Fitch.
Only 543 new housing permits were issued in 2009. The Tucson housing market experienced less rapid rates of price appreciation than other Arizona cities, and the most recent residential delinquency and foreclosure rates are below the national averages.
Among the unknowns facing the city and Pima County are the costs of training local law enforcement officers in federal immigration law in order to enforce SB 1070 and the cost of potential lawsuits arising from the arrest of suspected illegal immigrants.
Under the new law, police and sheriff’s deputies can also be sued by any local citizen if they fail to adequately investigate the citizenship status of a suspected undocumented worker.
While Gov. Jan Brewer said the new law forbids racial profiling, the only major source of illegal immigrants in Tucson is the Mexican border 60 miles to the south.
Hispanics who were born in Arizona and whose families have lived in the area for generations fear that they will be arrested and possibly deported if they are caught without a passport, driver’s license or birth certificate.
While the non-Hispanic population of Arizona has grown dramatically in the last 50 years, some Arizonans remember the forced deportations of the 1930s in which many Americans of Mexican descent were sent to Mexico without a chance to prove their citizenship. Historians estimate that up to 60% of those deported were born in the U.S.
In the current economy, the loss of cross-border commerce through a boycott of Arizona could be costly, tourism officials fear.