Fitch Ratings assigns an 'AA-' rating to the following Pima County, Arizona's (the county) revenue obligations: -- $50.7 million sewer system revenue obligations, series 2014. The bonds are expected to sell via negotiation the week of Jan. 20, 2014 . Proceeds will be used to finance improvements and extensions to the county sewer system and pay costs of issuance. In addition, Fitch affirms the following ratings: -- $151.7 million in outstanding senior lien revenue obligations at 'AA'; -- $486.8 million in outstanding subordinate lien sewer system revenue obligations at 'AA-'. The Rating Outlook is Stable. SECURITY The series 2014 obligations are payable from installment payments made by the county to the trustee. The county's obligation to make the installment payments is secured by pledged revenues (net revenues, including unrestricted cash balances) of the county's sewer system (the system); such lien on, pledge of, and security interest in the pledged revenues (exclusive of the unrestricted cash balances which are only pledged to the subordinate lien sewer system revenue obligations) is subordinate to the prior pledge and lien on outstanding senior lien debt. The senior lien is closed. KEY RATING DRIVERS BELOW-AVERAGE DEBT SERVICE COVERAGE: Debt service coverage (DSC), exclusive of pledged unrestricted cash balances, has weakened in recent years due to increased debt service costs, and ongoing DSC is expected to remain below-average. HIGH LIQUIDITY ENHANCES FINANCIAL PROFILE: Offsetting lower DSC, the county's very strong cash balances provide a great deal of flexibility. HIGH DEBT BUT CAPITAL COSTS DECLINING: Debt levels are relatively high and will continue to increase with additional planned debt issuances. Nevertheless, capital costs are beginning to ramp down and are expected to drop considerably beyond the five-year horizon; debt is also retired rapidly. PRESSURED RATE BASE: The county prudently adopted a series of automatic annual rate increases to counter the anticipated rise in fixed costs over the fiscal 2011 to 2014 period. User charges at 1.0 percent of median household income (MHI) as of fiscal 2013, however, are right at Fitch's affordability threshold. STABLE ECONOMY: The service area is anchored by the presence of the military and defense industry that provide some stability; county unemployment rates are below state but above national levels. RATING SENSITIVITIES STRONG CASH BALANCES KEY: Declining liquidity could lead to a lowering of the rating in light of expectations of below-average DSC through the forecast period. CREDIT PROFILE MIXED FINANCIAL METRICS Coverage has declined in the last two fiscal years, with total DSC (exclusive of pledged unrestricted cash balances) coming in at 1.5x in fiscal 2013. Including planned issuances totaling $195 million over the next five years (including the current debt issuance); all-in coverage is forecast to drop to a low of 1.2x by fiscal 2017. However, given the county's history of enacting rate increases, in some cases up to two rate hikes within one fiscal year, Fitch believes management will take the necessary steps to maintain the system's good financial performance. Furthermore, it should be noted that the aforementioned projections do not include additional rate increases beyond fiscal 2014 nor do they include unrestricted cash balances, which are legally pledged to the subordinate lien sewer system revenue obligations and can only be used to pay debt service or provide rate relief. When projected unrestricted cash balances are included, all- in coverage estimates are 2.0x or better in each year throughout the forecast period. Counterbalancing the downward DSC trend, liquidity has been steadily increasing, and was a high 845 days cash on hand and 639 days working capital in fiscal 2013. The county recently increased both its emergency and operating reserves, and constitutional expenditure limitations restrict the amount of cash from revenues or fees that can be used for capital expenditures. Bond proceeds are excluded from the expenditure limitation. The increase in reserve amounts, combined with the spending limitations, should help maintain strong liquidity levels and/or facilitate the acceleration of debt payments. In fact, the county plans to use some of its excess cash reserves to retire debt early. CAPITAL IMPROVEMENT PLAN RAMPING DOWN Capital needs over the next five years are expected to cost an estimated $333 million . Some of the more notable projects in the plan are for biosolids facility improvements, decommissioning of the 50-year old Roger Road Water Reclamation Facility, interceptor rehabilitation projects and system-wide conveyance rehabilitation and augmentation projects. The county has substantially met future permitting requirements for environmental compliance, and consequently most of its needs will have been met after this plan is completed unless growth-related needs emerge. DEBT LEVELS TEMPERED BY RAPID AMORTIZATION Given the constitutional limitations on cash spending for capital, the county plans to primarily debt-fund its CIP over the next five years. Debt levels currently are high with debt per customer at $2,408 . The county plans to issue an additional $135 million in parity debt (in addition to the current issuance) over the next five years, which will drive leverage ratios even higher. However, due to the rapid amortization of debt and the decline in capital needs beginning in fiscal 2016, debt levels are projected to descend at a moderately rapid pace post-2015, assuming future capital needs are low. Debt per customer is projected at $2,867 in fiscal 2018. Amortization of debt, including the current issuance, is very rapid, with principal payout at 77 percent and 100 percent in 10 and 15 years, respectively. GROWING DEBT SERVICE REQUIREMENTS PRESSURE RATES To cover the anticipated rise in debt service costs, the county enacted automatic annual rate hikes over fiscal years 2011-2014; the final approved rate increase became effective on July 1 , (fiscal 2014). While no rate increases are included in the county's financial projections, staff plans to propose modest rate increases for fiscals 2016 and 2017. The county will conduct a review of its rate adequacy as part of the annual budget process. With a monthly bill at $37.52 (assuming sewer flows of 6,000 gallons per month), rates currently are at Fitch's affordability threshold at 1.0 percent of MHI. SERVICE AREA BENEFITS FROM STABLE ECONOMY The county provides wastewater service to the Tucson metropolitan statistical area (MSA) and separate outlying areas in eastern Pima County . The system serves a population of approximately 1 million through more than 265,000 sewer connections. Together the wastewater facilities have a combined capacity of 97.1 million gallons per day (MGD), with sewer flows averaging 61 MGD. Tucson is Arizona's second largest city and the Pima County seat. Fitch rates the county's general obligation bonds 'AA' with a Stable Outlook. The area's economy is diverse, featuring military and defense, higher education, healthcare, government, and manufacturing as primary anchors. County unemployment levels at 7.7 percent as of August 2013 are below state (8.7 percent) but above national (7.3 percent) averages. County wealth levels are slightly below state and national levels. Additional information is available at 'fitchratings.com '. ((Comments on this story may be sent to email@example.com ))
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