Fitch Affirms Marana Municipal Property Corp, AZ's Revenue Bonds at 'AA-'; Outlook Stable

Fitch Ratings affirms the following Marana Municipal Property Corporation (MPC), Arizona revenue bonds at 'AA-':

--$5.9 million series 2004;

--$27.5 million series 2008A.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a first lien pledge of excise taxes (sales taxes, state-shared revenues, license and permit fees, and fines and forfeitures that the town collects or that are allocated or apportioned by the state of Arizona) from the town of Marana (the town).

KEY RATING DRIVERS

SOUND FINANCIAL PROFILE: Continued general fund operating surpluses driven by modest economic improvements have further enhanced already high reserve levels. Sufficient reserves are particularly important to offset inherent volatilities in the town's economically sensitive revenues.

HIGH DEBT BURDEN: Overall debt ratios are high; however, the cost of servicing the town's long-term liabilities, inclusive of debt, pension, and other post-employment benefits (OPEB), remains fairly affordable and is expected to remain stable. The town participates in various state-administered pension plans, whose funded ratios are below average.

STRONG REVENUE BOND COVERAGE: Pledged revenues are volatile but diverse. All-in coverage on the revenue bonds is strong, expected to be over 5 times (x) in part due to the general fund's reliance on these funds for operations.

IMPROVING ECONOMY: The mostly residential town benefits from a recent uptick in commercial and construction activities, above average income levels, and favorable unemployment rates.

RATING SENSITIVITIES

CONTINUED ENTERPRISE FUNDS ENCROACHMENT: A negative rating action is possible if the airport fund or the wastewater fund increases borrowings from the general fund to the extent that it materially weakens the general fund reserve position.

STRUCTURAL IMBALANCE: Despite a good general fund operating track record and conservative management, structural deficits are still possible if cyclical revenues do not recover sufficiently to counterbalance cost pressures.

CREDIT PROFILE

The town of Marana is located in the northwestern part of the Tucson metropolitan area along interstate 10. It is about 25 miles north of Tucson and 90 miles south of Phoenix. Major employers include public sector entities, retailers, and industrial companies.

LIMITED BUT IMPROVING ECONOMY

The town was primarily rural and agricultural historically, but experienced rapid growth recently. Population expanded by over 170% between 2000 and 2012, while commercial and industrial developments also took off. Although the local economy is still limited and largely residential in nature, it enjoys above average income levels (with median household income equivalent to 140% of state and 134% of national levels) and relatively low unemployment rates (5.8% as of Oct 2013, versus 8% statewide and 7% nationally). However, recent improvements in unemployment rates seem to be driven by the shrinking labor force, rather than gains in employment.

The local housing market has been recovering. Home prices are up 25% from the lowest point in 2012 according to Zillow, but still substantially below pre-recession highs. Further strengthening in the housing market is expected, as single family residence permit applications increased significantly in fiscal 2013 and are on track to outperform last year's figure through the first three months of fiscal 2014.

VOLATILE SALES TAX, BUT SUFFICIENT COVERAGE MARGIN

Pledged revenues increased by 9% and 8% from previous years in fiscal 2012 and 2013 respectively. Debt service coverage is strong at over 6x in fiscal 2013. Holding the pledged revenues flat at the budgeted 2014 level, future all-in maximum annual debt service (MADS) coverage is expected to remain strong at over 5x. Revenues can withstand a one-year 86% decline while retaining coverage at 1x. In contrast revenues fell an aggregate 33.2% from fiscal 2007-2010 before returning to positive growth.

Local sales tax, the largest component of the pledge revenues, is cyclical by nature. Despite recent recoveries, 2013 local sales tax is still 20% below its peak level. Local sales tax also exhibits a moderate level of concentration, with the top 10 retailers account for 25% and top 10 contractors 15% in fiscal 2013. The volatility and concentration are inherent risks both to the bondholders and the town's budget. Local sales tax comprises 60% of total general fund revenues, with an additional 20% coming from other economically sensitive sources.

WASTEWATER PLANT TAKEOVER LAWSUIT RESOLVED

The town took possession of a disputed sewer facility on Jan. 3, 2012 after several years of litigation with Pima County, and has been operating the facility since then. The settlement with the county was finalized in June 2013 when the purchase agreement was reached. The town took ownership of the facilities at a price of $16.1 million with no remaining contingencies.

The town subsequently issued $34.8 million revenue bonds in June 2013, partly to finance the purchase of the sewer facilities and for minor capital improvements. The bonds are issued on a subordinate basis to the Fitch-rated MPC revenue bonds, and the senior lien on the pledge revenues is now closed.

SATISFACTORY FINANCIAL RESULTS, STRONG RESERVE LEVELS

After two years of operating deficits in fiscal 2008 and 2009, 2013 marked the fourth year of surpluses from operations due to a recovering economy, adding a cumulative $6.4 million to general fund reserves in the four years, and ending 2013 with an $18.1 million, or 57% in unrestricted general fund reserves. Reserves consistently exceed the 25% minimum fund balance requirement, which Fitch's considers a prudent practice given the budget's dependence on revenue streams Fitch's considers more volatile.

The general fund balance sheet continues to reflect two sizable loans payable from the wastewater fund ($3.6 million) and the airport fund ($2.8 million at the end of fiscal 2013. Adjusting for these loans, the effective unrestricted general fund balance is around $14.3 million, or 45% of general fund spending, which is still a sound position.

During the last review in January 2012, Fitch had expected the airport fund loan ($3.3 million) to gradually reduce after certain contracts are renegotiated for cost savings. Two years on, the renegotiations have yet to start, but modest improvements ($0.5 million loan repayment) has been made. It remains unclear how the airport fund loan will be repaid.

On a positive note both funds now appear to be marginally self-sufficient, and the town expects to repay the wastewater loan from proceeds of a debt restructuring this year. The town has also taken steps to make its enterprise funds remain self-supporting, planning to increase both water and wastewater rates effective April 2014.

In addition, the general fund continues to face cost pressures coming from public safety needs and increasing labor costs, and expenditure flexibility is somewhat diminished after significant reductions done in fiscal 2010 and 2011. However, as the economy turns the corner, and given past conservative fiscal management, Fitch expects the town will continue to manage costs within its means.

WEAK LONG-TERM LIABILITIES PROFILE

Overall debt ratios are high at $5,255 per capita, or 5.9% market value, mostly due to large amount of the town's revenue bonds and significant overlapping school districts debt. In addition, the town also has a long-term lease (2099 maturity) with the state that has not been counted as debt. The annual payments range from over $500,000 to around $2.5 million.

Most of the planned capital projects have been funded, while the town's capital needs have been adjusted down over the last few years in response to slower growth. However, some modest amount of debt issuance is possible in the medium term.

Marana consistently meets its actuarially determined pension annual contributions. However, the funded status of the two major pension plans that the town participates in are below average. Using Fitch adjusted return rate, the Public Safety Personnel Retirement System is 63% funded in 2011, and Corrections Officers Retirement Plan is 53% funded in 2010. The town's other post-employment benefits (OPEB) liabilities are manageable. Total debt, pension and OPEB carrying costs are equivalent to a somewhat moderate 23% of total governmental spending in fiscal 2013.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors, and Zillow.

Applicable Criteria and Related Research:

-- 'Tax-Supported Rating Criteria' (Aug. 14, 2012);

-- 'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=817372

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