Fitch Affirms Chandler, AZ HURF Bonds at 'AA'; Outlook Stable

Fitch Ratings has affirmed its 'AA' rating on the $22.1 million outstanding street and highway user revenue bonds of Chandler, Arizona (the city).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a first lien on revenues derived by the city from highway user taxes, including all taxes, fees, and charges collected by the state and returned to the city for street and highway purposes as prescribed by law.

KEY RATING DRIVERS

HEALTHY COVERAGE: Debt service coverage is strong at 2.8(x) in fiscal 2013, and the highway user revenue fund (HURF) maintains ample liquidity.

SOUND LEGAL PROTECTIONS: The additional bonds test requires pledged revenues to cover maximum annual debt service (MADS) 1.5x and if projected MADS coverage is less than 2.0x the proposed bonds must be rated 'A' or higher by at least one nationally recognized rating agency.

STABILIZED REVENUE STREAM: Pledged revenues appear to have stabilized after declines due to weakening economic conditions and recent state legislative action to redirect state highway user revenues.

NO ADDITIONAL LEVERAGING: The city has no near term borrowing plans for highway user tax revenues.

RATING SENSITIVITIES

COVERAGE ADEQUACY: The rating is sensitive to shifts in fundamental credit characteristics including the bonds' historically sound coverage levels.

CREDIT PROFILE

Chandler occupies 70 square miles in southeastern Maricopa County with a 2013 population of approximately 245,628.

PLEDGED REVENUES STABILIZE; COVERAGE REMAINS SOUND

Highway user tax revenues consist of motor vehicle fuel taxes, motor vehicle registration fees, motor vehicle licenses taxes, motor carrier fees, motor vehicle operator's license fees, and other miscellaneous fees and revenues. Highway user tax revenues are collected by the state and deposited into the state highway user fund until distributed. Arizona cities and towns receive 27.5% of highway user tax distributions. One half is distributed to cities and towns on the basis of population in proportion to all cities and towns in the state. The remaining half is distributed, first, on the basis of county origin of sales of motor vehicle fuels within the state, and second, to cities and counties on the basis of population in proportion to all cities and towns in the county. Arizona cities with populations exceeding 300,000 also receive a 3% allocation for certain street and highway purposes.

The Arizona state legislature retains the authority to alter the type and/or rate of fees that are deposited into the state highway user fund, as well as the allocation of such monies between state purposes and the distribution to cities, towns and counties. The legislature has made such alterations during recent legislative sessions, resulting in a reported cumulative loss to the city's pledged revenues of approximately $5 million since fiscal 2009. Similarly to other regional municipalities, the city does not expect the state to divert near term HURF monies based on improving economic conditions and extensive municipal lobbying efforts.

Fiscal 2013 pledged revenues of $12.9 million registered a 9.4% year over year gain reflecting economic recovery and local population gains. The improvement follows pledged revenue declines in four of the past five years. The city has conservatively budgeted a flat $13 million in annual pledged revenues over the near term. Projected MADS coverage remains sound. Using audited fiscal 2013 revenue totals of $12.9 million, MADS coverage is 2.77 times (x), and a stress test reducing revenues by 15% from the fiscal 2013 total still generates coverage of more than 2.3x. All street and highway user revenue bonds outstanding mature by 2019.

SOUND LEGAL PROVISIONS

Legal provisions provide sound bondholder protections. They include an additional bonds test of 1.5x MADS, and if projected MADS coverage is less than 2.0x the proposed bonds must be rated 'A' or higher by at least one nationally recognized rating agency. In addition to debt service payments, highway user tax revenues are used for capital projects and for staffing, maintenance and contractual expenses related to Chandler streets and highways.

HEALTHY LOCAL ECONOMY; GROWTH PROSPECTS

Chandler's population has more than doubled since 1990, reflecting regional growth and the city's success in attracting and retaining top technology, manufacturing, advanced business and health services. Although Chandler is 85% built-out, its attractive workforce, ample capacity within six employment corridors, and strong transportation infrastructure position the city for ongoing growth.

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.

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=816344

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