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Rating Action Commentary
Fitch Rates Mesa, AZ $22.4 Million GO Bonds 'AAA', Affirms 'AA' IDR; Outlook Stable
Tue 10 May, 2022 - 12:26 ET
CREDIT PROFILE
By several measures Mesa has been solidly growing in recent years. Population is estimated to be up 15% since 2010, and taxable values have registered strong increases. Fiscal 2022 limited primary value (LPV) is $3.99 billion, up nearly 7% from fiscal 2021. Annual LPV gains averaged better than 6% over the prior five fiscal years.
Major employers in Mesa include Boeing, Banner Health Systems, Wal-Mart and Phoenix-Mesa Gateway Airport. Staff reports more than four million square feet of new commercial space was added throughout the city in 2021, exceeding an earlier projection of three million square feet. Gulfstream Aerospace recently announced plans for a 225,000 square-foot maintenance and repair facility at the airport.
The city's Elliot Road Technology Corridor features Apple's 1.3 million square-foot data center. Also, Meta has announced plans for an $800 million, 960,000 square-foot data center and Google has committed to a $1 billion, 750,000 square-foot data campus. ASU at Mesa City Center is a $75 million joint project between Arizona State University and the city that when completed (fall, 2022) will feature programs in sensory technology, gaming, experiential design and media arts. Bell Bank Park is a 320-acre sports and entertainment complex that opened in January 2022; the complex is projected to add 1,500 jobs and boost Mesa's annual visitor totals.
Revenue Framework
The largest components of general fund revenues are state-shared income and sales tax and vehicle registration fee revenues (43% of fiscal 2021 total) and local sales taxes (39%). Licenses and permits was the third largest category in fiscal 2021, generating 9% of total revenue.
The 10-year general fund revenue CAGR (fiscal 2011-2021) was slightly more than 4%, generally in line with U.S. GDP growth over the same period. Fitch expects a solid post-pandemic revenue growth rate given ongoing and planned economic activity in Mesa.
Arizona cities can increase the property tax levy for operations by 2% from the prior year, plus taxes on any new construction. Mesa currently does not levy a property tax for operations. In addition, any increase in the local sales tax rate must be approved by voters. These constraints impose significant restrictions on the city's revenue-raising ability.
Expenditure Framework
As is the case with most municipalities, public safety represents Mesa's largest governmental cost of service, accounting for 56% of fiscal 2021 operating costs. Other major spending categories include general government (25%) and culture and recreation (9%).
The city's natural pace of spending is expected to track closely with revenue growth, as service demands from a growing population will maintain a certain amount of pressure on the city's resources.
Mesa achieves expenditure flexibility through discretion over headcount, salaries and work rules with its three employee groups. While the city's carrying costs are moderately elevated at 20% of fiscal 2021 spending, the assessment considers the workforce flexibility and a rapid pace of debt retirement (more than 75% in 10 years). The fiscal 2022 budget included an additional contribution amount to the state sponsored public safety pension program (above the actuarially determined amount). Management reports this additional contribution, which will continue for the next several years, is aimed at reducing the net pension liability and smoothing out annual contribution amounts for the duration of the projected 21-year amortization period.
Long-Term Liability Burden
Mesa's long-term liability burden of just below 10% of personal income is relatively low but likely poised to climb higher as growth-related capital needs continue. The series 2022 bond issue includes various municipal improvement projects authorized by voters in 2018 and 2020. The $100 million bond proposition approved in November, 2020 provides funding for various transportation projects in the city, and staff expects annual tax-supported borrowings in the $30 million to $40 million range for the near term. In addition, the city's annual budget typically includes funding for various pay/go capital projects.
The city participates in three pension plans. These are
-- the Arizona State Retirement System (ASRS), a cost-sharing multiple-employer defined benefit plan for non-uniformed employees and two state-sponsored agent multiple-employer defined benefit plans:
-- the PSPRS Police and
-- PSPRS Fire plans.
Under GASB 67 and 68, the city reported an aggregate fiscal 2021 net pension liability (NPL) of roughly $1 billion, with fiduciary assets covering 54% of total pension liabilities. Adjusting for Fitch's lower standard 6% investment rate assumption, the aggregate NPL for the city's plans totals about $1.4 billion with fiduciary assets covering only 46% of total estimated pension liabilities.
Operating Performance
The Fitch Analytical Stress Test (FAST) scenario analysis tool relates historical tax revenue volatility to GDP to support the assessment of operating performance under Fitch's criteria. FAST is not a forecast, but it represents Fitch's estimate of possible revenue behavior in a downturn, based on historical revenue performance. Hence, actual revenue will vary from FAST results. FAST does provide a relative sense of the risk exposure of a particular local government compared to other U.S. local governments.
FAST results indicate an elevated amount of pressure on the city's financial resilience in a downturn, absent policy interventions. However, the city's revenue volatility is likely overstated due to a sizable shift of revenue out of the general fund in fiscal 2011 and fiscal 2012. The combined amount totaled roughly $63 million or 20% of fiscal 2010 general fund revenues.
Recent positive financial performance has boosted general fund reserves materially, contributing to Fitch's assessment that the city retains the highest gap-closing capacity and can address economic pressures and navigate future business cycles while maintaining a high degree of financial flexibility.
Fiscal 2021 general fund results included a sizable $94 million net surplus after transfers and an unrestricted year-end balance of more than $285 million or 66% of spending and transfers out. Better than expected revenue performance (due partly to federal stimulus initiatives) and solid expenditure control during the fiscal year both contributed to the positive results. Operating sales tax receipts totaled $152.6 million, up a sharp 15% from the prior year.
The fiscal 2022 (FYE June 30) general fund budget included a spending increase of roughly 9% from the adopted fiscal 2021 budget. The spending total included $49 million for pay/go capital spending and also included step pay increases of 3% for all employees. Operating sales tax revenues were originally budgeted at $137.6 million or about 12% above the amount budgeted the prior year; fiscal year-end totals currently are expected to exceed budget.
The budget anticipates a moderate drawdown of general fund reserves by year-end, with fund balance expected to comfortably exceed the city's 10% of spending policy minimum. Total budgeted staff positions of 4,240 represented a 2.5% increase from the fiscal 2021 budget.
The city reports pandemic-related financial assistance to date of roughly $240 million, including $90 million in CARES Act proceeds and a $105 million American Rescue Plan Act allocation. Application of the assistance has included a variety of community support initiatives, including health and safety measures, small business support, food and education assistance and premium pay for essential workers.
The city maintains a policy whereby annual utility transfers--in the form of PILOTs--support general fund operations; the policy allows for a maximum transfer of 30% of gross utility system revenues. The fiscal 2022 budgeted PILOT amount totaled $114 million or more than 20% of recurring general fund revenues and total transfers.
In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from Lumesis.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
Additional information is available on www.fitchratings.com
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE CRITERIA
APPLICABLE MODELS
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
- FAST Econometric API - Fitch Analytical Stress Test Model, v3.0.0 (1)
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
| Mesa (AZ) | EU Endorsed, UK Endorsed |
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