OREANDA-NEWS. Fitch Ratings has assigned an 'AA' rating to the following Pima County, Arizona obligations:

--$112.63 million general obligation (general obligation) refunding bonds, series 2016;
--$26.17 million street and highway revenue refunding bonds, series 2016.

The bonds are scheduled for separate negotiated sales the week of May 30. Proceeds of each series will be used to refund certain outstanding obligations for savings.

In addition, Fitch has affirmed the following ratings:
--Issuer Default Rating (IDR) at 'AA';
--$383.9 million GO bonds outstanding (pre-refunded) at 'AA';
--$113.87 million street and highway revenue bonds (pre-refunded) at 'AA';
--$172.9 million certificates of participation (COPs) at 'AA-'.

The Rating Outlook is Stable.

SECURITY
GO bonds are payable from an unlimited ad valorem tax levied against all taxable property in the county.

Outstanding COPs are payable from payments from the county under a master lease agreement with a security interest in mostly essential assets. The lease is subject to annual appropriation and the trustee has the right to seize the assets in the event of less than full appropriation.

The street and highway revenue bonds are payable from an irrevocable lien on and first pledge of all revenues received by the county from a statutory allocation of street and highway taxes, fees, and charges, and state motor vehicle license taxes (VLTs) collected by the state and returned to the county for street and highway purposes.

KEY RATING DRIVERS

The 'AA' IDR and GO ratings are supported by the county's sound revenue framework, strong expenditure flexibility, demonstrated gap-closing capabilities, and a low long-term debt liability burden. The 'AA-' COPs rating, one notch off the IDR, reflects the options inherent in an appropriation security structure. The 'AA' street and highway revenue bond rating reflects a solid coverage cushion, strong additional bonds test of 2x, and Fitch's solid expectations for the pledged revenue stream.

Economic Resource Base:
Pima County is home to Tucson, Arizona's second largest city, with a population of about 1 million. The county's diverse economy features higher education, healthcare, government, technology, tourism and manufacturing as primary anchors. The top 10 taxpayers represent retail, healthcare, utility and mining sectors, comprising a modest 7% of total fiscal 2016 assessed valuation.

Revenue Framework: 'aa' factor assessment
Pima County revenue growth prospects are strong, benefitting from a diverse and relatively stable regional economy and recent transportation infrastructure improvements. Pima County has modest revenue-raising capabilities for operating purposes.

Expenditure Framework: 'aa' factor assessment
Fitch expects the county's pace of spending to remain generally in line with revenue growth. The county's ability and willingness to undertake spending cuts provides the capacity to manage potential state funding mandates and increasing pension contributions.

Long-Term Liability Burden: 'aaa' factor assessment
The combined burden of debt and unfunded pension liabilities in relation to personal income is low at 6%. The assessment reflects the county's rapid debt amortization rate (about 87% retired in 10 years), moderate capital needs, and an elevated unfunded net pension liability over the medium term.

Operating Performance: 'aa' factor assessment
Pima County has demonstrated the capacity to close funding gaps through spending cuts and tax rate hikes. The county's budget takes advantage of economic recovery to replenish reserves.

RATING SENSITIVITIES
Financial Resilience: The IDR, GO and COPS ratings are sensitive to Pima County's ability to maintain adequate financial flexibility as demonstrated by reserve adequacy throughout the economic cycle.

Street & Highway Bond Financial Cushion: Material erosion of the county's solid coverage cushion could pressure the current rating.

CREDIT PROFILE
Pima County's economy continues to perform well. Expansion is evidenced by 6% growth in fiscal 2016 market value, and Fitch anticipates additional near-term tax base growth based on regional trends and new development. The county's housing market continues to strengthen, as evidenced by a reported uptick in permits and housing starts.

Accelerated private investment in Tucson has been sparked by the 2014 completion of the city's streetcar rail system that extends from downtown to the University of Arizona campus. Major southern Arizona employers include the University of Arizona, Raytheon Missile Systems, Davis-Monthan Air Force Base, state and local government, Wal-Mart Stores Inc., Tucson Unified School District, U.S. Customs & Border Protection/U.S. Border Patrol, Freeport-McMoRan Copper and UA Healthcare.

Revenue Framework
Pima County general fund revenues have grown at a greater-than-inflation 10-year compound annual growth rate (CAGR) of 2.6% through fiscal 2014 and a stronger 3.0% rate through fiscal 2015. Property tax revenues contribute about 60% general fund revenues and have rebounded strongly from moderate declines during the great recession.

Fitch's assessment of strong revenue growth prospects is based on Pima County's diverse and relatively stable economy and the expectation for continued private investment spurred by transportation infrastructure improvements. Fitch expects Pima County's growth to exceed that realized in its 10-year history, which was muted due to the unusually large impact of the great recession throughout Arizona.

State law limits the county's ability to make changes to certain revenues. Primary property tax levies, used for operations, are limited to a 2% per annum increase over the maximum allowable levy in the prior year plus taxes on any property not subject to taxes in the prior year. Additionally, the state allows banking and carry forward of the 2% maximum levy increase, to the extent not fully used. Pima County has approximately $50 million of annual unused capacity in this regard. Though limited, the 2% allowable increase, in conjunction with the county's control over other miscellaneous revenues, compares favorably to a 1.1% decline in revenues indicated for the county from Fitch's analytical sensitivity tool (FAST) modeling of a 1% decline in a U.S. GDP moderate downturn scenario.

Fitch notes that there is no limitation on annual secondary property tax levies, used for voter-approved bond indebtedness, although such levies are not available to support operations.

Expenditure Framework
The county's largest general fund expenditure areas are general government (44%), public safety (28%), and health and social services (19%). Fitch expects the county's pace of spending to generally align with revenue growth over time.

Expenditure flexibility is derived from management's strong control over workforce costs and moderate carrying costs, 17% of fiscal 2015 governmental spending. Fitch expects Pima County's carrying costs to remain manageable based on a rapid 10-year debt amortization rate of 87% which provides bandwidth for moderate capital needs, the potential for increasing pension contributions associated with state-wide plans that are currently underfunded, and the potential for state funding mandates . The county has demonstrated the ability and willingness to make spending cuts.

Long-Term Liability Burden
Pima County's long-term liability burden is low as reflected in a long-term liability-to-personal income metric of only 6%. Fitch expects the county's burden to remain affordable based on the rapid debt amortization schedule and modest near-term issuance plans. Fiscal 2017 issuance plans include routine GOs, $10 million in transportation bonds, in relation to total governmental debt of $600 million, and an estimated $45 million in sewer revenue obligations in relation to $592 million of sewer bonds and obligations currently outstanding.

The county participates in five state-sponsored pension programs for its retirees. The three most significant of these are the Arizona State Retirement System (ASRS), a cost-sharing multiple-employer plan; the Public Safety Personnel Retirement System (PSPRS), an agent multiple-employer (AME) plan; and the Corrections Officer Retirement Plan (CORP), also an AME plan. Proposed legislation provides modest PSPRS reforms applicable to new hires and eliminates the automatic cost of living adjustments currently in place, which Fitch anticipates could, if implemented improve long-term plan affordability.

Under GASB 67 and 68, the county reports a fiscal 2015 ASRS net pension liability (NPL) of $379 million, with fiduciary assets covering 69.5% of total pension liabilities at the plan's 8% investment return assumption (approximately 63% based on a lower 7% investment rate assumption). The NPL for the county's PSPRS plan is $185 million, with fiduciary assets covering 43.1% of total pension liabilities at the plan's 7.85% investment return assumption (approximately 39.4% based on a lower 7% investment rate assumption). The NPL for the county's CORP is $52 million, with fiduciary assets covering 48.2% of total pension liabilities at the plan's 7.85% investment return assumption (approximately 44.1% based on a lower 7% investment rate assumption).

Operating Performance
Fitch anticipates that Pima County will maintain an adequate financial cushion in an economic downturn based on its ability and willingness to cut spending and raise tax rates. Modest improvement in fiscal 2015 reserves reflects strong revenue growth mirroring the expansionary economic cycle.

Fiscal 2015 unrestricted reserves of $48 million represent 8.9% of spending, above the county's minimum reserve target of 5%. The county increased its fiscal 2015 primary tax rate by 16.7%, which yielded about a 15.7% levy increase, to address expenditure growth coming out of reduced spending during the recession. Pima County officials project fiscal year-end 2016 reserves to be approximately $42 million based on an increase in state-mandated support for Tucson Unified School District. The county is planning to increase property taxes in fiscal 2017 and projects $46 million in unrestricted reserves in fiscal 2017. The county typically outperforms its conservative budget assumptions, and Fitch expects the county will take advantage of improving economic trends to rebuild reserves. The assessment reflects Fitch's expectation that despite occasional reserve draws, the county will maintain reserves at or above its 5% minimum reserve target.

Street and Highway Revenue Bonds

The street and highway revenue bonds are payable from revenues received by the county from a statutory allocation of street and highway taxes, fees, and charges, and state vehicle license taxes collected by the state and returned to the county for street and highway purposes. Fitch believes that there are sound growth prospects for this revenue stream, driven primarily by expected population growth in Pima County.

Highway user tax revenues include 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 counties currently receive 19% of the monthly revenue distributions, and the state Department of Transportation, the cities and towns and other state uses receive the remaining 81%. Of the money distributed to counties in the state, 72% is distributed in proportion to the sale and consumption of fuel within each county, and the remainder is distributed on the basis of the proportionate population within the unincorporated areas of each county.

Legal provisions provide adequate bondholder protections. They include an additional bonds test (ABT) of 2x maximum annual debt service (MADS; using an historical test) for bonds outstanding plus bonds to be issued. After debt service payments, residual highway user tax revenues are used by the county for capital projects and for staffing, maintenance and contractual expenses related to county streets and highways. The rating incorporates the possibility of future diversions of highway revenues by the state of Arizona that would reduce distributions to municipalities, although the amount previously diverted was associated with state-wide budget stress during the great recession. Additionally, the state legislature retains the authority to alter the rate of fees that are constitutionally required to be deposited into the state highway user fund, as well as the allocation of such monies between state purposes and the distribution to local governments. However, the Arizona Supreme Court has indicated that these revenues cannot be reduced in a manner which impairs an issuer's ability to meet debt service requirements on the bonds.

To evaluate the sensitivity of the dedicated revenue stream to cyclical decline, Fitch considers both revenue sensitivity results (using the same 1% decline in national GDP scenario that supports assessments in the IDR framework) and the largest decline in revenues over the period covered by the revenue sensitivity analysis. Based on the county's 15-year pledged revenue history, Fitch's analytical sensitivity tool (FAST) generates a 6.5% scenario decline in pledged revenues. The largest actual cumulative decline in historical revenues is a steep 25.6% decline from fiscal 2007-2011. The pledged revenues have been sensitive to both economic downturns and diversion by the state for public safety spending during times of state budgetary stress; the historical analysis reflects both factors.

Assuming issuance up to the 2x ABT, well below actual current coverage, the structure could tolerate a 50% drop in revenues, 7.7x the scenario results and 1.95x the largest actual revenue decline in the review period. Fitch believes that these results are consistent with a 'AA' rating (noting that the fiscal 2007-2011 performance reflected a housing bust that disproportionately affected Arizona to an extent that Fitch believes is less likely to be repeated in the future).

Fiscal 2015 pledged revenues of $53.2 million are up for the fourth consecutive year and cover MADS (2017) a solid 2.85x.

Issuing Entity Exposure

Fitch views the pledged street and highway revenues as special revenues under section 902(2)(B) of the bankruptcy code, which defines "special excise taxes imposed on particular activities or transactions" as special revenues. Therefore, the rating is not capped by the county's IDR. Fitch believes special revenue status is unaffected by the state's, rather than the county's, responsibility for the levy, collection, and appropriation of the revenues to the county, or the state's discretion as to the distribution of the revenues among local government units.