OREANDA-NEWS. Fitch Ratings has assigned an 'AAA' rating to the following city of Chandler, Arizona obligations:

--$40.655 million general obligation refunding bonds, series 2016;

--$15.095 million excise tax revenue refunding obligations (ETROs), series 2016.

The obligations are scheduled for a negotiated sale the week of August 22nd. Proceeds will be used to refund outstanding debt for savings.

In addition, Fitch has affirmed the following ratings at 'AAA':

-- Issuer Default Rating (IDR);

--$309.5 million general obligation bonds;

--$201.3 million ETROs.

The Rating Outlook is Stable.

SECURITY

ETROs are payable from a first lien on the city's excise tax revenues. The GO bonds are payable from an unlimited ad valorem tax levied against all taxable property in the city.

KEY RATING DRIVERS

The 'AAA' IDR and general obligation (GO) ratings are based on Chandler's exceptionally strong financial flexibility, enabled by solid expenditure flexibility and strong budget management practices supplemented by reserves, as well as its low long-term liability burden. The 'AAA' ETRO rating reflects an ample coverage cushion, strong additional bonds test of 3.0x and expectations for solid growth in the pledged revenue stream.

Economic Resource Base

Chandler encompasses 70 square miles in southeastern Maricopa County, with a 2015 population of approximately 260,000. Anchored by Intel Corporation, top employers represent technology, manufacturing, local government, education, financial, healthcare, and telecommunication interests.

Revenue Framework: 'aaa' factor assessment

Strong revenue trends and ongoing population growth and economic development support the expectation for solid revenue growth. Chandler's independent legal ability to raise operating revenues is considered high based on its capacity to raise the local sales tax rate without external approvals.

Expenditure Framework: 'aa' factor assessment

Chandler's natural pace of spending is in line with revenue growth. The city benefits from a voluntary 'meet and confer' process with its employee groups, contributing to expenditure flexibility. Fitch expects the city's carrying costs to remain moderate based on rapid principal amortization and limited debt plans which offset planned increases in pension contributions to facilitate prepayment of a portion of its pension liability.

Long-Term Liability Burden: 'aaa' factor assessment

Long-term liabilities are a low 5.8% of personal income. Fitch expects the long-term liability burden to remain low based on regional growth to support new issuances, and the city's plans to accelerate pay-off of one of its pension liabilities.

Operating Performance: 'aaa' factor assessment

The city has taken advantage of nonrecurring revenues and the economic upturn to build a strong financial cushion. Fitch expects Chandler to demonstrate strong financial resilience through a moderate economic downturn based on its current high reserve level, revenue-raising capacity and solid expenditure flexibility.

RATING SENSITIVITIES

Financial Flexibility: The 'AAA' rating is sensitive to shifts in fundamental credit characteristics, most notably the city's ongoing strong financial flexibility and solid economic growth.

CREDIT PROFILE

Strong employment growth trends reflect Chandler's participation in the broad-based Phoenix area economy. Intel Corporation employs approximately 11,000 (about 8% of Chandler's employment base). However, the city's success in attracting and retaining top technology, manufacturing, advanced business and health services continues to widen and diversify the employment base. The city's low unemployment rate continues to trend below regional and U. S. averages. A highly educated and skilled workforce contributes to the city's low unemployment and attractive growth prospects; income and wealth trends are well above average.

Chandler's local economy continues to expand as evidenced by the 15% compound annual growth of its ad valorem tax base since fiscal 2013 due to new industrial, commercial, and residential development, as well as property appreciation.

Revenue Framework

The city's local sales tax or transaction privilege tax (TPT) collections contributed 52% of fiscal 2015 general fund revenues, followed by state shared revenues (28%). Ad valorem property tax revenues contributed only 3% to revenues.

Chandler's general fund revenue compound annual growth rate (CAGR) over the past 10 years of 2.6% exceeds inflation, but falls short of U. S. GDP, reflecting significant exposure to economically sensitive revenues during the Great Recession. Subsequent to the recession (fiscal 2011 through 2015), Chandler realized a healthy general fund revenue CAGR of 4.1%. Fitch's expectation for solid growth considers the city's current expansion as well as its exposure to economically sensitive revenues.

By virtue of its status as a TPT non-program city, Chandler retains the independent legal capacity to change its own TPT rate, currently at 1.5%, without limit. The city's sales tax rate is competitive and its long-range plan does not include a TPT rate increase based on the expectation of moderate ongoing growth in the sales tax base, consistent with current trends.

Expenditure Framework

Public safety represents Chandler's largest governmental cost of service, accounting for just over 50% of operating costs.

The city's natural pace of spending is expected to track closely with revenue growth.

Chandler achieves expenditure flexibility through discretion over headcount, salaries and work rules within the framework of meet and confer agreements the city has in place with its employee groups. The city tapped this flexibility during the last recession by initiating a hiring freeze, voluntary separation and retirement incentives and vacant position eliminations. Additional flexibility is maintained through the city's moderate carrying costs, 16.9% of fiscal 2015 spending. Fitch expects the city's carrying costs to remain moderate based on a rapid 10-year 85% amortization rate and limited debt plans which offset a planned uptick in pension contributions for the scheduled paydown of the city's Public Safety Personnel Retirement System (PSPRS) net pension liabilities (NPLs).

Long-Term Liability Burden

Chandler's long-term liability burden of $448 million (including overall debt and direct pension liabilities) is low at 5.8% of personal income and is expected to remain low based on moderate area debt needs, an expanding economic base and the city's management of its unfunded pension liabilities. Chandler's fiscal 2017 budget includes $592 million in projected capital spending over the next five years, $313 million for municipal utilities, $164 million for transportation, and $115 million for general government, parks & recreation, and public safety. Funding sources include impact fees, current revenues, grants, tax-supported debt and enterprise user fee-supported debt. The city routinely conducts bi-annual GO and excise tax revenue debt sales.

Under GASB 67 and 68, the city reports a fiscal 2015 Arizona State Retirement System (ASRS) NPL of $105.7 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 city's PSPRS police and fire plans are $73 million and $36 million, respectively, with fiduciary assets covering a low 58.7% of total police plan and 66% of fire plan pension liabilities at the plan's 7.85% investment return assumption (approximately 53.7% and 60.3% based on a lower 7% investment rate assumption). Notably, the city's fiscal 2015 budget included annual contributions in excess of the actuarially determined contribution to achieve pay-off of the unfunded liabilities within the 10-year planning horizon. Additionally, 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 sustainability.

Operating Performance

Fitch expects Chandler to maintain its exceptionally strong financial resilience during a moderate economic downturn, benefiting from its very high current level of reserves, strong independent legal ability to raise revenues without external approval, and solid expenditure flexibility. Chandler estimates completing fiscal 2016 with a strong financial cushion approximating that of fiscal 2015. The city's five-year budget incorporates reserve applications for capital projects and accelerated paydown of its PSPRS unfunded pension liability, but maintains reserves in excess of its four-month of revenue target, commensurate with a 'aaa' operating performance assessment.

Chandler typically outperforms its conservative budget and replenishes reserves during times of economic expansion and with nonrecurring revenues to apply to capital and strategic applications.

Excise Tax Revenue Bonds

Excise tax revenues include local sales tax or transaction privilege tax (TPT), state shared revenues (reflecting a two-year lag in distributions), franchise fees, licenses and permits, and fines and forfeitures. ETROs fund the city's water and waste water system improvements and these system revenues support ETRO debt service.

Excise tax revenue collections reflect strong 3.8% CAGR from 2004-2014 and growth prospects remain strong. Legal provisions provide solid bondholder protections. These include an additional bonds test (ABT) of 3.0x maximum annual debt service (MADs) using an historical test for bonds outstanding plus bonds to be issued.

To evaluate the sensitivity of the dedicated revenue stream to cyclical decline, Fitch considers both revenue sensitivity results (using a 1% decline in national GDP scenario) and the largest decline in revenues over the period covered by the revenue sensitivity analysis. Based on the city's 15-year pledged revenue history, Fitch's analytical sensitivity tool (FAST) generates a 2.6% scenario decline in pledged revenues. The largest actual cumulative decline in historical revenues is a 16.5% decline from fiscal 2009-2011, reflecting sensitivity of sales and state shared revenues to the economic downturn.

Assuming issuance up to the 3.0x ABT, well below actual current coverage, debt service would be covered with more than a 60% drop in revenues, 25x the scenario results and 4.0x the largest actual revenue decline in the review period. This level of resilience is consistent with a 'AAA' rating (noting additionally that the fiscal 2009-2011 performance reflected a housing bust that disproportionately affected the Arizona economy to an extent that Fitch believes is less likely to be repeated in the future).

Fiscal 2015 pledged revenues of $170 million are up for the fourth consecutive year and cover MADS (2029) a high 8.65x. Projections which include the addition of a $100 million ETRO issuance in fiscal 2017 indicate that ETRO MADs coverage from pledged excise tax revenues will continue to provide a financial cushion commensurate with the current rating.

Issuing Entity Exposure

The special tax bond rating is limited by the city of Chandler's IDR ('AAA') as Fitch does not believe that the security insulates the bonds from the general credit of the issuer. Fitch does not view the pledged excise tax 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.