OREANDA-NEWS. Fitch Ratings has assigned the following ratings to the securities of Pima County, AZ (the county):

--\$15 million general obligation (GO) bonds, series 2015 at 'AA';
--\$56.8 million certificates of participation (COPs), series 2015 at 'AA-'.

The bonds and COPs are scheduled for a negotiated sale in mid-March 2015. Proceeds from both series will finance various county improvements.

In addition, Fitch affirms the following county ratings:

--\$407.3 million outstanding GO bonds at 'AA';
--\$113.4 million outstanding COPs at 'AA-'.

The Rating Outlook is Stable.

SECURITY
GO bonds are secured by an unlimited ad valorem tax levied against all taxable property in the county. COPs are secured by 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.

KEY RATING DRIVERS

FINANCIAL CHALLENGES; ADEQUATE RESERVES: The county responded to the economic downturn and accompanying revenue declines with a mix of spending cuts, tax rate adjustments, and use of reserves. Fitch expects that conservative budgeting, improving revenues, and the county's commitment to reserve adequacy will generate an improved financial cushion over the next several years.

TAX BASE BOTTOMS OUT: Fitch anticipates a modest uptick in the fiscal 2016 tax base following a precipitous multi-year decline. The expected improvement reflects recent development and the two-year lag from market value.

LARGE, DIVERSE REGIONAL ECONOMY: The local economy remains a positive long-term credit consideration, with its diverse and stable elements providing a sound foundation.

POSITIVE DEBT PROFILE; UNDERFUNDED PENSIONS: Capital needs are sizable but should not increase the county's currently moderate debt burden given a very rapid debt repayment schedule. State pension plans are underfunded; a rise in contributions, while improving the plans' sustainability, would pressure the county's currently moderate carrying costs (debt service and state plan contributions).

RATING DISTINCTION ON COPs: The COP rating is one notch lower than the unlimited tax (ULT) rating. Although lease payments are subject to annual appropriation, Fitch believes the incentive to continue to appropriate is strong. The county is a regular COP issuer and most of the leased assets are essential to core governmental purposes.

RATING SENSITIVITIES

ADEQUATE FINANCIAL FLEXIBILITY: Maintenance of the current rating is dependent on replenishment of operating reserves approximating historical levels. Lack of progress in this duration as the economic recovery continues could pressure the ratings.

CREDIT PROFILE
Pima County is home to Tucson, Arizona's second largest city, with an approximate population of about 1 million.

ADEQUATE RESERVES; FINANCIAL CHALLENGES REMAIN

The county reduced spending during the recession to build up adequate reserves for use in future years. Although the county continues to realize savings from multiple years of staff reductions and frozen salaries, a fiscal 2014 general fund deficit of \$12.3 million (2.3% of spending) reflects ongoing revenue pressure and general fund support to other governmental departments.

Fiscal 2014 unrestricted reserves of \$42.9 million represent 8.5% of spending, above the county's minimum reserve target of 5%. Fitch considers the target low given the demonstrated revenue volatility of the last economic cycle.

The county increased its fiscal 2015 primary tax rate by 16.7%, which yielded about a 13.7% levy increase, to address expenditure growth. Property tax revenues contribute 60% of fiscal 2014 general fund revenues. Officials expect year-end reserves to decline to the range of the county's policy floor as planned. The current rating assumes that the county will outperform their budget expectations as they have been doing recently.

Diminishment of the county's financial cushion is a credit concern but Fitch expects an improving trend of state shared revenues and modest gains in the tax base to provide a measure of relief in the next couple of years. The current ratings and Stable Outlook assume that the county will take advantage of this improving trend to rebuild reserves to prepare for the next, eventual, economic downturn, as they have done in the past.

MANAGEABLE DEBT BURDEN

Series 2015 GO bond proceeds will fund a variety of projects including facility and park system improvements. Series 2015 COPs proceeds will finance improvements to the county's wastewater system, with annual debt payments from system revenues. The county is in the process of planning for a potential fiscal 2015 bond election; the current potential recommendation of which approximates \$640 million.

Overall debt ratios are moderate at 2.4% of fiscal 2015 market value. The county expects to issue \$15 million of transportation bonds in fiscal 2016 to fund several transportation road projects. Fiscal 2016 issuance plans include routine GOs, and an estimated \$45 million in sewer revenue obligations. Fitch views the county's rapid amortization (90% in 10 years) as offering significant flexibility and expects debt levels to remain moderate.

UNDERFUNDED STATE PENSION PLANS

The county participates in three state-sponsored pension programs for its retirees. These include 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.

Fitch estimates that the overall ASRS plan for the state is funded at 68% based on a 7% investment return assumption. Using this investment return assumption, Fitch estimates funding levels for the PSPRS plan and CORP plan to be a very weak 40% and 44%, respectively.

Carrying costs (including debt service, pension contributions, and health insurance premiums within the state plans) are moderate at 21% of fiscal 2014 governmental spending, with the potential for a rising trajectory to the extent that future pension contributions rise.

LARGE, DIVERSE REGIONAL ECONOMY

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 7.2% of total fiscal 2015 assessed valuation. Fiscal 2015 market value per capita of \$64,000 is down from the recent fiscal 2010 peak of \$81,000, reflecting a cumulative 21% loss of assessed value over the past five years.

Management is anticipating modest tax base growth in fiscal 2016 after a series of recessionary declines, and this projection appears reasonable to Fitch based on new commercial development in the county. A 2012 state constitutional amendment will limit increases in existing real property for taxation purposes to 5% annually beginning in fiscal 2016. The limit excludes new growth. Fitch does not anticipate any near-term negative impact for Pima County from this new limitation.

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.

An unemployment rate of 6.3% as of November 2014 is favorable to the state average of 6.8%, but remains above the national average of 5.5% for the same period. The county's housing market continues to strengthen as evidenced by a reported uptick in permits and housing starts. County wealth levels are moderately below state and national averages.