OREANDA-NEWS. Fitch Ratings affirms the following ratings on Oro Valley (the town), Arizona's outstanding bonds:

--\$4.3 million excise tax revenue bonds series 2005 at 'AA-';
--Oro Valley Municipal Property Corporation (MPC or the corporation) \$16.2 million outstanding excise tax revenue bonds, series 2007 at 'AA-';
--Implied general obligation rating at 'AA-'.

The Rating Outlook is Stable.

SECURITY: Town-issued and MPC-issued excise tax revenue bonds are parity obligations, payable from a first lien on the town's excise tax and state-shared revenues. The town's obligation to make lease payments to the MPC is absolute and unconditional. The town must fund a reserve fund if pledged revenues fall below 2.5x coverage of annual debt service on all parity obligations.

KEY RATING DRIVERS:

EXCISE TAX AND IMPLIED GO RATINGS ON PAR: The excise tax and implied general obligation (GO) ratings (the town has no GO debt outstanding) are on par, as the credit fundamentals that support both pledges are similarly affected by the economically sensitive nature of the excise taxes. The town relies substantially on the broad-based excise taxes to fund general services. In addition, the corporation's lease structure presents no appropriation risk and debt service coverage on the excise tax bonds is strong.

FAVORABLE SOCIO-ECONOMIC PROFILE: Income and wealth levels as well as educational attainment metrics are well above state and national averages.

MODERATELY IMPROVING ECONOMY: Evidence of a strengthening local economy is found in steady gains in economically sensitive revenues, modestly rising home values, and increased development activity. Unemployment levels continue to trend downward and compare favorably to those of the Tucson metropolitan statistical area (MSA), state & U.S.

SOLID COVERAGE MAINTAINED; TAXPAYER CONCENTRATION: Pledged revenues have turned positive after a cumulative 32% decline during the recession (fiscal years 2009-2011). Fitch anticipates strong coverage levels will be maintained at well above the 2x additional bonds test level, given pledged revenues are the town's primary operating revenues. Sales taxpayer concentration is high, led by the top sales taxpayer at nearly 12% of the total .

RESERVES PRESERVE FINANCIAL FLEXIBILITY: Management maintains a solid financial cushion despite recent draws on fund balance for one-time capital projects. Fitch views sizable reserves as a key offset to the risk associated with operating revenues derived largely from economically sensitive revenue streams.

LONG-TERM LIABILITIES MODERATE: Overall tax-supported debt levels are low and principal amortization of direct debt is rapid. Capital needs appear manageable. Carrying costs are expected to remain low even with probable increases to annual pension costs (APC) to boost pension funded positions over the intermediate term.

RATING SENSITIVITIES

DETERIORATION OF FINANCIAL, DEBT FLEXIBILITY: Additional operating and capital spending pressures are likely over the intermediate term given recently strengthened economic trends and population expansion through build-out. Nonetheless, the Stable Outlook reflects Fitch's expectation the town will adequately manage its growth-related needs, maintaining reserves and coverage levels consistent with the current rating.

CREDIT PROFILE

The town of Oro Valley was incorporated in 1974 and is located in northeastern Pima County, approximately six miles northeast of Tucson's city limits. Population gains since 2000 have been rapid and exceeded the MSA and state, although they slowed recently due to the recession. Population is currently estimated at 41,500 and build-out is expected to occur around 2020, absent annexations. Educational attainment exceeds the nation and income/wealth levels are high, exceeding state and U.S averages by 40%-56%.

STRENGTHENING ECONOMY
The town is primarily residential in nature and residents are within commuting access to the larger Tucson employment base. Nonetheless, the town itself has attracted a number of technology-related firms in recent years (some of which stem from expanded research and development associated with the University of Arizona) that have provided further economic diversification. Otherwise, retail stores, government, and health care make up a large percentage of the town's top employers.

Signs of a modestly strengthening economy are evident. At 5.6% in January 2015, the unemployment rate remained steady year-over-year and held favorably below the MSA (6.0%), state (6.6%) and U.S (6.1%) rates for the same time period. Some commercial and residential development is underway and permitting is up year-to-date, although still below pre-recessionary peaks. Home values have improved modestly as well, with a 1.5% year-over-year increase in median home value to \$260,000 as of February 2015 according to Zillow.

PLEDGED EXCISE TAXES BENEFIT FROM IMPROVING ECONOMY
Pledged excise tax revenues have rebounded steadily after posting a cumulative 32% recessionary loss during the fiscals 2009-2011. Fiscal 2014 pledged revenues equaled about 88% of the pre-recession high (fiscal 2008), and they produced strong coverage of maximum annual debt service (MADS) of 7x. Fiscal 2015 pledged revenues are on track to grow notably due to a large 18% increase in local sales taxes. The large sales tax gain is due to the full allocation of all construction sales tax revenues to the general fund (one-third of which was previously allocated to the HURF) and core growth in the construction, retail, and hospitality sectors.

The excise taxes pledged to pay debt service include locally levied transaction privilege (sales) taxes, franchise taxes, licenses and permits, charges for services, and fines and forfeitures. The state-shared revenues consist of state-shared sales and income taxes, distributed to localities based on population. State-shared revenues made up about 31% of total excise tax revenues in fiscal 2014. The town's sales and franchise tax is the largest excise tax component, at 60%. In the break-out of the town's sales and franchise tax, local retail sales taxes provide the largest piece of the town's collections. Retail sales taxes began exceeding construction sales tax revenues in 2010, largely reflective of the housing market collapse.

SOLID FINANCIAL POSITION MAINTAINED
Nearly all of the town's general operating revenue is derived from local sales taxes and intergovernmental (largely state-shared) revenues, the largest components of the pledged excise tax revenue 'basket'. While these revenues are derived from a fairly broad base, the dependence upon economically sensitive revenues is a credit risk. Fitch believes the financial flexibility provided by the sizable general fund balances offset much of this concern. Comparable to other Arizona municipalities, the town does not levy a property tax. Management does maintain some revenue flexibility with the ability to increase local sales tax rates without voter approval. The sales tax was most recently increased to 2.5% from 2% effective March 1, 2015 for the operations of the town's planned community recreation center. The sales tax increase does not apply to fuel purchases or groceries.

The town spends about 50% of its fiscal 2015 general fund budget on public safety. In addition, the town has maintained a steady pace of annual general fund capital outlays since fiscal 2009 that have averaged \$1.2 million, which Fitch views as a source of flexibility. Use of reserve levels above the policy minimum (no less than 25% of spending) and prudent implementation of one-time and permanent expenditure cuts allowed management to largely offset the recessionary pressures on revenues and restore structural balance over several fiscal years. The fiscal 2014 audit posted a \$1.6 million (5.1% of spending) net operating deficit due to \$4.1 million (13% of spending) in capital outlays and transfers to the capital projects fund. The resulting unrestricted fund balance still totaled a healthy \$11.5 million or 36.8% of spending.

For fiscal 2015, the year's \$32.3 million general operating budget is balanced and represents a large 13.7% increase from the prior year. The notable budget increase is due to \$3 million in capital outlays and transfers to the capital projects fund and \$1.7 million in market salary adjustments and step / merit increases. General fund revenue growth is led by the aforementioned 18% local sales tax gain. The town allocates all construction sales tax revenues for one-time capital outlays, which Fitch views positively. Management reports revenues and expenditures are on track to maintain balanced operations by year-end, despite the large capital outlays.

LOW DEBT BURDEN AND RAPID PAYOUT
The town's debt profile is favorable. Capital needs have historically been financed via excise tax revenue bonds and utility loans from the state bond bank rather than voter-approved GO debt. The town has no GO debt. The overall debt burden is low relative to fiscal 2015 full market value at 1.9% and moderate on a per capita basis at \$2,382. Low debt levels also reflect the town's practice of annual pay-go capital spending. Principal amortization of all outstanding excise tax debt is rapid with 90% of principal retired in 10 years.

Having only been incorporated 40 years ago, the town's infrastructure is relatively new. Management has no plans to further leverage excise tax revenues over the near term. The town's relatively moderate capital needs are expected to be met with pay-go capital spending from one-time revenue sources; otherwise, the capital program is largely composed of water utility projects.

WEAK/SATISFACTORY PENSION FUNDING BUT LOW CARRYING COSTS
The town contributes to two pension plans, and also pays for disability, death and healthcare benefits. The general employee plan is through the Arizona State Retirement System (ASRS), a cost-sharing, multiple-employer plan. The town has made 100% of its annual pension cost (APC) in fiscal years 2010-2014. The plan's funded position is satisfactory at 74.5% at June 30, 2013, although it falls to 67% after adjusting for a more conservative 7% investment rate of return. The town also contributes to the Arizona Public Safety Personnel Retirement System (PSPRS) and the Correctional Officers Retirement Plan (CORP). Both are agent, multiple-employer (AME) plans. The PSPRS pension funding level is satisfactory at 75.3% at June 30, 2013 while the CORP's pension funding level was a weaker 62.2%. However, using Fitch's more conservative 7% rate of return versus the plans' assumed 8% rate, funded ratios for the AME plans would drop to a weak 67.9% and 56%. Under this assumption, the plans' estimated \$11.9 million unfunded accrued actuarial liability would represent less than 1% of market value.

Other post-employment benefits (OPEB) offered by the town are limited to an implicit subsidy for health insurance coverage for retirees. Carrying costs (debt service, pension, OPEB costs) favorably totaled a low 12.6% of governmental spending in fiscal 2014 despite the rapid pace of amortization.