OREANDA-NEWS. Fitch Ratings has affirmed the 'AA-' rating on the following bonds for the Prescott Valley Municipal Property Corporation, AZ (the MPC or the corporation):

--$13.5 million municipal facilities revenue refunding bonds series 2011.

Fitch also affirms the implied unlimited tax general obligation (GO) bond rating for the Town of Prescott Valley, AZ (the town) at 'AA-'.

The Rating Outlook has been revised to Positive from Stable.

SECURITY

The MPC bonds are payable from rental payments made by the town to the corporation which are secured by a first lien on excise tax revenues collected by the town.

KEY RATING DRIVERS

STRUCTURAL BALANCE; IMPROVING RESERVES: The Positive Outlook reflects the town's resumption of structurally balanced operations in fiscal 2014 subsequent to five years of recessionary budget pressures. Operating reserves are improving, although still lower than prerecession levels. Healthy reserves are a key credit mitigant to the towns above average exposure to volatile sales tax revenues.

YAVAPAI COUNTY IDA FINANCING: The Positive Outlook also reflects the town's release from litigation associated with the Yavapai county improvement district financing. Removal of this liability represents a credit plus.

SOUND DEBT SERVICE COVERAGE: Fiscal 2014 pledged revenue coverage of maximum annual debt service (MADS) is healthy at 6.7x, which is expected given that the pledged revenues comprise the majority of general fund revenues.

RATING CAPPED AT IMPLIED GO: The revenue bond rating is capped at the equivalent of the town's implied unlimited tax GO rating, consistent with Fitch's criteria.

GROWING LOCAL ECONOMY: Favorable trends in sales tax receipts, home prices, and building permit totals signal a return to growth in the local economy subsequent to the severe recession and housing sector collapse.

MODERATE DEBT; MANAGEABLE CAPITAL: The town faces manageable near term capital needs; the debt profile is moderate, amortization is rapid, and overall carrying costs appear affordable.

RATING SENSITIVITIES

STRONG FINANCES: Maintenance of structurally balanced operations and sound reserve levels could result in a rating upgrade.

CREDIT PROFILE

Located approximately 90 miles northwest of Phoenix, the town experienced explosive population growth in the past decade, increasing from less than 9,000 in 1990 to roughly 40,000 presently. The primary economic sectors of the town include tourism, trade, services, and construction. However, a segment of the population commutes to nearby Prescott to work in its government, mining, and ranching economy.

PLEDGED REVENUE GROWTH, SOUND COVERAGE

Pledged revenues consist of local sales tax revenues, state shared income and sales taxes, licenses and permits, and fines and forfeitures. After declining by a cumulative 25% from fiscal 2007 to fiscal 2011, revenues have increased a cumulative 35% to $24.2 million in fiscal 2014, surpassing the prerecession peak. Local sales tax receipts and state shared revenues have shown the greatest improvement, with state revenues boosted by a census-related formula adjustment beginning in fiscal 2012.

Debt service coverage remains healthy, which is expected given the fact that the pledged revenue stream comprises most of the town's general operating revenues. Audited fiscal 2014 pledged revenues of $24.2 million generate MADS coverage ($3.6 million in 2020) at a solid 6.7x. Fitch believes further moderate gains in pledged revenues are likely, given reported retail development underway in Prescott Valley and overall improving economic conditions in Arizona.

STRUCTURALLY BALANCED OPERATIONS; SOUND RESERVES

The town resumed structurally balanced operations in fiscal 2014 following five years of net operating losses, as the decline in economically sensitive revenues outpaced the town's spending cuts. A fiscal 2014 net surplus of $1.3 million (5.4% of spending) brought unrestricted reserves to $8.9 million (36% of spending). This percentage was down from roughly 100% of spending at fiscal 2008 year-end. Healthy reserves are appropriate given the town's reliance on sales taxes for operations (88% of fiscal 2014 general fund revenues).

The preliminary fiscal 2015 operating results and fiscal 2016 balanced budget anticipate further growth in reserves. The town reportedly plans to build reserves more in line with prerecession levels over the next three to four years. Fitch will monitor the town's progress in this effort.

MODERATE DEBT PROFILE

The town's debt profile is generally positive, with a moderate overall burden (2.7% of estimated market value) and rapid amortization (100% of excise tax and certificates of participation debt is retired in 10 years). Management reports no near term borrowing plans. The five-year non-enterprise capital plan appears manageable at roughly $41 million and will be funded primarily from existing resources and grants from other agencies. The town has no variable rate debt or derivative exposure.

The town and its non-uniformed employees each contribute to a defined contribution retirement plan. Uniformed employees participate in a state sponsored agency multiple-employer plan. The funded level at June 30, 2014 was just 67% using a 7.85% investment return assumption; using a more conservative return assumption of 7% results in a weak 61% funding level. The town does not offer other post-employment benefits. Total carrying costs (debt and retirement contributions) in fiscal 2014 were manageable at 13% of governmental spending.

GROWING LOCAL ECONOMY

Economic data suggests the area economy has recovered from the steep recession. Sales tax collections reflect compound annual average growth of 9.5% since the trough in fiscal 2011 and building permit totals continue to exhibit solid three year growth. Management reports ongoing retail and industrial growth. Local wealth and income levels are below state and U.S. averages. A low unemployment rate of 4.5% as of March 2015 reflects several years of employment base growth.