Heftier reserves lead Fitch to upgrade Tucson ratings

Fitch Ratings boosted Tucson’s general obligation and other ratings, citing recent sizable increases in operating reserves that provide some cushion given the city’s reliance on economically sensitive revenue. 

The rating on nearly $111 million of outstanding GO bonds issued by Arizona’s second-largest city was upgraded to AAA from AA-plus, the rating on $752.8 million of certificates of participation was lifted to AA-minus from A-plus, and the city’s issuer default rating rose a notch to AA from AA-minus. The higher ratings have stable outlooks.

“Prior concerns regarding structural budget balance no longer weigh on the rating; the city has reported general fund surpluses in each of the last six fiscal years and is poised to report another substantial surplus for fiscal 2022,” Fitch said in a statement. “Satisfactory spending flexibility and a moderate long-term liability burden also factor into the rating, while limited revenue raising ability weighs negatively on the overall credit assessment.”

City Manager Michel Ortega said the rating action recognizes efforts to build reserves over the last decade or so. 

“It’s not just revenue growth but also looking hard at the efficiencies around our operation is key,” he said.

He added Tucson has been tapping reserves for some pay-as-you-go project funding, although the city is considering the issuance of utility revenue bonds and parks and recreation GO bonds next year. 

“It’s great to have an awesome rating, one of the highest ratings, but if the interest rate in the market is not cooperating, we may have to pause that for a bit until we can see a better rate,” Ortega said.

Tucson’s latest annual financial report showed it ended fiscal 2021 with $593.6 million in general fund revenue, which was 6.3% higher than in fiscal 2020, and with a $111.3 million general fund balance that at about 18.7% of revenue exceeded the city’s target of 7%. The general fund balance was $50.4 million at the end of fiscal 2020.

Fitch noted Tucson’s property taxes are restricted by state statute and city charter and sales taxes require voter approval, with the city winning approval in May for a 10-year extension of a temporary half-cent sales tax to fund street improvements. It added the city’s combined debt and pension liability at 11% of personal income is “a moderate burden on resources.”

Tucson has GO ratings of AA from S&P Global Ratings and Aa3 from Moody’s Investors Service.