Scottsdale Borrowing Bucks Trend

By Russ Wiles The Republic | azcentral.com Sat Dec 21, 2013 7:42 PM

Arizona’s politicians and public officials are gradually weaning themselves from debt dependence.

Total borrowings by cities, counties, special districts and state agencies across Arizona have dropped modestly over the past two years — after doubling over the prior eight. And of the new bonds issued in recent years, only about half represent borrowings for new expenditures. The rest have gone to replace higher-interest IOUs, much like home buyers have been refinancing mortgages.

Defaults in places like Detroit have kept municipal-bond risk in the news, but the picture nationally has been fairly good this year and even better in Arizona. That was underscored by a late-November announcement by Moody’s Investors Service that it had raised its outlook for Arizona’s state-government debt from neutral to positive, with a possible credit-rating upgrade the next step.

“The state deserves some credit that we’re not in the same position as Illinois or Detroit,” said Kevin McCarthy, president of the Arizona Tax Research Association.

As the economy continues to recover, state and local governments around the nation are doing better than expected, said Moody’s in a recent report. For state governments in general, income-tax revenue has increased 14 straight quarters, on a year-over-year basis, and governments have been rebuilding depleted reserves, the report noted.

“We expect most states to maintain fiscal stability through tight budgeting and spending restraint — practices that became common in the recent recession,” said Baye Larsen, the Moody’s senior analyst who wrote the report.

Few Arizona municipalities have been downgraded in recent years. But Phoenix’s perfect credit rating was downgraded Friday, a major blow to city leaders who once pointed to the rating as evidence of its sound fiscal management compared with other large U.S. cities.

Standard and Poor’s, one of the world’s largest credit-rating agencies, changed Phoenix’s general-obligation bond rating from AAA to AA+, citing concerns about its overall economic performance and level of debt and financial liabilities. Phoenix’s downgrade could mean it will have to pay more in interest to take out debt.

City officials said the downgrade is largely the result of a change in S&P’s rating criteria this year, placing a higher emphasis on local economic conditions. In particular, Phoenix’s property values, which plummeted during the housing-market crash, depressed its rating, they said.

Among other large debt issuers in the state, only Glendale continues to struggle, from stadium-related financial stress, and even its credit rating remains in the A category.

“Arizona has been building up its rainy-day fund, and the (fiscal conservatism) has trickled down to most municipalities,” said Todd Curtis, Phoenix-based portfolio manager of the Aquila Tax-Free Trust of Arizona, a mutual fund that invests in bonds issued around the state. Even Glendale could make strides ahead in improving its financial situation, he predicts.

Local- and state-government entities across Arizona shelled out $1.73 billion in interest over the 12 months ending in June 2013, the Arizona Department of Revenue disclosed in a report earlier this month. That was up 3 percent over the prior year but represented the lowest rate of increase since the department started to track interest payments in 2010.

Taxpayers ultimately are on the hook for some public-sector interest payments, but large chunks of debt are directly financed by the revenue from gasoline taxes, utility fees, tuition, hospital charges and other specified payments from users.

One interesting finding about general municipal health is that pension shortfalls, despite well-publicized examples, aren’t a primary cause of overall financial stress.

Pensions are a minor factor in troubled cities, according to a recent report from the Center for Retirement Research at Boston College. Rather, fiscal mismanagement tops the list of catalysts, followed by economic problems, population losses and declining tax bases. Only a small number of cities faces serious financial troubles, and a third of those are in California, the researchers said.

Moody’s has given speculative or junk ratings to just 217 municipal-bond issuers nationally out of more than 15,000. Three are in Arizona, with the Downtown Phoenix Hotel Corp. the most prominent. That entity sold $350 million worth of bonds to develop the Sheraton Phoenix Downtown Hotel, which had the rotten luck of opening during the middle of the recession, in 2008.

Indeed, many of the factors leading to bankruptcies or defaults in places such as Detroit and Jefferson County, Ala., are localized rather than broad, systemic problems.

More than 1,100 Arizona cities, counties, state agencies, school districts and other entities report to the Department of Revenue, yet little more than one-third of these have any bond debt outstanding.

The 15 largest issuers in Arizona — led by Phoenix, Salt River Project, several state agencies, Pima County and the Maricopa County school system — account for about 75 percent of all debt.

The $43 billion statewide debt total as of mid-2013, as compiled by the department and released earlier this month, is down from $44 billion two years earlier. It also contrasts with a doubling in debt from $21.9 billion in mid-2003. The progress shows up also in per capita debt obligations, which the department pegs at about $6,610 per Arizonan, down from $6,810 two years earlier.

“The mind-set is to put projects on hold and not add a lot of debt,” Curtis said.

In large part, Arizona municipalities lately have been constrained from selling new bonds by revenue downturns including the sizable contraction of the property-tax base due to the housing slump, McCarthy said.

Although he hasn’t yet seen evidence that that has changed, many school districts, cities and other issuers would like to dust off long-delayed capital plans and start borrowing again now that the real-estate market is recovering.

“There’s a lot of pent-up demand,” he said.

Reach Wiles at russ.wiles@arizonarepublic.com or 602-444-8616.