Draft IGA on Rio Nuevo’s Desk Early This Week

Last week, the Fitch Rating Service announced it was reducing the ‘A’ Rating for Rio Nuevo bonds to ‘BBB’. The annual review cited the ongoing concerns with the City of Tucson’s credit stability, which has a negative outlook on Rio Nuevo with the city as bond guarantor for $67.4 million subordinate lien excise tax revenue bonds, series 2008, and $11 million certificates of participation series 2009.

Since Tucson’s general obligation bonds were downgraded by Fitch on May 14, 2014 from ‘AA’ to ‘AA-’ this part of the report was no surprise.

More striking was the negative outlook based on the procedural tax collection of Rio Nuevo. The bonds are secured by a subordinate lien on ½ of state sales tax collected from activity within the district boundaries, however the district had no access to analyze and accurately reflect sales activity of the over 1,100 merchants was a big issue.

In order to obtain this information, Rio Nuevo was told it needed an Intergovernmental Agreement (IGA) before it could see whether or not merchants were registered in the district or not. If not, then the state sales tax was being collected, but Rio Nuevo was unable to account for its revenues returned to the district. Rio Nuevo board had been trying to obtain this IGA for over a year.

We followed up with the Arizona Department of Revenue (ADOR) to learn more.

When asked, how could this be? Sean Laux, ADOR Communications Officer, told us that there would be “a draft IGA on Rio Nuevo’s desk early this week.” Laux explained that by Arizona statute, “transaction privilege (sales) tax information is confidential and collected by the department on behalf of the county, city or town tax official.” Since Rio Nuevo is “an exception rather than the rule,” it seemed to have caused some delays for the Intergovernmental Agreement (IGA).

The Fitch Rating Service in their downgrade acknowledged that the district was working with the State on a new Intergovernmental Agreement that would allow the Rio Nuevo board access to taxpayer data, but without the agreement finalized Fitch had no choice but to move forward with its downgrade.

The draft IGA, once agreed upon by the Rio Nuevo Board, will need final approval from the Attorney General’s office. But Fitch will not upgrade the rating, with quarter to quarter visibility, so the next review, even with the IGA in place, will be pending until next year.