TUCSON – Last Thursday, Moody's Investors Service downgraded to A2 from A1 the rating on Rio Nuevo Multipurpose Facilities District (City of Tucson), Arizona's subordinate lien excise tax revenue bonds. The downgrade affects $64.7 million in outstanding bonds. The bonds are secured by a subordinate lien pledge on the district's incremental state sales tax revenues. The bonds are additionally secured by an intergovernmental agreement with Tucson that provides, in the event there is insufficient pledged revenues to make debt service payments, that Tucson will cure that deficiency, subject to annual appropriation.
A stable outlook has also been assigned.
RATING RATIONALE for Rio Nuevo
The downgrade reflects a deteriorating trend of the district's pledged revenues in recent years. The rating also considers the bonds' legal provisions, the existence of a cash-funded debt service reserve, and Tucson's moral obligation pledge to cure a deficiency in pledged revenues to make debt service payments.
The stable outlook reflects Moody's expectation that the City of Tucson will fulfill its moral obligation pledge to cure a deficiency in pledged revenues to make debt service payments.
STRENGTHS
- Moral obligation pledged from a highly-rated entity (the City of Tucson)
- Intergovernmental agreement with the Arizona Department of Revenue to provide the district with greater transparency into taxpayer information
CHALLENGES
- Deteriorating trend in pledged revenues in recent years
- Weak tax collection mechanism primarily reliant upon accurate self-reporting by taxpayers
OUTLOOK
The stable outlook reflects Moody's expectation that the City of Tucson will fulfill its moral obligation pledge to cure a deficiency in pledged revenues to make debt service payments.
WHAT COULD MOVE THE RATING-UP
- Upgrade of the City of Tucson's credit rating which Moody's rates Aa3 for general tax backed obligation bonds
- Substantial and sustained increase in pledged revenues
WHAT COULD MOVE THE RATING-DOWN
- Downgrade of the City of Tucson's credit rating
- Continued deterioration in the district's pledged revenues, including falling below sum-sufficiency
Rio Nuevo and the State of Arizona recently announced a new agreement that will allow the District to monitor over 1,100 merchant returns for accuracy and timeless, which will address the rating agency's concerns in future years.
Rio Nuevo anticipates no new debt issued by the District and has relied on cash on hand, funds received from the city as part of the litigation settlement and proceeds from the sale of property to fund continued downtown development. Prior to the legislature seizing control of Rio Nuevo in 2010 the District spent approximately $300,000,000 on downtown area redevelopment. The District issued four series of bonds for approximately $125 million of debt. Two of the four bonds have been paid off, about $75 million of prior debt remains and is paid utilizing current sales tax receipts from area merchants.
The reconstituted District board has committed around $12 million on very visible projects such as the newly renovated Tucson Community Center arena and the recently launched Marriot AC Hotel to be located downtown and will have approximately $10 million remaining to help fund priority projects. The substantial majority of Rio Nuevo receipts will continue to go to repay debt issued before 2010.