Phoenix economy pivots, city credit rating solid for $231M bond

City of PhoenixThe vision worked. Phoenix efforts to grow from the Great Recession without depending on housing starts and retail sales is a key reason the city earned a strong credit rating from all three rating agencies.

Shifting economic policies pivoted the Phoenix metro economy from retail and home building to sustainable, higher wage employment opportunities. The policy move is paying off. Historically since the 1960s, Phoenix has used housing to build its way out of a recession; not this time. The recovery from the worst economic turndown since the Great Depression was built on a diversifying economy, according to the three major public finance rating agencies.

The trio gave high marks to city of Phoenix for a $230 million bond issue going to market May 16. For the first time in a rating analysis, increased economic diversity was cited as the source of sustainable, strong economic growth.

In the first ratings from Fitch Ratings, the diversified Phoenix economy is cited as one of the key factors in the AA+ rating the city earned for the bonds. Fitch also said the city earned a default credit rating of AA+.

“Phoenix is growing sustainably, and we see that over the near-term and intermediate-termsaid Steve Murray, senior director at Fitch. “The broad and diverse regional economy is anchored by professional and business services, retail and wholesale trade, education and health services, and government. Arizona State University and the University of Arizona facilities in downtown Phoenix headline growth in higher education locally.”

Fitch, Moody’s Investor Services and S&P Global Ratings have affirmed or raised Phoenix’s strong credit rating. These ratings earned by the city means city-issued bonds can be sold at lower interest rates. For the first time since the 1970s, the city’s sustained economic growth comes from a non-consumption economic base.

Consumption industries, such as retail and construction, are more volatile in economic downtowns. Production-based industries, such as financial services, health care and manufacturing tend to be more stable when the economy declines.

Moody’s Investor Services and Standard & Poor’s both cited economic diversity in assigning ratings.

“(Phoenix’s) large and expanding economy, growing employment diversification and healthy population growth (are credit strengths),” said Dan Steed, assistant vice president at Moody’s Investor Services. “It has an affordable cost of living and low business costs.”

Standard & Poor’s RatingsDirect report on the bond issue hits diversification on its first summary bullet: “The ratings…reflect our view of (t)he breadth and diversity of Phoenix’s economy.”

A week after the three ratings reports came out, the U.S. Bureau of Economic Activity released 2016 gross domestic product numbers for states. Two thirds of Arizona’s 2.1 percent growth rate was generated by increased economic output from the industry sectors directly responsible for economic diversification: health care, financial services, advanced manufacturing and technology.

“Diversifying our economy has been the emphasis of the Mayor and City Council, and now the numbers are backing it” said Ed Zuercher, city manager, City of Phoenix. “Phoenix is the major driver of the state’s economy, so when you see that two-thirds of the state’s GDP growth came from advanced industry sectors, it’s apparent that economic diversification is making a real difference across the board.”

This new perspective on economic diversity impacts Phoenix businesses and residents right in the pocket book, in a positive way. Over the life of the bonds, taxpayers will save as much as $15 million in interest cost.

The result of high quality credit ratings; Phoenix is refinancing $121 million in bonds, and looking at a savings upwards to $10 million in interest, according to CFO Denise Olson. The new $110 million in bonds for capital equipment will deliver interest savings as high as $5 million because of the credit marks.

“We’re in a much better situation today than we were a few years ago,” Olson said. “We’re seeing growth in different economic sectors, and it’s a much more stable economy today.”

It was a long, slow recovery for the Phoenix metro, as the reliance on in-migration driving home building and retail jobs supported a consumption-based economy.

“The market has always had success in attracting businesses, however the recession spurred a shared realization that in order for the market to recover more quickly in future downturns, we would need to shift our attraction efforts to a more diversified industry base,” said Chris Camacho, president and CEO of the Greater Phoenix Economic Council. “The mayor, council and leadership at the city of Phoenix fully supported this direction, and these ratings show those efforts are paying off.”

In October 2016, when the Phoenix metro finally passed its pre-recession peak employment month, October 2007, the composition of the workforce looked very different than nearly a decade earlier. Instead of half the workforce in leisure and hospitality, construction and retail, more than half the jobs in the Valley were in advanced financial services, technology, health care and life sciences, and professional services. While leisure and hospitality still has a big share of the workforce, retail and construction employment have declined.

The diversified workforce is only part of the ratings considerations from the three agencies.

“The city has high quality revenue framework and top operating performance ratings,” said Murray. “We rate both ‘aaa.’ The other two key rating drivers, expenditure framework and long-term liability burden both rate ‘aa.’”

Murray doesn’t see any short-term or intermediate-term concerns about economy growth in the city or the state.

Phoenix revenues have been growing nearly 3 percent per year, according to Moody’s, and this sustained growth rate results in what the agency calls a “debt service coverage” of 10.8, a ratio indicating prudent borrowing and healthy projected revenue growth.

Arizona State University survey of economists, according to Lee McPheters, research professor of economics in the W. P. Carey School of Business and director of the JPMorgan Chase Economic Outlook Center, project that Phoenix will continue to increase its financial activities workforce this year and next in the neighborhood of a 6 percent job creation rate.

The same forecast from ASU projects personal income in the metro area will increase 5.6 percent this year and 5.8 percenter next year. The continuing boost in income is driven by company commitments to more than 15,000 new quality Phoenix jobs over the next three to five years.

All of these data are reviewed by the credit rating analysts during in-person visits and deep data assessment of the Phoenix market. They all cautioned that Phoenix, and all Arizona cities, are heavily dependent on revenues that are dependent on economic performance. In Arizona, municipalities gain the bulk of discretionary revenue from transaction privilege and excise taxes, both forms of sales tax.

Over the short-term and intermediate-term, all three credit agencies report strong economic indicators and believe that an economic downturn is unlikely.

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