Rating Update: Moody's revises Glendale, AZ's outlook to stable from negative; A3 GOULT and related ratings affirmed

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1 Rating Update: Moody's revises Glendale, AZ's outlook to stable from negative; A3 GOULT and related ratings affirmed Global Credit Research - 30 Sep 2014 Approximately $963 million of total debt affected GLENDALE (CITY OF) AZ Cities (including Towns, Villages and Townships) AZ Opinion NEW YORK, September 30, Moody's Investors Service has revised Glendale Arizona's outlooks on both the city and its water and sewer enterprise to stable from negative. At this time, Moody's affirms the city's A3 general obligation unlimited tax (GOULT) rating ($158.1 million outstanding). Moody's also affirms the city's various special tax bond ratings, as follows: A3 for senior lien excise tax bonds ($249.1 million), Baa1 for subordinate excise tax bonds ($210.5 million), A3 rating for transportation excise tax bonds ($88 million), and A3 for street and highway user revenue bonds ($3.9 million). Additionally, Moody's affirms the A1 ratings on the senior and subordinate liens of the city's water and sewer enterprise revenue bonds ($253.1 million). SUMMARY RATING RATIONALE The affirmation of the A3 GOULT rating reflects the city's high debt burden that reflects significant leveraging of excise taxes otherwise available to support core services. The city bears significant enterprise risk exposure to professional sports facilities that includes long-term debt financed by the city and a sizable annual arena management fee paid to the owners of the NHL's Coyotes franchise. The city's operating funds remains in a weak position but are showing continued improvement and maintain solid liquidity. Recovery from the recent downturn is also benefitting operating tax revenues, and the still large tax base is expected to continue rebounding. The city's A3 and Baa1 special tax ratings were also affirmed. For each security type, pledged revenues are benefitting from economic improvement and maintain sound debt service coverage. The various excise taxsupported obligations are rated either at, or below, the city's GOULT rating in accordance with Moody's US Public Finance Special Tax Methodology. The city directly receives all pledged excise revenues prior to fully setting aside funds for upcoming debt service payments, which allows for comingling of special tax revenues for debt service with the city's other operating resources. As such, the city's various excise tax obligations lack legal separation from the city's general operations and management, and are therefore capped at the city's GOULT rating. The stable outlook on the city reflects our expectation that the city will continue to benefit from economic recovery and improved financial management despite ongoing challenges stemming from high fixed costs driven largely by a high debt burden and net operating costs associated with professional sports facilities. Additionally, the city's now permanent sales tax rate increase to a 1.9% rate from 1.2% will continue to provide more revenue to support operations and excise tax secured debt, following failed civil suits and an unsuccessful voter initiative. The affirmation of the A1 ratings on the city's water and sewer revenue bonds reflects a largely residential and diversified customer base and satisfactory debt service coverage. The congruent A1 ratings on the enterprise's outstanding senior and subordinate liens are attributed to the open senior lien that could be leveraged for future debt issuance and diminish debt service coverage levels for subordinate lien bonds which comprise the vast majority of the enterprise's outstanding debt. The stable outlook on the city's water and sewer enterprise reflects reliance on regular service charges to support operations and pay-go capital needs, demonstrated willingness to increase rates over time, and no plans for additional debt. Additionally, coverage reflects management's annual target of 1.5 to 2.0 times debt service which is somewhat modest but stronger than covenant requirements. The outlook also reflects ample water supply despite persistent drought conditions affecting the western U.S. STRENGTHS

2 - Management's willingness to permanently increase the city's sales tax rate to support both operations and excise tax debt service - Still large tax base relative to peers benefitting from near-term recovery in property values - Participation in Phoenix metro area's economy which is recovering from the recent economic downturn - Reduced net costs of NHL's Coyotes to the city under an agreement with the team's current owners - New management team in place since late 2013 CHALLENGES - Weak, albeit improving financial position - Excise taxes are the largest operating revenue and costs of professional sports facilities compete with key services for funding - Limited financial flexibility given high fixed costs driven by debt supported by sales and excise taxes from operating funds DETAILED CREDIT DISCUSSION THE CITY'S OPERATING POSITION WILL REMAIN WEAK OVER THE MEDIUM TERM BUT IS IMPROVING Unaudited results for FY2014, presented a GAAP basis, anticipates still weak operating reserves of 3.9% of revenues ($7.9 million) that nevertheless indicates improvement over recent, prior years. Operating funds still maintained sound liquidity with estimated net cash of at least 26.1% of revenues ($52.7 million) that also improved from the prior year. Performance indicates a modest $6.4 million operating surplus supported by revenue growth and savings from unfilled vacancies and other operating efficiencies. The largest revenue stream for operating funds is local sales taxes, representing nearly half of revenues, which benefitted from FY2014 being the first full year after the recent increase in the levy rate to 1.9% from 1.2%. State-shared sales, excise, and income taxes combined for approximately 20% of operating revenues and were above expectations with broad economic recovery as receipts that were conservatively budgeted at flat to the prior year. State shared income tax grew by an estimated 9.2% from the last year and reflected a two-year lag from collection. We include the following as the city's operating funds: general, police and fire sales tax, general obligation debt service, municipal property corporation debt service, and Western Loop 101 public facilities corporation debt service funds. Reserves in the police and fire special revenue fund are included in available reserves since the fund is dedicated to supporting operations for those services not otherwise paid by the general fund. Glendale's budget for FY2015 was established by management under conservative assumptions and marks a continued trend toward better performance than deep deficits back during the recession. Budget basis figures indicate a modest deficit of $6.4 million for operating funds (3% of revenues), not including $5.3 million of prudent spending contingencies. Excise taxes are expected to grow modestly by 6% over the prior year, or $9.6 million, based upon a conservative haircut to the state's forecast plus no speculative inclusion of commercial developments nearing completion. The city faces approximately $2.1 million of one-time costs associated with hosting Super Bowl XLIX at University of Phoenix Stadium, mostly for public safety, though it is unknown what offsetting revenues will be generated by economic activity surrounding this event. The budget also indicates a $2.1 million discretionary draw on reserves for a vehicle replacement sub-fund. The city is also considering sales of excess capital assets like commercial buildings and a golf course that would provide modest, one-time funds that could help to rebuild reserves or fund capital projects. The city's fixed cost burden is high at approximately 36.4% of budgeted operating revenues for FY2015, which limits operating flexibility but is consistent with the prior year's burden. Fixed costs are driven by debt service supported by general excise taxes, and also amortization of the city's Moody's adjusted net pension liabilities as well as an estimate of other postemployment benefits (OPEB) based on consistent contributions in recent years. The city's policy for general fund reserves specifically is to maintain at least 10% of revenues and performance has been well below that level in recent years, and no specific timeline for recovery has been established. Deep budget cuts have been adopted since 2008 that included reducing general fund supported staff by over 25% in response to recessionary declines in tax revenues and prior payments to the NHL. Despite budgetary

3 adjustments, the city will be challenged to find fiscal balance given high fixed costs, but will be aided by the nowpermanent increase in the local sales tax rate. FY2013 results on an audited GAAP basis indicated that available operating reserves remained weak at -1% of revenues (-$1.8 million) including accrual of the 2012 payment of $25 million that was still owed to the NHL, of which $20 million was later paid to the league from an escrow (discussed in detail below). Nevertheless, operating funds maintained positive liquidity to support services with net cash of 21.5% of revenues ($39.9 million) at yearend. Management closed a $32 million budget gap for the year, mostly by increasing the city's general sales tax rate (over $20 million of incremental revenues) effective August 2012 and also further reduced to staff and services ($10 million of savings). The escrow for the 2012 NHL payment was funded by a long-term interfund loan from the city's water and sewer enterprise, and the remaining $5 million will be paid in FY2017 under an agreement with the league. SUPPORTING SPORTS FRANCHISES IS A SIZABLE NET COST TO THE CITY Glendale's financial position remains challenged by expenditures related to the NHL's Coyotes franchise and its spring training baseball facility. The Coyotes are the anchor tenant of the city owned and financed Gila River Arena (formerly Jobing.com Arena) so management is inclined to financially support the team to keep it located in Glendale. The city council approved an arena management agreement with the new owners of the Coyotes, Renaissance Sports & Entertainment (RSE) and its affiliates, effective August 2013 with the purchase of the team from the NHL. Under this agreement, the city is obligated to pay the team's owners an annual fee of $15 million (6.9% of FY2015 budgeted operating revenues) for up to 15 years to manage the arena. The arena fee will exacerbate the city's already weakened financial position if uncertain excise revenues from the arena and surrounding retail fail to substantially offset the fee. Shared revenues for the city and RSE hinge on attendance for events, economic conditions, and other related factors. Officials note that the city typically receives over $6 million of excise revenues from events at the arena as well as taxable activities from surrounding retail. Additionally, under the arena management agreement the city will receive other revenues shared with the team's owners that are projected to combine for over $6 million from parking fees, ticket surcharges for hockey games and other events, a portion of naming rights revenue for the arena, and rent. The city may also capture the owner's portion of ticket surcharges if its shared revenues combine for less than $9 million per year as was the case in FY2014 when almost $0.9 million was released to the city since revenue-sharing provided only $6.3 million to the city. As of FY2014, the city's total net cost attributed to the Coyotes was approximately $12.4 million (equivalent to 5.6% of operating revenues); the net loss was driven by fixed costs of $22.9 million that comprised the management fee and scheduled debt service on arena debt and the year's $3 million scheduled repayment toward prior interfund loans that were not fully offset by $13.5 million estimated excise taxes and revenue-sharing with the team's owners. Looking forward, city officials and RSE expect that enhanced marketing efforts by new team ownership will improve the team's operating performance since the NHL reportedly invested little in the team's operations or promotional efforts when it owned the franchise over the last few years. Struggles to attract events over the last year were partly attributed to the timing of the team's purchase in August 2013 that was unfavorable for securing non-hockey events, like music tours, for the remainder of 2013 and partly into Also of note, RSE has an out-clause in the arena management agreement allowing for relocation of the team after five years if the Coyotes generate over $50 million of accumulated losses for the period. If exercised, the city would be paid $45 million less shared revenues received over the period. Relocation of the team in other circumstances during the lease period ending in 2028 would likely constitute a default under the non-relocation agreement and lead to liquidated damages to the city of $9 million for each remaining year under the lease agreement. The city demonstrated its commitment to keeping the Coyotes in Glendale in recent years and the current arena management fee is less than prior subsidies provided by the city. Specifically, the former city council remitted approximately $50 million of payments to the NHL over FY funded primarily with $45 million for loans from various enterprises to the general fund. These interfund borrowings are scheduled to be repaid over 25 years and constituted uncommon actions among local governments which are indicative of the significant impact that supporting the Coyotes has on the city. Contributions to the NHL offset the Coyotes' substantial operating losses borne by the league while pursuing a long-term owner willing to keep the team in Glendale. Lastly, the city receives negligible revenues related to the Camelback Ranch facility to offset its sizable debt service burden on operating funds. The facility was developed just before the recent, deep recession and opened in Prior management anticipated that the facility would attract substantial surrounding development that

4 would in turn benefit the city's future tax revenues. However, the magnitude of the downturn led to a dramatic slowdown in development for the area and forestalled tax revenue growth following this project. Scheduled annual debt service on the facility fluctuates generally between $12-15 million through FY2032, and then grows to $22-23 million through FY2038 after debt related to the hockey arena is retired. Camelback Ranch has a non-binding contribution with principal of $60 million pledged by The Arizona Sports and Tourism Authority (A1 negative) (AzSTA) to the city for a portion of the costs of the facility. AzSTA is a state agency that promotes tourism and sports facility projects and is supported by hotel and car rental taxes. Potential payments were delayed from their original schedule and are now projected to begin in 2021 but availability of funds is uncertain given pending litigation that jeopardizes collection of AzSTA's car rental tax which is a significant share of its annual revenues. Lost contributions from AzSTA would be foregone revenues that would somewhat offset future annual debt service on the facility, and we do not include these potential contributions in calculating coverage for related subordinate lien excise debt. ECONOMY AND TAX BASE RECOVERING FROM PRIOR DOWNTURN The city is located adjacent to Phoenix (Aa1 stable) and benefits from participation in the greater metro area, which is a regional economic center. Luke Air Force Base remains the city's largest employer, and which features the military's F-35 fighter pilot training mission. Other diverse employment opportunities in the area include the healthcare, government, and retail centers. The city's unemployment rate was 6.3 % as of July 2014 and was modestly below the nation and well below the state. Officials noted that the current stock of commercial property is nearly full and implies there is a local economic recovery under way. Wealth measures for the city are somewhat modest at 91.4% of U.S. levels ($59,025) according to the 2012 American Community Survey. The city is also a sports tourism destination given the presence of the University of Phoenix Stadium (home to the National Football League's Arizona Cardinals, host for the Super Bowl again in 2015, and host annually for college football bowl games), Camelback Ranch (spring training facilities for two Major League Baseball's Chicago White Sox and Los Angeles Dodgers), and Gila River Arena (home to the NHL's Arizona Coyotes). Supporting sporting facilities has long been a component of the city's plans to encourage economic development, and consequently bolster excise tax revenues. We note that University of Phoenix Stadium was financed by AzSTA. The city's tax base remains substantially larger than many similarly rated peers with a full value of $12.5 billion as of The tax base expanded aggressively prior to the recent housing downturn, and then declined by a substantial 42.8% from peak levels reached in 2009 before returning to growth by 3.7% in Of note, tax base values are lagged by two years relative to market activity. For 2015, an estimation of secondary assessed valuation indicates strong annual growth of 22.2% that reflects more recent recovery in property values and full value is expected to improve significantly as well. HIGH DEBT BURDEN BUT SATISFACTORY COVERAGE FOR SPECIAL TAX BONDS Glendale's outstanding net direct debt burden of 5% of 2014 full value is significantly outsized for peers both in Arizona and nationally. The largest share of the city's debt is attributed to revenue bonds that leverage the city's unrestricted excise tax revenues otherwise used for general fund operations, and over 40% of the city's outstanding net direct debt is attributed to financings that developed the Gila River Arena and Camelback Ranch sports facilities. Management currently has no plans to issue new money debt secured by the city's GOULT or general excise taxes. The city may issue up to $20 million of transit excise tax debt within the next few years. The city's general excise tax debt continues to demonstrate significant coverage of peak debt service by pledged revenues, despite recent volatility in cyclical local and state-shared sales and income taxes during the economic downturns. Pledged revenues realized a sizable 22.9% aggregate declined from FY in the depths of the recession. In FY2013, pledged revenues rebounded by a 34.2% driven by the increase in the city's sales tax rate and bolstered peak debt service coverage to 5.5 times for the first lien and 3.4 times for the combined liens. Unaudited results for FY2014 indicate that peak debt service coverage again improved to 5.9 times for the senior lien and 3.6 times for the combined liens, and is attributed to continued economic improvement as well as being the first full fiscal year with the sales tax hike in place. For FY2015, budgeted collections would again bolster peak debt service coverage to 6.3 times for the senior lien and 3.9 times for the combined liens. The city's transit excise tax debt remains satisfactorily secured by pledged revenues from the citywide 0.5% sales tax levy dedicated to transportation purposes. Pledged revenues weakened amid the recent recession by a sizable peak-to-trough decline of 22.2% across FY Pledged receipts improved since in the single-digit range with coverage improving to 3.0 times peak debt service in FY2013. Improvement in retail sales is supporting coverage that remains 3.0 times for FY2014 according to unaudited results but is budgeted to improve to 3.2 times

5 in FY2015. Contemplated plans to issue additional debt over the medium term could weaken future coverage levels. The city's street and highway user excise debt remains satisfactorily secured by pledged revenues from the city's allocation of state-shared motor vehicle revenues. Pledged revenues realized sizable volatility in recent years driven in part by state-level diversions of revenues for state budgeting purposes, which resulted in reduced distributions to underlying municipalities. Cities share 27.5% of the state's gross highway user revenues before various appropriations at the state level based upon a city's population, county origin of sale, and population relative to its county. For FY2012 in particular, the city's distribution from the state was reduced by 18% from the prior year because of larger diversions to the state's Department of Public of Safety and the Motor Vehicles Division. In FY2013, pledged receipts improved by 9.4% and coverage translated to a satisfactory 2.6 times peak debt service with a rebound in state shared revenues. Modest growth in pledged receipts improved peak debt service coverage to 2.7 times unaudited receipts for FY2014 and is budgeted to again improve to 2.8 times for FY2015. Looking forward, potential for reductions of state-shared distributions remains an inherent credit weakness although the state's budget condition improved following the recession. Glendale's pension burden is manageable and it participates in three of the State of Arizona's multi-employer costsharing and defined benefit plans. The three-year averages for the city's Moody's adjusted net pension liability (ANPL) averaged 2.1 times operating revenues and 3.5% of full value for FY , net of self-supporting contributions from the water and sewer utility. The city pays 100% of actually required contributions each year. Pension contributions are split equally between the city and its employees. WATER AND SEWER ENTERPRISE PERFORMANCE REMAINS SATISFACTORY The enterprise's performance has been supported by prior rate increases that bolstered operating performance. Management implemented sizable rate increases of 11% to 15% annually beginning in fiscal 2006 for both the water and sewer systems, and additional increases are anticipated starting FY2016 following an ongoing rate study. The enterprise benefits from the city's unilateral authority to set rates and charges locally. The enterprise's unrestricted reserves equated to 662 days of operating expenses ($71.2 million) as of FY2013, though liquidity could decline in the near term with conservatively budgeted pay-go capital investments. Liquidity remains strong despite the city funding most of the payment to the NHL for the 2012 hockey season with available cash from the enterprise with scheduled repayment over 25 years. Management currently targets combined annual debt service coverage between 1.5 times and 2.0 times, which is well above the 1.2 times rate covenant and additional bonds test. As of FY2013, coverage of combined peak debt service was adequate at 1.7 times net revenues and remains satisfactory but modest compared to many peers nationally. Glendale's water supply remains ample despite ongoing drought conditions in the western U.S. Daily water production capacity totals approximately million gallons daily (MGD) compared to maximum daily deliveries that averaged 61.9% of this capacity for FY The majority of the city's water supply is attributable to the Salt River Project Agricultural Improvement and Power District (Aa1 stable), a regional provider to the Phoenix metropolitan area that is sourced from mountain runoff. Another major source is the Central Arizona Project, which administers the state's share of federally-regulated Colorado River water distributions. The city also owns various groundwater wells with available supply. NO LEGAL ACTION HAS OCCURRED FROM RECENT INVESTIGATIONS Glendale has been subject to two investigations since 2013 referred to the state Attorney General's office and, importantly, the various senior staff reportedly involved in these issues are no longer employed by the city. First, a member of the city council requested a probe for the propriety of the $45 million of interfund borrowings used for past payments owed to the NHL from FY Second, the city council commissioned an external audit with a focus on transfers made from internal service funds to pay for an early retirement program dating back to 2009, along with some other financial actions. The audit indicated that the city made approximately $6.1 million of reportedly inappropriate transfers from the city's employee benefits, risk management, and workers' compensation funds. Officials reported that no actions have been taken by the state's investigations in the past year and no significant, pending legal actions are known currently. WHAT COULD CHANGE THE RATING UP - Continued trend of improved financial performance with sustainable and positive operating reserves

6 - Reduction in net cost for operations and debt service related to professional sports facilities - Trend of substantial tax base growth WHAT COULD CHANGE THE RATING DOWN - Deterioration of the city's financial position, including narrowed liquidity - Increased debt burden, including additional leveraging of general excise taxes - Growth in net costs for operations and debt related to professional sports facilities KEY STATISTICS GOULT RATING Full value of tax base, 2014: $12.5 billion Full value per capita: $54,529 Median family income, 2012 American Community Survey: 91.4% of U.S. ($59,025) Available operating reserves, FY2013: -1% of revenues 5-year change in available operating reserves, FY : -27.5% Available net cash, FY2013: 18.7% of operating revenues 5-year change in available net cash, FY : 0.3% Institutional framework: Aa 5-year average of operating revenues to expenditures, FY : 0.9 times Net direct debt to full value: 5% Net direct debt to operating revenues: 2.9 times 3-year average of Moody's ANPL to full value, FY : 3.5% 3-year average of Moody's ANPL to operating revenues, FY : 2.1 times GENERAL EXCISE TAX RATINGS Peak debt service coverage, FY2013: 5.5 times for senior lien, 3.4 times for combined liens Additional bonds tests: 3.0 times peak debt service for senior lien, or 2.0 times for subordinate lien Debt service reserve fund requirements: springing if peak debt service coverage below 3.0 times for senior lien, below 2.0 times for subordinate lien TRANSIT EXCISE TAX RATING Peak debt service coverage: 3.0 times Additional bonds test: 2.0 times peak debt service Debt service reserve fund requirement: springing if peak debt service coverage below 1.75 times STREET AND HIGHWAY USER REVENUE RATING Peak debt service coverage: 2.6 times Additional bonds test: 2.0 times peak debt service Debt service reserve fund requirement: none

7 WATER AND SEWER ENTERPRISE RATINGS Unrestricted reserves, FY2013: 662 days of operating expenses Operating ratio, FY2013: 48.2% Debt ratio, FY2013: 47.4% Peak combined debt service coverage, FY2013: 1.7 times Rate covenant: 1.2 times debt service for both liens Additional bonds tests, both liens: 1.2 times peak debt service in the next fiscal year, or 1.1 times peak debt service in the preceding fiscal year with 1.25 times peak debt service coverage for the succeeding fiscal year Debt service reserve fund requirements: springing if annual debt service coverage below 1.75 times for senior lien, and standard three-tiered test for subordinate bonds RATING METHODOLOGIES The principal methodology used in rating the general obligation debt was US Local Government General Obligation Debt published in January The principal methodology used in rating the special tax debt was US Public Finance Special Tax Methodology published in January The principal methodology used in rating the water and sewer revenue debt was Analytical Framework For Water And Sewer System Ratings published in August Please see the Credit Policy page on for copies of these methodologies. REGULATORY DISCLOSURES For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review. Please see for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating. Please see the ratings tab on the issuer/entity page on for additional regulatory disclosures for each credit rating. Analysts Patrick Liberatore Lead Analyst Public Finance Group Moody's Investors Service Andrea Unsworth Additional Contact Public Finance Group Moody's Investors Service Contacts Journalists: (212)

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