The Rating Outlook is Stable
Series 1999A bonds are secured by a senior pledge on incremental tax revenue generated in the sole
Series 1999B bonds are secured by a subordinate pledge on incremental tax revenues from the same project area. They are net of the housing set-aside, senior bond debt service, and pass-throughs to education entities, up to an amount equaling 125% of annual debt service.
KEY RATING DRIVERS
CLOSED LIEN ENHANCES SENIOR SECURITY: The upgrade of the senior TABs reflects Fitch's refined analysis of the TAB lien as being effectively closed, thus protecting against future parity leveraging.
SURPLUS HOUSING REVENUES BOOST SUBORDINATE COVERAGE: The upgrade of the subordinate TABs reflects Fitch's refined analysis of surplus housing revenues, which Fitch now considers to be available to pay non-housing TAB debt service. The availability of these revenues, coupled with recent assessed value (AV) gains, materially improve the bonds' debt service coverage.
SOLID TAX BASE: Project area AV has been exceptionally resilient and continued to grow throughout the recession with only one year of decline. The tax base strength is weighed down by moderately high taxpayer concentration and the project area's small size.
STRONG COVERAGE, AMPLE AV CUSHION: Maximum annual debt service (MADS) coverage from pledged revenues is a strong 6.9x for the senior TABs and a solid 3.2x for the subordinate TABs. Both are highly resilient to potential AV declines and other stresses.
ABOVE AVERAGE SOCIO-ECONOMIC CHARACTERISTICS: The city of
AV STABILIZATION: The rating is sensitive primarily to shifts in AV and concentration. However, given recent AV stabilization and historical concentration, such shifts are unlikely.
The city of
MATURE, WEALTHY COMMUNITY
The project area's steady AV growth during the recession is well supported by the city's high income levels and favorable employment numbers, being an integral part of the dynamic and booming
Median household income level for the city is very high, equivalent to 167% of the state average and 195% of the national average. Average house price is above
Population growth has been slow, and the maturity of the tax base is also reflected in the high incremental value (IV) (
SOLID TAX BASE, CONCENTRATION AND SIZE CONCERNS
The effect of nationwide housing-led recession has hardly been felt in the project area, which encompasses the city's economically active downtown area. Project area AV only experienced a minor decline (4.1%) in fiscal 2011 and has since continued to grow at a moderate and steady pace resulting in a cumulative gain of 11% as of fiscal 2015. Average house price enjoyed significant increases since late 2011. Recent growth has slowed, but AV is expected to remain steady.
The strength and resilience of the tax base is partly offset by concentration concerns. Top 10 taxpayers comprise a high 31% of the project area's IV as of fiscal 2013, led by office buildings and apartments. The project area is limited in size compared to other Fitch rated project areas, aggravating concentration exposure.
Current outstanding appeals can potentially lower AV by up to
ANALYTICAL REFINEMENT CONSIDERS POSITIVE EFFECTS OF DISSOLUTION
Fitch formerly excluded positive dissolution factors from consideration, reflecting a conservative approach to a dissolution environment marked by legislative, administrative, and judicial uncertainty. Two-and-a-half years and six recognized obligation payments schedule (ROPS) cycles have passed since dissolution, during which the factors have benefitted TAB credit quality with no successful legal challenges to date. Although uncertainties remain, Fitch views the continued presence of closed TAB liens and surplus housing revenue availability as more likely than not to remain a feature of California TABs.
SENIOR TABS UPGRADED DUE TO LIEN CLOSURE, STRONG COVERAGE
The senior TABs current MADS is a strong 6.9x after including 20% housing set-aside revenues. Coverage is also highly resilient to potential AV declines, with an AV cushion (defined by the percentage of one-time AV decline that the tax base is able to withstand while maintaining 1x MADS) of 71%. The effective closure of the senior TAB lien, in combination with the bonds' high debt service coverage for their former rating category, materially improve bondholder protection against future leveraging and are significant factors in the upgrade.
SUB COVERAGE ENHANCED BY HOUSING REVENUES & AV GAINS
The availability of surplus housing revenues for non-housing TAB debt service, together with tax base gains, caused a material enhancement of debt service coverage for the subordinate TABs. MADS coverage improved to 3.2x from 2.3x. The AV cushion also increased to 57% from 50%, based on fiscal 2015 AV. The improvement in AV cushion becomes more pronounced after factoring in recent AV gains. At fiscal 2011 level (the last time Fitch looked at coverage), the AV cushion was 44%. The AV cushion increase to 57% from 44% makes the credit more comparable to higher rated credits, contributing to the basis for the upgrade.
Tax increment revenues are sufficient to sustain other moderate to severe stresses. Both senior and subordinate MADS coverage stays well above 1x under various stress scenarios, such as the loss of top 10 taxpayers, 100% of outstanding appeals loss, and ongoing moderate annual AV declines.
AB 1X26 IMPLEMENTATION AND DEBT MANAGEMENT
The successor agency (SA) has recently and successfully completed the July to
The city and the SA are in litigation with the DOF regarding a
There is a small amount of housing TABs outstanding (not rated by Fitch) that are due to mature soon. The SA also plans to refund the 1999 series bonds in calendar year 2014.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope,
--'Tax-Supported Rating Criteria' (
--'U.S. Local Government Tax-Supported Rating Criteria' (
U.S. Local Government Tax-Supported Rating Criteria
Tax-Supported Rating Criteria
Source: Fitch Ratings
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