News Column

Fitch Affirms Turlock PFA, CA's TABs at 'BBB+'; Outlook Stable

June 13, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the following tax allocation bonds (TABs) for the Turlock Public Financing Authority (PFA), California:

--$2.7 million outstanding TABs series 1999 at 'BBB+'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a senior lien on all tax increment revenues from the former Turlock Redevelopment Agency's (the RDA) sole project area net of any required housing set-asides and administrative charges.

KEY RATING DRIVERS

ADEQUATE AV CUSHION: The bonds are characterized by an adequate AV cushion, defined as the percentage of the one-time assessed value (AV) decline that the tax base can withstand while maintaining sum-sufficient coverage of maximum annual debt service.

NO IMPACT FROM ANALYTICAL REFINEMENT: Fitch recently refined its analysis of California TABs and is now considering their liens to be effectively closed and surplus housing revenues to be available to pay non-housing debt service. This action did not result in a material improvement of the TABs' credit risk profile, despite somewhat improved debt service coverage.

TAX BASE RECOVERY: The project area's tax base is improving after significantly contracting during the recession. The low incremental value to base value ratio had magnified pledged revenues' deterioration from assessed value declines.

MODERATE TAXPAYER CONCENTRATION: Top taxpayers are moderately concentrated both as a percentage of assessed value, and within the food production industry.

WEAK, NARROW ECONOMY: Agriculture and food production underlie the local economy's base. Socio-economic and labor metrics compare unfavorably to those of the nation.

SATISFACTORY AB 1X 26 IMPLEMENTATION: The rating assumes continued satisfactory implementation of AB 1X 26 (dissolution legislation) procedures and prioritization of debt service payments.

RATING SENSITIVITIES

AV CUSHION CHANGES: Significant shifts in AV resulting in meaningful shifts to the AV cushion could prompt a rating action.

CREDIT PROFILE

The city of Turlock (the city, population 70,365) is located 15 miles south of Modesto in California'sCentral Valley.

ANALYTICAL REFINEMENT CONSIDERS POSITIVE EFFECTS OF DISSOLUTION

On May 1 Fitch refined its California RDA analysis pertaining to the beneficial impact of dissolution legislation (AB 1X 26). Fitch now considers TAB liens to be closed and surplus housing revenues to be available for non-housing TAB debt service.

Although Fitch views these factors as positive credit characteristics increases to the AV cushion and debt service coverage for Turlock were sufficiently modest such that the overall credit profile remained consistent with the 'BBB+' rating.

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 benefited 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.

MODESTLY IMPROVED DEBT SERVICE COVERAGE AND AV CUSHION

Two additional series of TABs (series 2006 and 2011) are ranked pari passau with the Fitch rated 1999 series. There are no housing bonds. Fiscal 2013 coverage of all parity maximum annual debt service (MADS) improved to 1.9x with the inclusion of surplus housing revenues, compared to the 1.5x achieved with non-housing revenues. Fiscal 2014 coverage inclusive of housing revenues is projected at 2.0x MADS. The AV cushion for the TABs rose to an adequate 23.9% from the low 18% based solely on the inclusion of non-housing revenues.

Tax increment revenues are sufficient to sustain other moderate stresses. MADS coverage would remain above 1.0x should the project area experience a repeat of the AV declines seen during the past recession. Historical appeals are moderate and a sustained increase would not materially diminish coverage.

RECOVERY SEEN IN INHERENTLY VOLATILE TAX BASE

The project area's tax base rose 2.1% in fiscal 2014, after a note-worthy 19% cumulative decline in the five years following the onset of the recession. Management reports that growth city-wide is projected at 5% - 8% for fiscal 2015, and that AV trends within the project area mirror those of the city. Fitch believes that the projections may be somewhat liberal, but that overall AV changes will be positive.

The project area's increment value (IV) to base year ratio equals a very low 91%, indicating very high revenue volatility. This low ratio resulted in disproportionate peak-to-trough IV declines during the recession, at a high 34%.

LARGE, CONCENTRATED PROJECT AREA WITHIN LIMITED ECONOMIC BASE

The project area, formed in 1993 and amended in 1996, consists of a significant 4,318 acres. It represents 40% of the city and includes some unincorporated portions of Stanislaus County (the county). The project area encompasses the city's downtown area as well as a portion of the county's Enterprise Zone, which offers various state and local tax incentives. About half the tax base consists of industrial and commercial properties.

Taxpayer concentration is moderate at 15% of AV but higher as a percentage of IV, at 32.6%. Several of the largest taxpayers are members of the food production industry.

The city's economic base reflects its location within the Central Valley, one of the most productive agricultural areas in the nation. Agricultural products include fruits, nuts, livestock, and animal products.

The area continues to show weaknesses after being hard-hit during the recession. Unemployment remains stubbornly high at 10.3% in March 2014, well-above both the state and regional averages, at 8.4% and 6.8%, respectively. Over the past year, employment growth has been an anemic 0.5%, less than one-third of the nation-wide improvement. Wealth levels generally hover at 80% of the state and national averages.

SATISFACTORY AB1X26 IMPLEMENTATION

Fitch believes that the successor agency (SA) will continue to reconcile the timing difference in pledged revenue receipts (in January and June) and debt service payments (mostly in September). The state has indicated that the SA should incorporate prorated debt service in both of the semi-annual ROPS submissions, requesting property tax allocations as needed to compensate for semi-annual periods when such allocations would be insufficient to pay obligations due. Fitch believes that prorating allocations in this way will not pressure the SA's ability to pay debt service, given that the state will approve requested reserves in the period when property tax allocations would be insufficient.

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, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, and the National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=834609

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Barbara Ruth Rosenberg

Director

+1-212-908-0731

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Leslie Cook

Analyst

+1-212-908-0507

or

Committee Chairperson

Michael Rinaldi

Senior Director

+1-212-908-0833

or

Media Relations

Elizabeth Fogerty, New York, Tel: +1-212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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