News Column

Fitch Rates San Joaquin County Transportation Auth, CA's $49MM Sales Tax Revs 'AA'; Outlook Stable

June 2, 2014

SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AA' rating to the following San Joaquin County Transportation Authority (SJCTA), CA sales tax revenue bonds:

--$48.8 million Measure K sales tax revenue bonds, 2014 Series A.

Bond proceeds will be used to finance various transportation improvements and pay the costs of the bonds. The bonds will be sold via negotiation the week of June 16th. The final maturity date on the 2014 series A bonds is March 1, 2032.

The Rating Outlook is Stable.

SECURITY

The sales tax revenue bonds are secured by revenue from the 1/2 cent retail transactions and use tax (sales tax) authorized by Measure K and levied throughout San Joaquin County (the county), net of the Board of Equalization administrative fee.

KEY RATING DRIVERS

STRONG DEBT SERVICE COVERAGE: Maximum annual debt service (MADS) coverage is projected to remain strong at 2.14 times (x) based on fiscal 2013 revenues and performs well under various stress tests.

LIMITED FUTURE LEVERAGING: Management's additional debt issuance plans are limited and constrained by a satisfactory 1.5x additional bonds test (ABT) and formal policies established through the Measure K expenditure plan that maintain capital funding at low levels.

MODERATELY CONCENTRATED TAX BASE: Sales tax revenues are moderately concentrated with the top 10 revenue generators accounting for 16.7% of total revenues. Revenues are expected to reach a new high in fiscal 2014 after declining by a sharp 25% during the housing-led recession.

RECOVERING, LIMITED ECONOMY: The county continues to recover from the recession with an improving but still-high unemployment rate, above average employment growth, and new businesses entering the area. However, the economy is largely driven by agriculture and socioeconomic characteristics remain weak with below average income and education levels.

LIMITED OPERATING RISK: SJCTA benefits from its limited exposure to operational risks, the essential nature of Measure K's approved projects, and strong voter support.

RATING SENSITIVITIES

UNEXPECTED ADDITIONAL LEVERAGING: Additional leveraging beyond current plans or beyond current leveraging policies may pressure the rating.

CREDIT PROFILE

The authority provides funding for public transit systems and oversees the construction and improvement of roads and highways along with other transit projects. The authority does not own or operate a transit system. Given the entity's narrow role, Fitch believes the authority has limited exposure to operating risks from related transit agencies or the authority itself.

STRONG DEBT SERVICE COVERAGE

The bonds benefit from strong projected debt service coverage levels. Coverage of MADS on the outstanding parity 2011 sales tax bonds and the 2014 Series A bonds is 2.14x, based on fiscal 2013 revenues. Coverage levels are projected to remain sound under various Fitch performed stress tests.

LEVERAGING CONSTRAINTS

The high coverage levels are protected to some degree by constraints on additional leveraging. Fitch views the 1.5x additional bonds test as satisfactory. However, the legal restriction is bolstered by management's commitment to maintain MADS coverage at 2.0x, which Fitch views as reasonable given the formal policies included in the measure K expenditure plan.

The Measure K expenditure plan dedicates sales tax revenues to various programs, with 35% set aside for capital funding projects. Management's revenue projections, which serve as the base for the expenditure plan's revenue allocation, assume a 4.4% annual growth rate through 2041. Fitch views this as mildly optimistic but within the county's historical average range of 2.4% and 4.6% over the past 10 and 20 years, respectively.

The board has the ability to modify the expenditure plan. Fitch does not anticipate any significant changes will be made to increase capital funding as increases in the absence of revenue growth would likely reduce the funding available to other programs supported with Measure K dollars with direct effects on board member constituencies.

Additional debt issuance plans consist of a potential $75 million refunding of an outstanding subordinate line of credit upon its expiration in fiscal 2016. Management has not yet determined whether that line will be refunded, extended, or paid off.

SALES TAX REVENUE PERFORMANCE

Sales tax revenues have recovered to near pre-recession levels after falling sharply from their previous high recorded in 2006 ($47.2 million). Revenues amounted to $46.2 million in fiscal 2013, approximately 2% below fiscal 2006 levels, but are expected to reach a new high in fiscal 2014 with revenues over the first three quarters of the fiscal year 4.4% higher than in fiscal 2013.

Sales tax revenue demonstrated economic sensitivity by declining by a sharp 25% during the housing-led recession as measured from the peak year (2006) to the bottom (2010). While the decline was dramatic, Fitch's concerns are somewhat offset by sound MADS coverage and management's very limited debt issuance plans.

Sales tax revenues are generated by a broad-based tax applied on all taxable transactions throughout the county. Sales tax generators are moderately concentrated with the top 10 businesses accounting for 16.7% of sales tax revenues in fiscal 2013.

LIMITED ECONOMY

San Joaquin County is located in California's Central Valley. The county included approximately 1,448 square miles and serves a population of 710,731 (2014).

The county's economy is driven by agriculture, transportation, and its location on the periphery of the Bay Area economy. Solid population growth in the county is expected to continue over the next decade or more due to organic job growth in services, leisure and hospitality, logistics and transportation, and other industries and the lower cost of housing that attracts Bay Area labor market participants.

Countywide employment is diverse in terms of industry with government, education and health services, and retail trade as the top three sectors. However, the county's reliance on agriculture (87% of land area is occupied by farms and ranches) and agribusiness are viewed by Fitch as economically limiting. Unemployment rates in the county are structurally high, which is common in agricultural areas. Despite recent improvements, the unemployment rate remained a high 12.1% in December 2013. Wealth levels are below average with per capita income at 82% of the national average.

THE AUTHORITY AND MEASURE K

The San Joaquin Council of Governments (SJCOG) was formed through a joint powers agreement between the county's seven cities and the county to act as the coordinating body for local transportation, environmental, and other projects. SJCTA was established in 1990 by SJCOG for the purpose of administering and implementing the original Measure K, which imposed a 1/2 cent sales tax on all taxable transactions within the county for the purposes of financing transportation improvements throughout the county.

Measure K was extended with 78% of the vote in 2006. The 30-year extension began in March 31, 2011 and runs through March 31, 2041.

The SJCOG's 12 member board also serves as the authority's board and is comprised of 12 members representing each of the county's seven cities and the five county supervisors.

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, 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=832614

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

Matthew Reilly, +1 415-732-7572

Director

Fitch Ratings, Inc.

650 California Street, 4th Floor

San Francisco, CA 94133

or

Secondary Analyst

Yueping Liu, +1 415-732-5629

Analyst

or

Committee Chairperson

Karen Ribble, +1 415-732-5611

Senior Director

or

Media Relations:

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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