The bonds are secured by loan repayments to the PFA from non-housing tax increment revenue net of applicable pass-through payments and county administrative expenses, and are additionally payable from housing increment on a subordinate basis to housing TABs, in each of the project areas. While revenue pledged to debt service combines repayments from all project areas, none of the project areas is responsible for the shortfall in another's payments per the TAB indenture. The bonds are additionally backed by an MBIA debt service reserve surety bond.
KEY RATING DRIVERS
IMPROVED AV CUSHION: The Positive Outlook reflects improvement of the Casa Blanca project area's assessed valuation (AV) cushion (the amount of AV decline that can be absorbed before coverage becomes sum sufficient) and the expectation that maintenance or further improvement of the cushion will lead to an upgrade. As a several but not joint obligation, the rating is based on Fitch's assessment of the weaker of the two project areas, which in Fitch's view is the Casa Blanca project area.
SURPLUS HOUSING REVENUES BOOST COVERAGE: Casa Blanca's improved AV cushion in part 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 materially improved the project area's debt service coverage and AV cushion.
HIGH TAX-BASE CONCENTRATION. Both tax bases are very concentrated among the top 10 payers; however, this risk is mitigated somewhat by a high incremental value (IV)/base-year value, reflective of the maturity of the project areas.
ECONOMIC RECOVERY UNDERWAY. The city's economy was affected severely by the housing downturn, but recent data points to strong employment growth and rebounding home prices.
COMPLIANCE WITH DISSOLUTION PROCEDURES: Dissolution-related (AB 1X 26) risks are being mitigated as management is continuing to adhere to indenture requirements, necessary revenue tracking is in place, timely and robust continuing disclosure reports are being provided, and debt service reserves are being used to mitigate dissolution-related cash flow issues.
SUSTAINED TAX BASE GAINS: Retention of recent AV gains, or further AV improvement, in the Casa Blanca project area likely would lead to an upgrade.
The city of
EMPLOYMENT RECOVERY CONTINUES; HOME PRICES UP SUBSTANTIALLY
The city is in its fifth year of employment recovery, with 2013 employment at last surpassing its prior peak in 2007. Regional employment sectors experiencing the most rapid growth include education and health care (6.6% annualized growth from 2009-2013), transportation and utilities (6.3%), and construction (5.3%). Despite the employment market's progress,
The city's housing market has realized substantial gains over the past year with
Despite these limitations, Fitch believes the project areas ultimately will benefit from some positive valuation tailwinds from the broader regional real estate recovery. Fitch's base case 5% AV growth assumption for fiscal 2015 matches the city's assumption and is based on a discount to the 6.5% growth estimate provided by the county. To the extent that the project areas realize growth in excess of these estimates, there could be positive credit implications assuming these gains appear likely to hold or expand.
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.
CASA BLANCA PROJECT AREA EXPERIENCING TAX-BASE GROWTH
The Casa Blanca project area is highly concentrated and small at 725 acres, but is centrally located and mature. Established in 1977, the project area benefits from a high IV/base-year ratio of 1681%. This is reflective of a low degree of additional revenue volatility for a moderate reduction of AV. The project area additionally benefits from a diverse mixture of taxpayers by land use. As of fiscal 2007 (the most recent land use information available), the project area's AV was 43% residential, 21% commercial, 13% industrial, and 11% unsecured. The top 10 taxpayers make up 33% of AV and a high 35% of IV.
Severe home price declines resulted in a significant three-year cumulative AV decline of 12% from fiscal years 2009-2012. However, AV began stabilizing in fiscal 2013 with a modest 1.3% gain that accelerated to a solid 4.3% gain in fiscal 2014. The fiscal consultant is projecting that pending appeals will result in a
Based on fiscal 2014 AV, Fitch estimates the project area's net revenues at
DOWNTOWN/AIRPORT PROJECT AREA EXPOSED TO HIGH APPEALS
The Downtown/Airport merged project area is highly concentrated, but mature and quite large at 2,415 acres. The project area's sub-areas were established in 1971 and 1976, with a correspondingly high IV/base-year ratio of 730%. Land use is concentrated in non-residential taxpayers, with residential AV making up just 16% of the total. The top 10 payers make up 34% of AV and a high 39% of IV. The project area experienced a fairly modest 4.2% AV decline from its fiscal 2010 peak to fiscal 2012 and AV increased by a modest 0.5% and 1.7% in fiscal years 2013 and 2014, respectively.
The project area is facing a large and growing backlog of pending AV appeals. The fiscal consultant is projecting a related AV loss of
Based on fiscal 2014 AV, Fitch estimates the project area's net revenues at
SATISFACTORY IMPLEMENTATION OF DISSOLUTION PROCEDURES
Management appears to be acting in conformity with its bond indentures, despite the administrative hurdles imposed by dissolution law (AB 1X 26). Management is continuing to track revenues on a project area-specific basis and is adhering to the senior/subordinate status of its various obligations. Dissolution law imposed a cash flow timing issue on the agency, which is being fully mitigated with the use of a debt service reserve fund, allowed under AB1484. Continuing disclosure remains timely and robust and the agency has received its finding of completion from the state's department of finance.
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, and Zillow.com.
--'Tax-Supported Rating Criteria' (
--'U.S. Local Government Tax-Supported Rating Criteria' (
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
Source: Fitch Ratings
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