News Column

Fitch Affirms Santa Cruz, CA's Lease Debt at 'AA'; Outlook Stable

August 5, 2014

SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the following Santa Cruz Public Financing Authority, California (the authority) bond ratings:

--$6.1 million 2007 lease revenue bonds at 'AA';

--Implied general obligation (GO) bond rating at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by lease payments from the city to the authority for use of a police station, subject to abatement. The lease includes covenants to budget and appropriate, maintain casualty insurance, two years of rental interruption insurance, and a debt service reserve. The reserve is cash-funded at $468,750, based on maximum annual debt service (MADS).

KEY RATING DRIVERS

SOUND FINANCIAL OPERATIONS: The 'AA+' implied GO rating reflects the city's strong financial profile, characterized by a large financial cushion, surplus operations in fiscal years 2010-2013, pension reforms, and reservation of funds to begin paying down the city's modest other post-employment benefits (OPEB) liability.

EMPHASIS ON EXPENDITURE CONTROL: Despite a small projected general fund drawdown in fiscal 2014, the city has demonstrated strong expenditure control, particularly with regard to its labor costs and service restorations. Fitch expects such expenditure control will allow the city to avoid conservatively projected structural imbalance going forward.

MATURE, DIVERSE ECONOMY AND TAX BASE: The city's mature economy includes significant education, governmental, tourism, service industry, and technology employers. The city's tax base is also well diversified and demonstrated considerable resilience during the recession.

SOUND DEBT PROFILE: The city's debt levels are moderate, its carrying costs are affordable, capital needs are manageable, and debt amortizes swiftly.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices and emphasis on expenditure control. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

The city of Santa Cruz is located on California's central coast, approximately 75 miles south of San Francisco and 30 miles from San Jose. The 12 square mile city is the county seat and has a population of approximately 61,000.

SOUND FINANCIAL OPERATIONS, STRONG EXPENDITURE CONTROL

The city ended fiscal 2013 with a high unrestricted general fund balance of $27.6 million or 38.3% of spending. This represented the fourth consecutive year of net operating surpluses after transfers. The city expects that this balance will decline somewhat (by no more than $2 million) at fiscal 2014 year-end due to planned police over-expenditures and self-insurance loss claims that are potentially recoverable. However, the city expects to maintain strong general fund liquidity and continues to have access to $110 million of internal borrowable funds in an emergency.

The city's conservatively budgeted multiyear projections indicate a small structural imbalance through fiscal 2018. Based on the city's strong history of expenditure control (particularly with regard to managing its labor costs and conservatively restoring services) and budgetary outperformance, Fitch expects that the city will be able to solve this structural imbalance easily on an annual basis, particularly given likely general fund revenue growth.

As an example of the city's fiscal conservatism, all current labor agreements were negotiated on the basis that remuneration increases are one-time and, at the end of the labor agreement terms, revert back to pre-July 2013 levels unless succeeding labor agreements negotiate new increases. The city took this approach because it was cautious about committing to a new structural base when the identified funding sources were one-time in nature ($2.1 million in excess resources and salary savings) rather than the result of sustained operating growth.

MATURE, DIVERSE ECONOMY AND TAX BASE

The University of California, Santa Cruz (student population of almost 17,000 and a staff of approximately 7,700) anchors an economy that also includes significant governmental, tourism, service industry, and technology employers. As a result of this mix, the local economy held up relatively well during the recession although the unemployment rate did peak at 10.6% in fiscal 2010. As of May 2014 it had come down to 5.8% from 7.1% a year prior, so is now better than the state (7.1%) and the nation (6.3%). Socioeconomic characteristics are largely positive.

Assessed value (AV) held up well during the recession, reflecting the community's maturity. AV fell by just 0.2% in fiscal 2010, rebounding each year thereafter apart from another tiny 0.2% decline in fiscal 2012. While there are limited new development opportunities within the built-out city besides in-fill and redevelopment activity, a new hotel is under construction and three others are in the active planning stage. The top 10 property taxpayers made up just 4.9% of fiscal 2013 AV and were primarily tourism- and hotel-related.

SOUND DEBT PROFILE

The city's overall debt burden is moderate at $3,212 per capita and 2.7% of AV and is expected to remain moderate given manageable capital spending plans which will only need to be partially bond-funded. Principal amortization is well above average with 77% of debt maturing within 10 years.

The city's fiscal 2013 carrying costs for annual debt service, annually required pension contributions, and pay-as-you-go OPEB contributions were an affordable 15.2% of total governmental spending in fiscal 2013. Fitch expects carrying costs to remain affordable in the future, despite rising pension contribution costs.

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 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=845094

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

Alan Gibson

Director

+1-415-732-7577

Fitch Ratings, Inc.

650 California Street, 4th Floor

San Francisco, CA 94108

or

Secondary Analyst

Scott Monroe

Director

+1-415-732-5618

or

Committee Chairperson

Arlene Bohner

Senior Director

+1-212-908-0554

or

Media Relations

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

elizabeth.fogerty@fitchratings.com


Source: Fitch Ratings


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