--Implied general obligation bonds (GOs) to 'BBB+' from 'BBB' for the city of
The Rating Outlook is revised to Stable from Negative.
The city has covenanted to budget and appropriate lease rental payments, subject to abatement, to the authority for use of its public works yard from any available funds of the city. The bonds are additionally secured by a cash-funded debt service reserve fund sized to the
KEY RATING DRIVERS
IMPROVED FINANCIAL, MANAGERIAL PERFORMANCE: The upgrade reflects material improvements to the city's financial position and management practices. These include passage of a five year sales tax override extension, a fifth year of structurally balanced general fund operations and the third year with an unqualified audit. The city's early efforts to develop a comprehensive plan to maintain structural fiscal balance over the long-term is also a credit positive.
FISCAL, MANAGERIAL CHALLENGES REMAIN: The city faces rising pension costs and a large deferred wage increase beginning in 2016 that will require expenditure restraint by policymakers, despite the city's improved financial position. Also, the financial management team has faced substantial turnover in recent years, which Fitch views with concern.
TWO-NOTCH DISTINCTION: The two-notch distinction between the implied GOs and the revenue bonds reflects statements made by management in 2012 that called into question the city's willingness to pay revenue bond debt service from any available source, as legally required. Although management has since confirmed its legal commitment, Fitch is likely to maintain a two-notch distinction until sufficient time has passed under a stable management team.
SATISFACTORY DEBT PROFILE: Debt levels and principal amortization are moderate, the city's capital improvement plan is relatively small, and there are no plans for additional long-term debt. Plans to fund a recently created OPEB trust are viewed favorably. Although carrying costs are moderate, they are expected to rise with escalating pension costs.
WEAK, IMPROVING LOCAL ECONOMY: The local economy is weighed down by very low income levels and high yet improving unemployment. These weaknesses are somewhat mitigated by the city's location within the extremely large and well diversified
MANAGERIAL STABILITY, SUSTAINABILITY PLAN: Evidence of improved managerial continuity and successful implementation of a prudently crafted fiscal sustainability plan, now under way, could lead to positive rating action.
FINANCIAL DETERIORATION: Unexpected and substantial deterioration of the city's general fund operations or financial management practices could lead to negative rating action.
The city serves a population of about 116,000 and covers 10 square miles approximately 12 miles east of downtown
IMPROVED FINANCIAL OPERATIONS, BUT WEAKNESSES REMAIN
The upgrade in part reflects the city's improved financial operations, with fiscal 2013 marking the city's fifth consecutive general fund audited surplus, raising the city's unrestricted fund balance to a solid
The city's financial profile was boosted significantly by passage of Measure GG, a five year extension of a sales tax override, approved by a high 71% of voters in
The city faces
ENHANCED FINANCIAL MANAGEMENT PRACTICES DESPITE HIGH TURNOVER
Over the past year the city took a number of prudent steps towards improving its financial policies and long-term fiscal position. Policymakers approved an irrevocable OPEB trust in fiscal 2015, with expectations that pre-funding will begin in fiscal 2016 upon anticipated implementation of a fiscal sustainability plan (see below for more information on the plan). In addition to the successful extension of the city's sales tax override, policymakers prudently approved a reserve to be funded with 20% of Measure GG sales tax revenues. Although the reserve may be used for any board-approved purpose, the city intends to hold the reserve until the potential non-renewal of the tax in five years.
The goal of the plan is to ensure long-term structural balance while achieving service delivery targets. Fitch views the city's use of a third-party consultant as a credit positive given recent years' concerns over high managerial turnover and certain financial reporting timeliness and quality issues.
WEAK ECONOMY SHOWING SIGNS OF RECOVERY
The local economy is weak overall despite continued recovery from the recession. Household income levels are low at 68% and 79% of state and national levels, respectively, and poverty levels are high. The city's April unemployment rate registered a high 9.5%, though it has improved from 11.7% the year prior. Educational attainment levels are very low.
The city's tax base is well diversified, with the top 10 taxpayers making up just 6.8% of AV. The tax base also benefits from the maturity of the local housing stock, with AV declining a total of just 2.1% during the recession. Fiscal 2015 AV increased by a moderate 3.8% to a record high
Management cited large scale commercial real estate projects in various stages of construction and planning that could ultimately add roughly
ADEQUATE DEBT PROFILE
Overall net debt levels are low to moderate at
The city has a pension property tax override that provided for full funding of employee pensions in prior years. However, pension costs have risen to
The revenue bonds are secured by any available funding source, and the city uses former redevelopment agency (RDA) tax increment and revenues from its water and sewer systems to pay debt service, thus posing no direct burden to the general fund as long as these sources remain adequate, as management anticipates.
Net tax increment revenues amply cover tax allocation bond and revenue bond debt service. The water fund's financial health is somewhat weak, but has improved over the last two audited years with rising liquidity and debt service coverage that has increased to 1.23x in fiscal 2013 from 0.99x in fiscal 2010 (exclusive of rate stabilization fund balances). The sewer fund has no debt and good liquidity, suggesting a solid capacity for continued payment of its portion of the revenue bond debt service.
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' (
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
Source: Fitch Ratings
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