As part of ongoing surveillance, Fitch Ratings affirms Turlock Public Financing Authority's $3,900,000 outstanding series 1999 tax allocation revenue bonds at 'BBB+'. The Rating Outlook is Stable.
The 'BBB+' rating reflects the satisfactory project area characteristics including its solid mix of residential and commercial properties and historically strong debt service coverage from tax increment revenues. The rating also reflects a moderately concentrated tax base - both in leading taxpayer assessed value (AV) and in the mainly agriculture-related industries in which they operate. The Stable Outlook reflects Fitch's expectation for maintenance of solid debt service coverage even with the potential issuance of parity bonds within the next 12 months to build a new public safety facility. However, significantly reduced debt service coverage from a combination of new parity bonds and larger than expected declines in AV, could put downward pressure on the rating.
The project area spans 3,400 acres and totals $1.6 billion in taxable AV. Residential properties accounted for roughly 49% of the land use by AV, up from 38% in 1999, while vacant land has decreased to less than 4%. AV growth in the project area has been robust at more than 10% annually from fiscal 2002 to fiscal 2009, before decreasing by roughly 6% for fiscal 2010, an effect of the broader economic and housing downturn. Fitch believes declining home values will continue to stem AV growth levels going forward.
A combination of availability of affordable housing and a solid commercial base has fueled the decade-long growth in AV. Growth in pledged revenues has been similarly strong, resulting in maximum annual debt service (MADS) coverage by incremental tax revenues of at least 2.5 times (x) in each of the past five fiscal years. Coverage levels reached as high as 3.7x when factoring in the subordination of all pass-through payments. Fitch projects the possibility of lower debt service coverage going forward, factoring in the potential for both declines in AV and the issuance of additional parity debt. Given the requirement to fund pass-through payments, however, Fitch expects coverage to remain above the 1.25x level allowed by the additional bonds test, and above 1.0x under severe stress scenarios.
While taxpayer concentration has improved, with the top 10 taxpayer's AV making up 14% of total AV in fiscal 2009 compared with 21% in fiscal 1999, Fitch believes some tax increment volatility from declines in property values remains. Additionally, the project area's tax base is somewhat concentrated in the food processing industry, a natural result of the agricultural base of the region.
The City of Turlock (population 70,000) is located approximately 85 miles south of the city of Sacramento in the heart of California's Central Valley. While the local economy has long had ties to agriculture and related businesses, many residents working in nearby metropolitan areas have been lured to Turlock by affordable housing. Despite this transformation, the local rate of unemployment remains higher than state and national averages (at 12.5% in July 2009), and median household income indicators similarly track below state and national levels.
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Fitch Ratings, New York
Andrew DeStefano, 212-908-0284
Janet
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or
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Email: cindy.stoller@fitchratings.com
