Fitch Ratings assigns an 'AA' rating to $37 million Santa Margarita/Dana Point Authority (Orange County, California) revenue bonds, series 2009B (Santa Margarita Water District Improvement Districts Nos. 2, 2A, 3 and 4 general obligation [GO] refunding bonds). Fitch also affirms the 'AA' rating on the authority's revenue bonds, series 2004A (Improvement Districts Nos. 3, 3A, 4 and 4A GO bonds) and series 2009A (Improvement Districts Nos. 2, 3 and 4 GO bonds). The Rating Outlook is Stable.
The bonds are expected to sell via negotiation during the week of Nov. 9, 2009. The bonds are payable from ad valorem property taxes on taxable land within improvement districts nos. 2, 2A, 3 and 4, with no limit on the tax rate. Each improvement district's obligation is several and not joint, and the property tax levy for debt service is allocated among these four of the authority's 14 improvement districts based on the benefit each receives from the bond-financed facilities. In addition, each of the four districts' share of the county-wide 1% property tax levy, proceeds from property foreclosures, and investment earnings are pledged as security, although Fitch's rating relies on the strength of the unlimited ad valorem property tax pledges since these other sources have been used historically for operations. The current offering refunds the district's 1997A bonds to achieve debt service savings.
The 'AA' rating reflects the district's provision of essential water and sewer services to largely built-out, affluent, residential communities. The district's water and sewer operations are financially healthy, with strong general fund balances and substantial liquidity. These factors are offset somewhat by the district's recent decline in assessed value (AV), which is expected to continue into fiscal 2011 as economic and real estate market weakness affects this newly and fully developed area. While direct debt levels are low to moderate, overall net debt levels for improvement districts nos. 3 and 4 are high, reflecting considerable use of debt financing to provide basic municipal infrastructure in a relatively new, rapidly expanded region. As a result though, the district's future capital needs are limited since the system's infrastructure is relatively new.
The district is located in the southeastern corner of Orange County and is the county's second largest water district with a 97-square mile service area. The district provides water transmission and treatment and wastewater services to an estimated 155,000 residents. The 14 improvement districts within the district's boundaries support specific water and sewer infrastructure and financing needs.
The local economy is characterized by residential communities of varying levels of affluence, now largely built-out after a period of rapid growth. Recently, assessed valuation has been declining and is expected to drop a further 6% in fiscal 2011. Despite the pressures on residential property, the district's socio-economic status remains above-average with unemployment rates below county and state levels.
The district's water and sewer systems and their financial operations are strong, reflecting low customer concentration, limited capital needs as the system's infrastructure is relatively new, and solid financial performance boosted by recently increased rates. Fiscal 2009 ended with healthy liquidity and an unreserved, undesignated general fund balance of $45.3 million or 56% of spending. Since fiscal 2004, net general fund income before capital contributions has increased fourfold to $8.6 million. Operations are supported mostly from user fees, with some additional support from a share of the countywide 1% property tax levy.
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