Fitch Ratings has downgraded the following tax allocation bonds (TABs) for Vista Community Development Commission, CA (the CDC):
--$13.1 million TABs, series 1998 A&B, to 'BBB' from 'BBB+';
--$11.6 million TABs, series 2001, to 'BBB' from 'BBB+'.
The TABs also remain on Rating Watch Negative by Fitch.
The TABs are secured by gross tax increment revenue from the combined project area net of certain senior pass-throughs and the 20% housing set-aside for housing. The TABs are also secured by primarily cash-funded debt service reserve funds.
KEY RATING DRIVERS
REDUCED DEBT SERVICE COVERAGE: The downgrade reflects lower projected annual debt service coverage following the 2011 issuance of $15.5 million additional TAB debt coupled with modest project area valuation declines. Annual debt service coverage has fallen from a high 2.84x in 2010 to 1.71x in 2011 inclusive of BAN interest. Coverage is projected to fall further due to a combination of rising debt service and AV pressures.
IMPLICATIONS OF AB 1484: The governor signed this trailer bill to the state's fiscal 2013 budget on June 27, 2012. The bill includes what Fitch believes are improvements to the ROPS approval process and other procedures going forward. However, it required repayment by many SAs of property tax distributions from December 2011 and January 2012 that the state believes should have been directed to other taxing entities. The SA reports that it made the required payment. However, the bonds remain on Rating Watch Negative pending further information on how the required repayment affects the SA's ability to fully fund September 2012 debt service.
PROGRESS ON AB1X26 IMPLEMENTATION: The City of Vista (the city) has been recognized as the SA to the CDC. Recognized obligation payment schedules (ROPS), including calendar 2012 debt service, have been approved by the oversight board, county and state. The SA received sufficient payments, along with available cash reserves, to cover the debt service included in the ROPS prior to the required AB 1484 payment.
HOUSING REVENUE AVAILABILITY: The CDC has outstanding housing TABs which are not rated by Fitch. The aggregation of housing and non-housing tax increment revenues does not result in materially different coverage on the Fitch rated TABs.
REFUNDING UNCERTAINTY: Fitch is concerned regarding the successor agency's (SA) ability to refinance a $24.2 million 2010 non-housing TAB BAN. The BAN was structured with a balloon maturity in fiscal 2017. Under recently adopted Assembly Bill 1484 the SA may seek authorization to issue refunding debt however execution risks remain.
FLAT PROJECT AREA GROWTH: Over the past four years the original project area has experienced flat to modest declines in assessed valuation (AV). This follows an extended period of strong growth. A recently added area which is not yet generating tax increment revenue and overall new development in both remains sluggish.
PENDING TAX APPEALS: Current pending valuation appeals are high offset in part by low historical success rates but could pressure future coverage.
DIVERSE, WEAK LOCAL ECONOMY: The diverse yet somewhat weak local economy is characterized by above average unemployment and low income levels.
WHAT COULD TRIGGER A RATING ACTION
TAB ratings would be negatively impacted if disputes regarding AB1484 are resolved in a way that could disrupt funds available for debt service, if debt service coverage erodes further than expected or the SA is unable to refund or refinance outstanding subordinate BANs prior to maturity on March 1, 2017.
The commission was established in 1986 with the purpose of providing tax base, employment and economic improvement within the City of Vista's downtown and central business districts.
IMPACT OF AB 1484
On July 9, 2012 the SA received a demand letter from the county for payment of $7 million pursuant to AB 1484. The SA made payment on July 12, 2012 as requested but indicates that funds needed for debt service have been diminished. The SA is uncertain in its ability to meet upcoming debt service.
SLOWING AV GROWTH
Following significant growth over much of the last decade, AV and related incremental property tax revenue growth within the project area has slowed in recent years. . AV has increased from $187.6 million in base year AV to $2 billion AV and $18.4 million in gross tax increment revenue in 2011. Set-aside and pass-through payments average approximately 45-50% of total annual gross tax increment revenue.
Overall bond debt service coverage for the past five years has averaged a strong 2.50x and above original projections. However, a $15.5 million parity issuance in 2011 coupled with a planned refunding of $24.2 million in outstanding BANs is expected to reduce coverage significantly to an issuer projected low-point of 1.26x under a conservative zero AV growth scenario.
The City of Vista (implied GO rated 'AA' by Fitch) is located in northern San Diego County, 30 miles north of San Diego and about five miles east of Carlsbad and the Pacific Ocean, midway between San Diego and Orange County. The CDC's original redevelopment area was adopted in 1987 with an area of 2,106 acres. Another 1,707 acres were added in 2008. The resulting merged project area is large and mature and makes up a significant part of the city, encompassing 33% of the city's land area.
DIVERSE PROJECT AREA
The original project area's historical AV growth was extremely high. This was due to a large amount of new development and price increases spurred by the development of a modern industrial park and several commercial centers. The new project area adds a significant amount of residential acreage and seeks to improve infrastructure and amenities in some of the lower income sections of the city.
The original project area's predominately commercial and industrial composition experienced significant increases in AV over the past decade. However, there were modest AV declines in fiscal years 2010 and 2011. Additionally, the added area's predominately residential composition has declined by 6.14% and 4% in fiscal years 2010 and 2011 from its fiscal 2009 base. To date the county assessor has not used the negative increment from the added area to reduce the merged project area increment.
Improvement projects within the added area are on hold until AV growth resumes. The original project area is concentrated by secured AV type with 63% industrial, 22% commercial, and 15% residential and vacant. Taxpayer concentration is somewhat high, with the top 10 taxpayers making up 18% of secured AV (20% of incremental value). The tax base is mature, with an incremental AV to base year AV ratio of 960%. This reflects a relatively low degree of additional revenue volatility caused by AV fluctuations. Tax appeals outstanding are high at $364.6 million or 18% of AV and, if granted at historical levels, could decrease fiscal 2013 assessed value by $78.6 million or 4.6%.
The CDC issued a $24.2 million BAN in 2010 to fund projects in the original project area. While BAN debt service is subordinate to the outstanding tax allocation bonds, the BAN is structured with a balloon maturity in fiscal 2017 and is expected to be refunded into a TAB in 2016 which would be parity with the senior TABs. While Ab 1484 allows for refunding debt issuances by SAs, Fitch remains concerned with various risks.
The SA has been in discussions with various officials and anticipates obtaining approval for a refunding by 2016. The refunding also faces execution risks as investor interest is currently uncertain. Inability to achieve the refunding will cause a significant revenue deficiency in 2017 and could impact the SA's ability to pay debt service. The Negative outlook reflects this and other uncertainties.
Under various other Fitch designed stress scenarios, coverage of MADS remains weak yet adequate. Fitch estimates that AV would have to decline 18.5% to result in 1.0x coverage of MADS. The aggregation of housing and non-housing tax increment does not materially change debt service coverage.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
Bernhard Fischer, +1-212-908-9167
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