Fitch Ratings assigns a short-term rating of 'F1+' to $30.4 million City of Riverside, CA's (the city) taxable pension obligation refunding bond anticipation notes (BANs), 2009 series A. The BANs mature on June 1, 2010 and are payable from any legally available funds. The notes will be sold via negotiation on April 29, 2009.
In addition, Fitch affirms the following ratings:
--$32.2 million in outstanding taxable pension obligation BANs, 2009 series A at 'F1+';
--$17.9 million in outstanding general obligations (GOs) at 'AA';
--$27.9 million in outstanding taxable pension obligation bonds (POBs), series 2005A at 'AA-';
--$49 million in outstanding certificates of participation (COPs) series 2003 at 'AA-';
--$19.9 million in outstanding COPs series 2006 at 'A+'.
The Rating Outlook on the GOs, POBs and COPs is revised to Negative from Stable.
The Negative Outlook primarily reflects the severe economic downturn which is affecting the city and the region to a greater degree than at state and national levels. The city's job losses and unemployment rate are very high, and home foreclosures are increasing, all of which will challenge the city's ability to maintain its current level of financial flexibility. A rating downgrade would be triggered if the city is unable to balance its budget and maintain its good reserve levels, or if the economic downturn worsens significantly beyond current expectations.
Positively, the city has proposed a balanced budget with reasonable revenue assumptions, and derives some stability from its role as the county seat, regional economic center and home to four universities. In addition, the city is permitted under its charter to make transfers to its general fund from its utilities, an amount which totaled about 18% of general fund revenues in fiscal 2009, up from 13% in fiscal 2006. This provides some cushion against revenue declines in property and sales taxes. In addition to increasing its utility transfers, the city responded quickly in fiscal 2007 to indications of a slowing economy with budget cuts and a hiring freeze.
The 'F1+' rating on the BANs reflects the strong security provided by all legally available funds, which includes unrestricted balances in the city's utilities. The city points to over $225 million in unreserved funds as of March 31, 2009. Furthermore, the city has covenanted to refund the BANs prior to their maturity on June 1, 2010. The current offering will refund all of the city's $30 million taxable pension obligation BANs, 2008 series A, which were issued to refund auction-rate securities.
The 'AA' GO rating reflect the city's currently healthy financial position and diverse economy and tax base, as well as the moderate to high overall debt burden, below average wealth levels, very high unemployment rate and declining sales and property tax trends. Starting in 2007, many of the positive economic and revenue trends the city had experienced for several years stalled or reversed. Since peaking in fiscal 2006, sales tax revenues are down about 26% through fiscal 2009 and assessed valuation (AV) citywide is projected to decline 8% for fiscal 2010. To date, management's response to declining sales tax receipts has ensured the maintenance of strong reserves.
After experiencing rapid job growth, the city employment level declined 2% in 2008 and another 4.6% from February 2008 to February 2009, bringing unemployment up to 12.7% in February 2009, well above the state and national levels of 10.9% and 8.9%, respectively. Many of these job losses were in construction and residential real estate financing and sales. Some employment stability may be provided by the sizeable government presence, including county operations and four colleges and universities. The city's moderately below average income levels are somewhat offset by the affordable cost of living and the large student population, estimated at about 52,000, or 17% of the city's total population.
Several years of very strong revenue growth began to reverse in fiscal 2007. For the five-year period through fiscal 2006, sales tax revenues increased by a high compound annual average of a 10.6%, but declined by 3.2% in fiscal 2007, 9.2% in fiscal 2008 and are projected to decline 17% in fiscal 2009. Assessed values had maintained a positive trend through fiscal 2009 due to both rising property values and new commercial and residential development, with assessed values posting a strong 12% and 9.5% gains for fiscal 2008 and 2009, respectively. However, home prices in the MSA have fallen 49% from the second quarter of 2006 to the fourth quarter of 2008, and with very high foreclosure rates (estimated at 18.5%) and very high negative amortization loan levels (15%), the city is likely to see continued home price pressure. The city reports 4,500 foreclosures to date (4.4% of housing units) and in response has set up a fund of $30 million to acquire foreclosed properties, improve them if necessary and to return them to the market.
The city's financial position benefits from diverse revenues, and modest ability to increase revenues through utility transfers and conservative management practices. For fiscal 2008 when revenues declined more precipitously than budgeted, the city used some one time sources as well as a portion of its reserved fund balance. However, the city ended fiscal 2008 with $45 million in unreserved fund balance, or a good 16% of expenditures and transfers out. Projections for fiscal 2009 show a $42.6 million unreserved fund balance and the fiscal 2010 budget also maintains that level. Budget assumptions for fiscal 2010 are for flat sales tax revenues and a property tax revenue decline of about 3%, reflecting the large amount of growth in the city's redevelopment areas which are expected to see larger value declines than the citywide AV. The city's policy is to maintain an unreserved fund balance of at least 15% of spending. Budget adjustments to date have not been severe, and included freezing non-public safety hiring, rolling back previous departmental expenditure increases, and revaluing indirect cost allocations. Labor contracts are in place through fiscal 2010 and management has agreed not to take 2% salary increases.
Due in part to the issuance of the series 2005B bonds, the city's funded position for its non-public safety employees was adequate as of June 30, 2007.
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