Fitch Ratings assigns an 'AA-' rating to the $20,660,000 city of Riverside, California's certificates of participation (COPs), series 2010 (recovery zone facility hotel project).
The bonds are expected to sell via negotiation March 10, 2010.
In addition, Fitch affirms the following ratings on city of Riverside (the city) obligations:
--$17.3 million in outstanding general obligation bonds at 'AA';
--$26.9 million in outstanding taxable pension obligation bonds (POBs), series 2005A at 'AA-';
--$47.9 million in outstanding COPs series 2003 at 'AA-';
--$19.9 million in outstanding COPs series 2006 at A+'.
The Rating Outlook on all obligations remains Negative.
RATING RATIONALE:
--The 'AA-' rating reflects the city's still favorable but reduced financial flexibility and better than average revenue stability provided by charter-approved transfers from utilities. The Negative Rating Outlook (assigned in April 2009) continues to reflect the severity and duration of the economic downturn in the city as well as its potential impact on the city's financial operations if negative revenue trends do not stabilize.
--The city's charter-permitted practice of transferring sizeable amounts from its two utilities for general operations provides substantial revenue enhancement, more than other cities facing a similar economic situation. However, if this begins to strain the enterprises' financial operations, there may be pressure to reduce transfers.
--The city's employment base has declined, the jobless rate has spiked and foreclosures are well above the national average. In spite of its location in western Riverside County, very close to Orange County and Los Angeles job markets, as well as its role as the county seat and home of four universities, the city's economy has been impacted as negatively as has the countywide economy.
--Starting in 2007, the city and regional economy began to slow, with employment growth slowing before reversing in 2008. Sales tax is projected to be down four consecutive years through fiscal 2010 and property tax revenues are expected to be down about 13% in fiscal 2010 commensurate with the decline in assessed valuation (AV).
--The city began to reduce spending at the first indication of the slowing economic trend and as a result has been able to maintain sound reserve levels. Nonetheless, available fund balance is down over 25% since its peak in fiscal 2005 and with the high foreclosure and unemployment rates pressuring property and sales tax revenues, is likely to be suppressed for the medium term.
--The city's direct debt level is low, but is above average when overlapping debt (including redevelopment debt) is included. Debt amortization is below average.
WHAT COULD TRIGGER A DOWNGRADE?
--Further negative trends in employment, home prices and foreclosure rates could lead to further deterioration in financial position, especially if the city is unable to fully offset revenue declines with spending cuts.
SECURITY:
The COPs are secured by lease payments made by the city for use and occupancy of two libraries and two fire stations with a total estimated value of $21.6 million. The lease payments are subject to annual appropriation and partial and full abatement.
CREDIT SUMMARY:
The city experienced good growth for several years before employment declined 2% in 2008 and another 4.6% from November 2008 to November 2009, bringing the jobless rate up to 15.2% in November 2009, well above the state and national levels of 12.3% and 9.5%, respectively. On a regional basis, the largest job losses were in construction and retail trade, with other large losses in government and manufacturing. The city's unemployment rate is essentially the same as the county rate, reflecting limited stability provided by the presence of sizeable government and education sectors, 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.
After at least five years of surpluses to fiscal 2005, the city has drawn on its fund balance the last four years, although only moderately in fiscal 2009. Some use was a result of planned capital spending, but revenues and expenditures have also become increasingly misaligned. The city ended fiscal 2009 with $77 million in total fund balance, or 30% of spending. Fiscal year-end 2009 unreserved fund balance totaled $36 million, or 14% of spending. For fiscal 2010, the city budgeted an 8% decline in revenues, but to date revenues are another 3.5% lower ($7 million) and the city plans to offset this with cuts to retain the same level of fund balance. 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. To date the city has not used furloughs or layoffs to balance budgets and believes it has some flexibility to do so in the future.
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 another 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 strong 12% and 9.5% gains for fiscal 2008 and 2009, respectively. However, AV declined 13% in fiscal 2010 reflecting home prices declines in the metro area of over 50% and little new development. With the 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. Sales taxes and property taxes combined make up about 45% of the city's general fund revenue. Utility transfers comprise roughly another 15% of general fund revenues.
The city's direct debt burden is low at about $1,200 per capita and 1.8% of market value. Including overlapping entities, such as the city's redevelopment agency, the debt burden is moderately high at about $4,100 per capita and 6.1% of market value. Amortization is slow at 34% in 10 years.
Applicable criteria available on Fitch's website at www.fitchratings.com include:
--'Tax-Supported Rating Criteria' (Dec. 21, 2009);
--'U.S. Local Government Tax-Supported Rating Criteria' (Dec. 21, 2009).
Additional information is available at www.fitchratings.com.
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