Fitch Ratings has assigned an 'F1+' to the following Riverside, CA (the city) bond anticipation notes (BANs):
--$31 million taxable pension obligation refunding BANs, 2011 series A, at 'F1+'.
Proceeds will be used to refund the city's taxable pension obligation BANs, 2010 series A, which Fitch affirms at 'F1+'. The 2011 BANs are expected to sell on June 1, 2011.
In addition, Fitch downgrades the following outstanding city obligations:
--$16.6 million general obligation (GO) bonds to 'AA' from 'AA+';
--$105.5
million taxable pension obligation bonds (POBs), series 2005A to 'AA-'
from 'AA';
--$20.7 million certificates of participation (COPs),
series 2010 (recovery zone facility hotel project) to 'AA-' from 'AA';
--$53.2
million COPs series 2003 to 'AA-' from 'AA';
--$19.9 million lease
revenue bonds series 2006 to 'A+' from AA-'.
The Rating Outlook is revised to Stable from Negative.
RATING RATIONALE:
--The 'F1+' rating on the BANs reflects the
strong security provided by the city's covenant to refund the BANs prior
to their maturity on June 1, 2012 as well as anticipated market access
based on the city's long-term 'AA' GO rating.
--The downgrade of
the GO bonds to 'AA' from 'AA+' reflects the change in the economic
profile of the city, with persistently high unemployment and a weakened
and pressured tax base.
--The 'AA' GO rating reflects the city's
sound financial position, exhibited by solid and stable reserves,
expenditure flexibility, and diverse revenue.
--The revision of the
Outlook to Stable from Negative reflects Fitch's expectation that
management will be able to adhere to their policy of maintaining strong
reserves despite continuing economic vulnerability.
--The city and
regional economy remains weak despite some signs of improvement; the
jobless rate is very high and the tax base remains vulnerable to
additional contraction related to suppressed housing prices.
--The
city's charter-permitted practice of transferring sizeable amounts from
two strong utilities for general operations provides substantial revenue
enhancement.
--The city's debt profile is mixed; direct debt is
low, but includes an above average amount of variable rate and short
term obligations, exposing the city to liquidity and market risk. Debt
amortization is below average.
--The city's pension system is
adequately funded and its OPEB liability is due only to an implicit
subsidy, resulting in a manageable unfunded liability.
KEY RATING DRIVERS:
--Continued structural budget and maintenance
of unreserved fund balance.
--Economic stability.
SECURITY:
Repayment of the pension obligation BANs is an absolute
and unconditional obligation of the city imposed by law for which
long-term bonding has been approved. The GO bonds are secured by
unlimited ad valorem property taxes. The certificates of participation
are secured by lease payments made by the city for use and occupancy of
various essential city facilities. The lease revenue bonds are secured
by improvements made for a privately owned retail center.
CREDIT SUMMARY:
The city of Riverside, the Riverside County seat,
is located in the western portion of the county, about 60 miles east of
downtown Los Angeles. The city experienced good economic growth for
several years before employment declined in 2008-2010 for an aggregate
9% loss in jobs. In the MSA, the bulk of those jobs were in construction
and manufacturing. The most recent data shows the pace of job losses has
slowed to just 0.1% in the year ending February 2011. After rising
steeply, the jobless rate has begun to decline but remains high at 14.2%
in February 2011 compared to 15.1% a year prior. The high unemployment
rate reflects limited stability despite the city's sizeable government
and education sectors, including county operations and four colleges and
universities. 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.
The city's financial position remains sound despite three years of declining revenue. The city entered the recession with a good financial cushion and, after using some fund balance for planned capital spending as well as to help balance budgets, the city ended fiscal 2010 with a total fund balance of $79 million, a strong 34% of spending. The unreserved portion was also sound at $38.5 million, or 16.4% of spending. The unreserved fund balance is comprised of $30 million for economic uncertainties plus another $8 million undesignated and unreserved. The city budgeted for break-even operations in fiscal 2010 and made a modest addition to fund balance. The fiscal 2011 budget was balanced although due to better than budgeted revenue, the city plans to add about $1 million to fund balance even after augmenting spending in public works and parks and recreation. The fiscal 2012 budget is balanced, assuming about 4% growth in sales taxes which is consistent with the trend in recent months, no property tax revenue growth and slightly declining utility-related revenue.
The city's policy is to maintain an unreserved fund balance of at least 15% of the following year's spending. Budget adjustments to date have not been severe, and include 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 major layoffs to balance budgets and believes it has some flexibility to do so in the future.
After three years of declines sales taxes returned to growth in fiscal 2011 and are well below their peak. Assessed values grew 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 7% in fiscal 2010 reflecting home price declines in the metro area of over 50% and little new development. Sales taxes and property taxes combined make up about 45% of the city's general fund revenue. Utility transfers comprise roughly another 15%.
The current offering will refund all of the city's $30.6 million taxable pension obligation BANs, 2010 series A. The city's direct debt burden is low at about $1,345 per capita and 1.8% of market value, but 34% is synthetically fixed, exposing the city to the risks associated with variable rate debt and swaps. Fitch believes there is also an element of refinancing risk inherent in BANs. Future debt plans are modest. Including overlapping entities, such as the city's redevelopment agency, the debt burden is moderately high at about $4,283 per capita and 5.7% of market value. Amortization is slow at 34% in 10 years. With only an implicit subsidy provided to its retirees for health care benefits, the city's OPEB liability is very manageable.
Additional information is available at 'www.fitchratings.com'.
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, Zillow.com, National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating
Criteria', dated Aug. 16, 2010;
--'U.S. Local Government
Tax-Supported Rating Criteria', dated Oct. 8, 2010.
For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.
Applicable Criteria and Related Research:
Tax-Supported Rating
Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
U.S.
Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566
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Contacts:
Fitch Ratings
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Director
Fitch Inc.
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Director
or
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Chairperson:
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or
Media
Relations, New York:
Cindy Stoller, +1-212-908-0526
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