In the process of routine surveillance, Fitch Ratings has downgraded Oakley Public Financing Authority, California's certificates of participation (COPs) and has assigned an implied general obligation (GO) rating as follows:
--$7.9 million COPs Series 2006 downgraded to 'A+' from 'AA-';
--Implied GO rating assigned at 'AA-'.
The Rating Outlook is Stable.
RATING RATIONALE:
-- The downgrade of the COPs rating to 'A+' reflects substantial tax base weakening caused by the city's distressed housing market and secondary effects on property tax revenues and other economically sensitive revenue sources.
-- The 'A+' rating and the 'AA-' implied GO rating are indicative of the city's strong financial operations, including a solid general fund cushion, very good financial management practices, projected balanced operations for fiscal 2012, prudent expenditure reductions, and a good degree of remaining expenditure flexibility.
-- The local economy is performing adequately overall, but is pressured by the housing market.
-- The city's tax base has fallen substantially over the past three fiscal years owing to severe Proposition 8 assessed value (AV) reductions, and remains vulnerable to further housing market deterioration.
-- The city's debt profile has weakened somewhat as sharply declining AV has pushed debt ratios higher, and amortization is slower than average. However, capital needs are manageable, the city has no other post employment benefit (OPEB) obligation, and management does not plan to issue debt in the foreseeable future.
KEY RATING DRIVERS:
-- The shape and timing of an eventual local housing market recovery.
-- Continued adherence to the city's 20% unreserved general fund balance policy.
SECURITY:
The COPs are secured by lease rental payments from the city to the authority for use of an essential asset, subject to abatement.
CREDIT SUMMARY:
The city of Oakley serves approximately 35,000 residents in north-eastern Contra Costa County. Located between San Francisco and Sacramento, this exurban bedroom community offers residents access to both employment markets. Economic characteristics are mixed, and the city's tax base was affected severely by the distressed local housing market. March unemployment fell to a still elevated 8.2% from 8.4% the year prior, and remains well below county, state, and national levels. Although household income levels are in line with the region and well above state and national averages, per capita income levels are low, reflective of large household sizes.
The city's tax base has been severely pressured by substantial local house price declines. From fiscal 2008 to fiscal 2011 AV fell 29.3% as the county assessor applied Proposition 8 re-assessments to the majority of residential properties. Management is budgeting for flat AV in fiscal 2012, noting that the Proposition 13 inflation factor is slightly positive for the upcoming fiscal year. Nonetheless, the tax base is vulnerable to further Proposition 8 re-assessments and commercial appeals, and Fitch is concerned that fiscal 2013 AV may be susceptible to material housing market weakness in calendar 2011.
Financial operations remain strong despite the economic weakness due to very good management practices, and efforts to align expenditures with falling revenues. Revenues have been substantially affected by the recessionary environment, including property taxes (41% of audited fiscal 2010 general fund revenues), sales taxes (16%), and building permits (16%). From fiscal 2007-2010 total general fund revenues contracted by a high 35% which the city prudently offset with numerous expenditure reductions. Financial operations benefit from high reserve levels and surplus operations upon entering the recession. As a result, audited fiscal 2010 general fund operations produced a $363,000 surplus, raising the total and unreserved general fund balances to $6.9 million (a high 84% of expenditures and transfers out) and $5.4 million (65%), respectively.
Management expects operations in fiscal 2011 to produce a modest surplus before consideration of a one-time $2 million commercial property acquisition. The city expects to recoup the costs of the property over a multi-year period based on an agreement recently entered into with a developer. Fitch believes this transaction presents a level of risk to the city, but the unreserved general fund balance will still remain strong at 42% of fiscal 2010 general fund expenditures, and should rise over the next few years if the developer makes expected periodic payments for the property, beginning with a $500,000 anticipated payment in fiscal 2012.
Although financial operations currently are strong, the city remains subject to an adverse local economic environment. If revenues are further pressured, management may have to make additional expenditure reductions to avoid a material reduction in the city's general fund balance. Fitch believes that a moderate degree of expenditure flexibility remains, and is supported by the city's practice of contracting a significant portion of its operations. The city pays the county for public safety services, and hires contractors to provide many others. As a result, the city's payroll is relatively small, and expenses can reportedly be adjusted rapidly. Financial operations additionally benefit from good management policies, including ten-year financial forecasting, and a 20% general fund balance policy.
The city's debt profile is adequate, but under pressure from falling AV. Direct debt levels are low at just $223 per capita (0.3% of AV), but a significant amount of overlapping debt raises net debt levels to an above-average $3,647 per capita (4.9% of AV). Debt ratios have increased as a result of tax base declines rather than new debt issuance. Amortization is somewhat slow, with just 39% of principal retired in ten years, but capital needs are manageable, and management does not anticipate further issuances over the near term. The city has no OPEB liability, and its pension liability is manageable given its relatively small direct work force.
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 and Case Shiller.
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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