Fitch Ratings has affirmed the 'BBB' rating on the following revenue bonds of the Baldwin Park Public Financing Authority, California (the authority):
--$4,400,000 sales tax and tax allocation refunding bonds (Puente Merced redevelopment project), series 2003.
The Rating Outlook is Stable.
SECURITY
The series 2003 bonds are limited obligations of the authority, payable from a first lien on sales tax revenues and tax increment revenues from the Puente Merced project area. The bonds are additionally secured by a cash-funded debt service reserve fund (DSRF) equal to maximum annual debt service (MADS). No additional parity bonds are permitted, but additional subordinate bonds may be issued if MADS coverage on all outstanding bonds and proposed bonds is 1.10 times (x) or better.
The series 2003 bonds are additionally secured by surplus tax increment revenues of the San Gabriel River, Delta, and Sierra Vista project areas, which were merged with the Puente Merced project area in April 2000 by ordinance of the city of Baldwin Park.
Surplus tax increment revenues are calculated after various tax sharing agreements and debt service payments related to the project areas, but before the 20% tax increment revenue set-aside for low and moderate income housing required by the redevelopment law. The authority has limited ability to issue additional debt secured by tax increment revenues of the San Gabriel, Delta, and Sierra Vista project areas.
CREDIT SUMMARY
The 'BBB' rating reflects the consistent satisfactory coverage of MADS from pledged tax increment and sales tax revenues of the merged project area, in addition to the absence of additional leveraging plans. These strengths are offset by moderately high taxpayer concentration within the merged project area and Baldwin Park's (the city) very weak economic profile.
KEY RATING DRIVERS
Strong Pledged Revenue Coverage: Coverage of MADS from pledged revenue was 3.4x in fiscal 2010 and 3.2x in fiscal 2009. Coverage from the pledged revenue of the Puente Merced project area alone is narrower at 1.40x in fiscal 2010.
Additional Issuance Not Anticipated: Additional debt on parity with the series 2003 bonds is prohibited. The authority has limited ability to issue debt secured by tax increment revenue of the San Gabriel, Delta, and Sierra Vista project areas. There are no redevelopment projects or capital needs reported within the merged project area.
Taxpayer Concentration Risk: Moderately high concentration exists within the merged project area, with the top ten taxpayers representing 27% of incremental assessed value (AV). Top taxpayers include Wal-Mart ('AA' with a Stable Outlook by Fitch), Home Depot ('BBB+'; Positive Outlook), Kaiser Foundation, and several multi-tenant offices and retail buildings.
Incremental Revenue Stability: The merged project area is mature with a high incremental AV ($635.2 million) relative to the base year ($89 million). As a result, tax increment revenues respond less dramatically to changes in total AV.
Gauging Future AV: Although the total AV of the merged project area has fallen less than 3% since the onset of the recession, local economic pressures are severe and growth prospects limited, increasing the likelihood of additional valuation declines over the near-term.
Below-Average Socioeconomic Profile: Baldwin Park is a lower income community, exhibiting a high incidence of individual poverty, and historically high levels of unemployment. Fitch believes persistently weak economic conditions may exert pressure on property values.
CREDIT PROFILE:
PUENTE MERCED CREDIT QUALITY
The Puente Merced project area was completed in 1989 as a neighborhood shopping center, anchored by Home Depot and a 178-room Courtyard by Marriott. The Puente Merced project area is very small, covering 16.2 acres in area with a 2011 tax year AV totaling $39.3 million and $38.4 million in incremental AV. Furthermore, concentration is very high, as Home Depot accounts for 50% of incremental AV and the top ten collectively exceed 100%. The Puente Merced project area is essentially fully developed and there are no redevelopment projects currently underway or proposed.
Pledged tax increment and sales tax revenue from the Puente Merced project area totaled approximately $738,000 in fiscal 2010 or relatively thin 1.40x MADS. Thin coverage is compounded by the fact that approximately two-thirds of the Puente Merced pledged revenues are derived from sales tax, which Fitch considers a more volatile revenue stream, particularly given the area's weak economic profile. The authority does not have information on the source of pledged sales tax receipts; however, based on the strong growth in revenue since the opening of the Home Depot store, Fitch concludes a fair amount of sales tax concentration exists.
In Fitch's view, the taxpayer and revenue concentration exhibited by the Puente Merced project area combined with its very small size represent significant credit risks, even at the current 'BBB' rating level. The pledge of surplus tax increment revenue of the San Gabriel River, Delta, and Sierra Vista project areas enhances bondholder security by expanding the breadth and diversity of the tax base and strengthening the debt service coverage ratio.
ALL-IN PLEDGED REVENUE COVERAGE
Surplus tax revenues from the San Gabriel River, Delta, and Sierra Vista project areas total $1.07 million in fiscal 2010, boosting MADS coverage to a strong 3.4x. The authority calculates surplus tax revenues prior to the 20% set-aside for low and moderate income housing, based on a provision of the redevelopment law related to merged project areas. Fitch conservatively calculates the available surplus after the housing set-aside, which would improve coverage more modestly to approximately 1.66x.
MERGED PROJECT AREA PROFILE
The four project areas comprising the merged project area were each created from 1975 through 1986. The merged project area totals 774 non-contiguous acres in the city's downtown area, largely comprising commercial and industrial properties with a small residential component.
The merged project area AV for fiscal 2011 totals $724.2 million or 7.1x the base year AV of $89 million. The ratio of incremental AV over the base year AV reduces volatility in incremental tax revenue to changes in the AV of the project area. The merged project area has generally been stable, suffering a 2.6% decline in AV in fiscal 2011 following growth of 3.4% in fiscal 2010 and 7.3% in fiscal 2009.
Pending appeals in the merged project area are not expected to have a meaningfully detrimental impact on the amount of pledged revenues available to service debt. The AV of pending appeals totals $54.4 million or 8.6% of incremental AV (the authority reports an average reduction of less than 20% for successful appeals).
MODERATELY HIGH TAXPAYER CONCENTRATION
Extraordinary taxpayer concentration exists within the Puente Merced project area, but the merged project area adds diversity to the tax base, with the top ten taxpayers accounting for 26.6% of incremental AV. Wal-Mart is the largest taxpayer at 4.8% of incremental AV followed by Kaiser Foundation (3.1%) and Home Depot (3.0%).
BELOW-AVERAGE SOCIOECONOMIC PROFILE
Fitch considers the city's economic and demographic profile weak. A very young population contributes to per capita income levels that equal 52%-56% of the state and U.S. average. Median household income approaches the national average but is only 84% of the state. The city's individual poverty rate is also high. The educational achievement of the local labor force is well below the state and nation, contributing to historically high levels of unemployment. Unemployment remains exceptionally high at 14.8% in May compared to 11.4% in California and 8.7% nationally.
According to Zillow.com, home prices within the city have remained relatively stable since the first quarter of 2009, with a median reported price of $254,000 as of May 2011. Median home prices peaked at more than $440,000 in May 2007. According to the most recent Case-Shiller Index, home prices in Los Angeles County continue to fall at a healthy rate.
Baldwin Park is located in western Los Angeles County, approximately 20 miles east of downtown Los Angeles. The city encompasses 6.7 sq. miles in area and is near fully built-out. The city had previously experienced strong growth due to infill development, but the city's population has fallen 2.2% since 2006 to 75,390 in 2010. The city is served by I-10 (the San Bernardino Freeway), I-605 (the San Gabriel River Freeway), and I-210 (the Foothill Freeway) making the greater Los Angeles metro area easily accessible for local residents.
FISCAL 2012 STATE BUDGET
Recently approved legislation requires large payments from redevelopment agencies to other local agencies, including school districts, in order to remain in existence. The legislation would provide for the repayment of all existing debt and contractual obligations by a successor agency in the event of a wind-down. A petition has been filed with the California Supreme Court challenging the constitutionality of the redevelopment bills.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the 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, and National Association of Realtors.
Applicable Criteria and Related Research:
'Tax-Supported Rating Criteria', dated 16 Aug. 2010.
'U.S. Local Government Tax-Supported Rating Criteria', dated 08 Oct. 2010.
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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