Fitch Ratings has affirmed the 'AA-' rating on the following Gilroy, California (the city) bonds:
--Approximately $10.1 million general obligation (GO) bonds, series 2009;
--Approximately $23 million GO bonds, series 2010;
The Rating Outlook is Stable.
SECURITY
The bonds are secured by the city's unlimited ad valorem tax pledge.
KEY RATING DRIVERS
SOLID FINANCIAL POSITION: General fund financial operations feature high fund balances, conservative fund balance policies, and active management to align expenses with revenues. The general fund does, however, face contingent liabilities related to inter-fund borrowing that could impact its operations.
GENERAL FUND CONTINGENT LIABILITIES: Various funds have borrowed heavily from the water enterprise, sewer development and storm drain development funds. These liabilities could affect the general fund to the extent that there are insufficient developer impact fee revenues to close these deficits.
BELOW AVERAGE ECONOMY: The city's economic characteristics are weak, including high unemployment, below-average income levels relative to the region, recent housing market stress and tax base declines.
WEAK DEBT PROFILE: Total net debt levels are high and debt amortization is very slow. No near-term debt issuance is planned, but a refinancing of $23 million in outstanding bond anticipation notes will be required by Nov. 1, 2013. Depending on its structure, the issuance could add strain to the city's debt profile.
CREDIT PROFILE
Gilroy is located in Santa Clara County, about 30 miles south of San Jose. The population was close to 49 thousand in 2010, an increase of about 18% from 2000. The economy has been diversifying in recent years, but still has a large agricultural base, with the high unemployment and low per capita income levels typical of communities with an agricultural base. The city's residential real estate market has been highly stressed in recent years, but price stabilization and recently reduced foreclosure rates suggest that the market is seeing stabilization.
Gilroy's financial operations in recent years have been balanced through substantial expenditure cuts implemented to offset sales- and property-tax revenue declines. Management prudently cut expenditures, reduced headcount, and was successful in obtaining labor concessions resulting in additional savings. The city's strong reserve policies, requiring a minimum unrestricted balance reserve (25% of expenditures) and an economic uncertainty reserve (15% of expenditures) provide an additional source of financial flexibility.
The city returned to operating surpluses in fiscal years 2010 and 2011 following prior year deficits, though fund balances were and continue to be maintained at high levels. The fiscal year 2010 unreserved general fund balance, including the economic stabilization fund totaled $21.3 million or 66% of expenditures and transfers out. For fiscal year 2011, the unrestricted fund balance (the sum of the unassigned, assigned, and committed fund balance under GASB 54) was $25.2 million or 77% of expenditures and transfers out. On a budgetary basis, management expects fiscal year 2012 to end with a modest surplus. The total ending balance is estimated at $24.7 million or 70% of expenditures.
The general fund has about $9 million in direct and contingent liabilities related to inter-fund borrowings. These borrowings, made largely by the public facilities impact fund and other governmental funds, are owed primarily to the water enterprise, sewer development, and storm drain development funds (a contingent liability) and directly to the general fund (about $2.8 million of the total). The borrowings were accrued due to various fund cash deficits and as a result of a land purchase. The public facilities impact fund has a great degree of flexibility in repaying the loans and is currently scheduled to pay them back over twenty years from developer impact fee revenues. Like the city's currently outstanding BANs and lease revenue debt, the planned 2013 BANs refinancing debt issuance would be payable from developer impact fees. Fee revenues would first pay debt service, with the remaining amounts then reducing internal loans. If developer impact fees are insufficient, the general fund could be tapped for debt service payments, and contingent liabilities may become direct liabilities of the general fund, particularly as they relate to the water enterprise fund under Proposition 218, if it is determined that the borrowing fund is unable to repay its loans. While developer impact fee collections experienced declines, particularly severe in fiscal year 2009, collections have stabilized in recent years.
Gilroy's debt profile is weak. Principal amortizes very slowly, with about 32% of outstanding principal retired in 10 years, excluding bond anticipation notes (BANs) due November 2013. While direct debt levels are low at $1,711 per capita (1.4% of AV), the debt of overlapping municipalities raises net debt levels to a high $6,754 (5.7%).
Capital needs are limited and no near-term issuance is planned for capital funding, though a BANs refinancing will be required in 2013. In 2010, the city refinanced its 2009 BANs with the issuance of fixed rate lease revenue bonds maturing in 2033 and BANs maturing in 2013. Management has not yet determined its strategy for refinancing the outstanding BANs. Options include further BANs issuance, fixed or possibly variable rate lease revenue debt. Depending on the ultimate structure of the refinancing debt, the city could be exposed to market access risk or could acquire a significant variable rate debt load.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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, and National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842
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