Fitch Ratings has downgraded the following tax allocation bonds (TABs) for the San Rafael Redevelopment Agency, CA (the RDA):
--$4.6 million TABs, series 1999, to 'AA-' from 'AA+'.
In addition, the TABs remain on Rating Watch Negative by Fitch.
SECURITY
The bonds are secured by a first lien on gross tax increment on all taxable property within the agency's sole project area, less a 20% set-aside for low and moderate-income housing.
KEY RATING DRIVERS
CASH FLOW ISSUES EXACERBATED BY RDA DISSOLUTION: The downgrade to 'AA-' reflects ongoing cash flow issues that have been exacerbated by the RDA dissolution process. Despite strong coverage of debt service by gross tax increment revenues, the timing of tax revenue receipts needed for debt service payments necessitates annual borrowing from Marin County. County and state department of finance (DOF) procedures related to the recognized obligation payment schedule (ROPS) process and the distribution of revenues have added to cash flow strain.
IMPLICATIONS OF AB 1484: The governor signed this trailer bill to the state's fiscal 2013 budget on June 27, 2012. The bill includes what Fitch believes are improvements to the ROPS approval process and other procedures going forward. However, it required repayment by many SAs of property tax distributions from December 2011 and January 2012 that the state believes should have been directed to other taxing entities. The SA reports that it made a partial repayment and expressed an inability to make the full payment from legally available funds. The bonds remain on Rating Watch Negative pending a resolution of this dispute. Fitch is concerned that full repayment amount may leave the SA insufficient funds to make its upcoming debt service payment.
REMAINING FLOW OF FUNDS ISSUES: The Rating Watch Negative stems from risks associated with a sizable repayment required by the state under AB1484 (the trailer bill) but not fully made by the City of San Rafael (city) as successor agency (SA) to the RDA. This repayment could jeopardize the city's ability to make its December 2012 debt service payment. As such, Fitch expects the rating to remain on Rating Watch Negative until this issue is resolved.
PROGRESS ON AB 1X26 IMPLEMENTATION: The ROPS includes 2012 debt service on the bonds and has been approved by the county and state. The SA has received approval for sufficient payments to cover the debt service included in the ROPS.
HOUSING REVENUE AVAILABILITY: The lack of distinction between former housing set-aside revenue and total tax increment under AB 1X26 did not affect Fitch's assessment of credit quality. This is because concerns about procedural issues outweigh the very strong coverage provided by pledged revenue.
WHAT COULD TRIGGER A RATING ACTION
AB 1484 PAYMENT OBLIGATION: A decision by DOF that requires the SA to fund the full amount determined under AB 1484 could leave the SA with insufficient funds for its next debt service payment absent a loan from the county.
CREDIT PROFILE
BOND DEBT SERVICE IS INCLUDED UNDER APPROVED PAYMENT SCHEDULE
The SA submitted its ROPS, which was approved by the oversight board and the state's DOF. Approved amounts totaled about $1.1 million for the January to June 2012 ROPS and $3.3 million for the July to December 2012 ROPS. Fitch believes they are sufficient to cover June 1, 2012 and Dec. 1, 2012 debt service payments on outstanding TABs. The SA intended, but was not permitted by DOF, to include a full year's debt service in the initial January to June 2012 ROPS to ensure availability of revenues for debt service, as other successor agencies had done. A distribution of about $597,000 for debt service was made directly to the bond trustee from the county of Marin for the June 1, 2012 debt service payment. However, no further distributions under the approved ROPS have yet been made by the county to the SA.
Provisions under the recently enacted AB1484 required the SA to repay $1.7 million to the county auditor controller that DOF calculated was distributed in December 2011 in excess of the amount stipulated in AB1X26. The SA has disputed the accuracy of the required payment amount and does not currently have sufficient legally available cash balances to pay the required amount. The SA has thus far remitted about $148 thousand.
Amounts approved under the ROPS and currently not distributed to the SA could cover the obligation. That said, use of these revenues would result in insufficient moneys remaining for the SA's Dec. 1, 2012 debt service payment. The outcome of the SA's appeal to the county regarding the repayment figure is uncertain. If the $1.7 million figure is not significantly reduced or eliminated, Fitch believes the city could request a loan from the county to ensure that debt service needs are covered, and that the county is likely to grant the request. However the county is not required to do so. This has led Fitch to maintain the Rating Watch Negative on the bonds until a resolution of this issue is clearer.
Due to the timing of the December semi-annual debt service payment (Dec. 1) versus tax revenue receipts (Dec. 10) and current county allocation procedures that limit the flow of revenues to an amount equivalent to debt service, annual cash flow borrowing has been necessary. The county has historically provided loans to the RDA for cash-flow purposes in order to ensure sufficient funds for debt service payments. The SA reports that the county has agreed to continue loans, if necessary, alleviating concerns about cash-flow timing.
SERVICE AREA CHARACTERISTICS REMAIN STRONG
The City of San Rafael is located in the San Francisco Bay Area and is both the county seat and largest city within the County of Marin. It benefits from its participation in the diverse regional economy of the San Francisco Bay Area and has traditionally featured strong employment, wealth, and income indicators. The city's redevelopment agency operates within a single project area located in the central San Rafael business core and east San Rafael.
Taxable assessed valuation (TAV) for the project area was $2.4 billion in 2012, nearly 15 times the base year value of $163 million. In 2012, TAV declined by 1.1%. This is still a relatively strong performance compared to most jurisdictions and reflects a second year of modest decline after many years of steady increases. Gross tax increment revenues still provided strong debt service coverage of about 5 times in fiscal year 2012.
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, 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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