Fitch Ratings has taken the following rating action on Rohnert Park (the city), California's certificates of participation (COPs).
--$3.5 million COPs affirmed at 'A+'.
In addition, Fitch assigns an implied unlimited tax general obligation (GO) rating at 'AA-'. The city has no GO debt outstanding.
The Rating Outlook is revised to Negative from Stable.
SECURITY
The certificates are secured by the city's covenant to budget and appropriate lease payments, subject to abatement, for the use and occupancy of the leased facilities. Standard insurance provisions apply.
KEY RATING DRIVERS
ONGOING STRUCTURAL DEFICIT: The Negative Outlook reflects the fact that an ongoing structural deficit continues to pressure the city's finances. Fitch is concerned that despite prudent efforts to enhance revenues and curb spending, operating deficits may persist due to rising pension and other post-employment benefit (OPEB) costs.
RESERVES REMAIN SOUND: The city's current financial cushion remains sound with over 20% in unrestricted general fund balance reported in fiscal 2011 despite drawdowns.
DEBT BURDEN A CREDIT POSITIVE: The city's debt ratios are low and expected to decrease due to the rapid amortization rate for outstanding principal and the lack of additional planned issuances. Carrying costs are low.
MIXED ECONOMY: The city's unemployment rate has declined modestly over the past year and wealth levels are marginally below the California average. The local economy is somewhat limited but benefits from the nearby location of Sonoma State University and an active tourism industry.
MODEST TAX BASE GROWTH: After three consecutive years of tax base contraction, taxable assessed value (AV) grew modestly in fiscal 2012.
WHAT COULD TRIGGER A RATING ACTION
REDUCED RESERVES: Additional use of the city's unrestricted reserves would likely result in a rating downgrade.
CREDIT PROFILE
REDUCED RESERVES; ON-GOING STRUCTURAL IMBALANCE
The city's overall financial profile has weakened as an on-going structural deficit has eroded previously strong unrestricted reserves. Operating deficits in fiscal 2010 and 2011 of approximately $2.8 million (11.2% of spending) and $867,000 (3.5%), respectively, marked the fourth and fifth consecutive years of audited deficits. The resultant use of reserves reduced the general fund's unrestricted balance to $5.2 million or 20.9% of spending at the end of fiscal 2011, down significantly from the high balance of $13.2 million (42%) at the end of fiscal 2008.
PRUDENT SPENDING ACTIONS; PRESSURES REMAIN
The city has taken actions to reduce its structural imbalance, but remains pressured by rising costs and reduced revenues. General fund spending was reduced by $6.7 million or 21% from fiscal 2008 to fiscal 2011 through various actions including workforce reductions, deferred capital investment, and furlough days. Additional reductions were made in fiscal 2012 through labor concessions requiring employees to pay their own share of the pension annual contribution. Fitch views the spending reductions positively, but remains concerned that further expenditure flexibility may be limited.
SUPPLEMENTAL TAX MODERATES REVENUES LOSSES
The city's revenue base is volatile due to its reliance on sales tax, hotel tax, and other economically sensitive revenue sources. Sales tax is the city's largest revenue source and accounted for 37% of total general fund revenue in fiscal 2011. Sales tax performance benefits from Measure E, a voter approved half-cent sales tax that expires in October 2015. Largely due to Measure E, general fund revenues rebounded 12% in fiscal 2011 to $22 million, although remain below pre-recession levels.
BUDGET GAP WIDENS IN FISCAL 2013
While the city has reduced its structural deficit, Fitch remains concerned that the city may be challenged to maintain current reserve levels given projected budgetary deficits of approximately $333,000 and $2.6 million, respectively, in fiscals 2012 and 2013. Pension and OPEB costs, which amounted to a high 20% of spending in fiscal 2011, are expected to continue rising. Additional use of reserves and an inability to regain positive financial margins will likely result in a rating downgrade.
MANAGEABLE DEBT BURDEN; HIGH BENEFIT COSTS
Overall debt ratios for the city are low at $1,582 per capita and 1.7% of AV. The city has no plans for additional debt in the near term with capital improvement projects entirely financed by restricted funds or enterprise funds. Outstanding debt amortizes at a rapid rate with 65% of principal repaid within 10 years and debt service costs are low at 3.4% of general fund spending.
The city participates in a state-wide pension plan and makes the full annual required contribution. In fiscal 2011, the contribution amounted to $3.4 million or a high 13.7% of spending. The city also provides OPEB and follows a pay-as-you-go funding policy. In fiscal 2011, the city contributed $1.6 million (6.5% of spending). The actuarially required contribution was $3.8 million, equal to 15.3% of spending. Rising contribution costs for pensions and OPEB are expected to continue pressuring general fund performance.
MIXED ECONOMY; STABILIZING TAX BASE
The city, located approximately 45 miles north of San Francisco in Sonoma County, is home to approximately 40,971 people. The local economy is largely residential but driven by tourism to Sonoma County's wineries and other recreational activities and Sonoma State University, the city's largest single employer. While still elevated, the city's unemployment rate has shown modest improvement declining year-over-year from 9.9% to 9.3% in March 2012.
The local real estate market remains pressured by falling home prices and some foreclosures. However, the city recorded modest AV growth of 1.2% in fiscal 2012 after three consecutive years of decline that lead to a cumulative contraction of 9%. Taxpayer concentration remains low with the top 10 taxpayers comprising approximately 8.8% of AV.
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, 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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