Fitch Ratings has affirmed the ratings on the following Santa Cruz, California (the city) bonds:
Santa Cruz Public Financing Authority, California (the authority):
--$6.5 million 2007 lease revenue bonds (LRBs) at 'AA';
Santa Cruz Public Improvement Financing Corporation (the corporation):
--$3.7 million 2004 certificates of participation at 'AA'.
In addition, Fitch assigns the following rating for the city:
--Implied general obligation bonds (GOs) rated 'AA+'.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by lease payments from the city to the authority and corporation for use of various essential assets, subject to abatement. All leases include covenants to budget and appropriate, maintain casualty insurance, two years of rental interruption insurance, and debt service reserves. The reserves are cash-funded.
KEY RATING DRIVERS
--SOUND FINANCIAL OPERATIONS: The 'AA+' implied GO rating reflects the city's sound financial operations, as shown by a large financial cushion, three consecutive years of balanced-to-surplus operations, recently implemented pension reforms, and a demonstrated willingness by taxpayers to support revenue enhancements in a pressured economic environment.
--DIVERSE ECONOMY: The local economy has shown a moderate degree of resiliency throughout the economic downturn, due in part to the city's maturity and the concentration of relatively insulated jobs in government and education.
--MATURE TAX BASE: The city's tax base is diversified and tax base performance has held up relatively well despite regional home market price contractions.
--SOUND DEBT PROFILE: The city's debt levels are moderate, capital needs are manageable, and debt amortizes faster than average.
CREDIT PROFILE
RESILIENT, MATURE ECONOMY AND TAX BASE
Santa Cruz is located about 30 miles south of San Jose on California's central coast. As the county seat and location of one of the University of California campuses, the city's economy benefits from a stable core of employment and related economic activity. The community is mature, with limited new development besides in-fill and redevelopment activity. As such, the local economy has held up relatively well during the recession. Current development activity centers on hotel development, the first of which management expects to be completed by September, spurring an uptick in transient occupancy tax revenues for fiscal 2013.
Reflective of the community's maturity, assessed value (AV) has held up well in spite of falling regional home prices. AV fell by just 0.2% in fiscal 2010, grew 1.3% in fiscal 2011, and fell again by 0.2% in fiscal 2012. The tax base is diversified with area employment focused on government, education, high-tech, and tourism. The top 10 taxpayers make up just 4.7% of AV and are primarily tourism- and hotel-related while the top 10 employers include the University of California, the county, the city, and Plantronics.
STRONG FINANCIAL OPERATIONS
The city's financial operations have remained strong throughout the recession due to prudent management practices. Fiscal 2011 audited general fund results show a $1.1 million operating surplus (after transfers), raising the unrestricted (committed, assigned, and unassigned) general fund balance to a high $22.1 million or 21.9% of spending. Fiscal 2012 estimates point to nearly balanced operations. For fiscal 2013 the general fund is budgeted to produce a $3.7 million operating deficit due to the loss of federal funding, $800,000 of redevelopment-related revenue losses, and $1.8 million of one-time spending on capital projects. However, the budget contains significant elements of expenditure and revenue conservatism, and Fitch believes that management expectations for actual results to be approximately balanced on a structural basis appear reasonable given historical budgetary out-performance.
The city's sound financial performance over the past three years has benefitted from cost-cutting, benefit reforms, and voter-approved tax hikes. In fiscal 2010 labor agreed to substantial concessions, while the city cut positions, reduced social service spending, and began charging its enterprises for land rentals. Taxpayers passed a utility user tax hike in 2010, and are considering a ballot measure in November of 2012 that would increase the transient occupancy tax rate to 11% from 10%, generating an additional $770,000-$880,000 annually. In recent years labor also agreed to a two-tiered pension system, and employees will begin picking up 100% of employee pension costs in addition to a portion of employer pension costs in exchange for the elimination of furlough days equivalent to 10% of salaries. Management projects this trade-off to be financially neutral to the city.
SOUND DEBT PROFILE OVERALL
The city's overall debt burden is moderate at $3,693 per capita and 3.2% of AV and expected to remain so given manageable capital spending plans. Principal amortizes faster than average with 64% of debt maturing over 10 years. Capital needs are manageable and focused on road improvements to be funded with a mixture of pay-as-you-go capital spending and about $10 million of debt that may be issued over the next few years.
The city's pension costs, including debt service on pension obligation bonds (POBs), is currently manageable at approximately 11% of fiscal 2011 general fund spending and transfers out. In fiscal 2011 the city issued $23 million of POBs to fully fund its large fire and police side-fund pension obligations. The city expects the transaction to result in annual cash flow savings of approximately $200,000. Due to recent investment underperformance and a reduction of the CalPERS discount rate, Fitch expects pension costs to rise from current levels. The city's OPEB liability is modest.
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.
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=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
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