SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BB' rating on the following San Jose Financing Authority (the authority) parking revenue bonds.
--$33.4 million parking revenue bonds.
The Rating Outlook is Stable.
SECURITY
The bonds are special limited obligations of the authority, secured by a pledge of surplus tax increment revenues (tax revenue) from the redevelopment agency (subordinate to senior and subordinate tax allocation bonds) and gross parking revenue from the city's parking enterprise fund.
KEY RATING DRIVERS
REDUCED PLEDGED REVENUES: The 'BB' rating reflects the performance of the parking fund and the city's legal commitment to replenish the operating reserve. Surplus tax revenue is not expected to be available to support debt service payments in fiscal 2014 or in the near future even with significant project area assessed valuation (AV) growth in fiscal 2014.
PARKING FUND FINANCIAL PROFILE: The parking fund's financial profile is weak as persistent operating deficits and loans to the redevelopment agency have eroded historically strong reserves. Current reserve levels are adequate for the rating but likely to continue declining.
OPERATING RESERVE: The city's pledge to maintain a parking system operating reserve equal to 25% of expected expenditures becomes increasingly important as the likelihood of a call on that reserve increases. The city (implied ULTGO rating of 'AA+') has not needed to contribute to the reserve to date, but Fitch views the city's capacity and willingness to meet its obligations as key to supporting the current rating.
COMPETITIVE PARKING SYSTEM: The parking system benefits from its strong competitive position, including its monopoly over essential on-street parking spaces, the diversity of its parking locations and parking options, and moderate degree of revenue raising flexibility.
ECONOMIC CONDITIONS DRIVE DEMAND: The parking system is exposed to broader economic trends which include a recovering but still below pre-recession level of economic activity resulting in a still elevated office vacancy rate and reduced demand for parking.
RATING SENSITIVITIES
SURPLUS TAX REVENUES: An increase in surplus tax revenues sufficient to support debt service, while not anticipated in the near term, would be a credit positive and may result in upward rating action.
CREDIT PROFILE
NO SURPLUS TAX REVENUE AVAILABLE IN FISCAL 2014
Surplus tax revenues are not expected to be available to pay debt service in fiscal 2014, continuing a multi-year trend of relying on parking system revenues and reserves to make full and timely payments.
The 'BB' rating reflects Fitch's view that surplus tax revenues are unlikely to be available in the near future. However, prospects for the availability of surplus tax revenue have improved due to a significant 11.39% increase in project area assessed value for fiscal 2014 and a recent court decision that would increase the incremental tax revenue available to the agency. The ruling will take effect on Aug. 20, 2013, unless appealed. Fitch's analysis does not assume receipt of additional funds given the uncertainty regarding a potential appeal of the court's decision.
Fitch would view the restoration of the agency's capacity to make debt service payments from surplus tax revenues positively.
PARKING FUND'S WEAK FINANCIAL PROFILE
The parking fund's financial performance improved in fiscal 2012, as expected, as the agency was able to use one-time funds to make a portion of the debt service payment. However, the parking fund resumed full debt service payments in fiscal 2013 and is expected to do so again in fiscal 2014 leading to projected deficits for both years. The parking fund is expected to record a deficit of nearly $1.2 million (budgetary basis) for fiscal 2013, based upon unaudited results. Fitch expects the budgetary deficit for fiscal 2014 to increase to approximately $2.2 million.
The city has implemented both parking rate increases and expenditure reductions to improve the fund's financial performance. These changes have improved the fund's financial performance, but operating revenue may not be sufficient to cover debt service and operating and maintenance (O&M) costs on a permanent basis.
The parking fund's historically strong reserves have been greatly reduced through operating deficits and loans to the agency for the purpose of making debt service payments on the bonds. The loans, totaling $13.5 million, were written off in fiscal 2012, as expected, as they were not deemed enforceable obligations of the agency. At the end of fiscal 2012, the parking fund retained approximately $12.9 million in unrestricted cash reserves. Fitch views the cash balance as adequate for the rating but unlikely to support the fund's indefinite payment of debt service on a stand-alone basis given historical operating performance.
IMPORTANCE OF CITY COMMITMENT
The city has legally pledged to maintain an operation and maintenance reserve fund within the parking fund equal to 25% of O&M expenses. Fitch views the city's commitment as a key rating driver given the weakening performance of pledged revenues. The 'BB' rating incorporates the likelihood that parking revenues will be insufficient in the near-to-medium term, triggering a call on the operating reserve and replenishment by the city pursuant to the City Parking Pledge Agreement.
PARKING SYSTEM'S GOOD FUNDAMENTALS
The city's parking system includes eight garages, nine parking lots, and on-street metered spaces. The city estimates that the city's system accounts for about 36% of the total publicly available parking supply in the downtown area.
Parking demand is generated through a diverse set of activities, including daily work commuters, special event attendees, and short-term parking. Increased economic activity in the downtown area has increased parking demand with daytime occupancy rates rising modestly to 51% in fiscal 2013, up 1% from the previous year. However, city officials noted that stronger demand was recorded later in the year and trends are expected to continue in a positive direction, supported by declining commercial vacancy rates and generally increased activity.
San Jose is sizeable, covering over 178 square miles at the southern end of the San Francisco Bay. The city is the largest in the Bay Area with an estimated population of nearly 1 million, and the third largest in the state. Its economy, like that of the region, continues to be tied to the high technology sector. The city benefits from its proximity to several universities, an abundance of venture capital companies, and a highly educated, affluent workforce.
Additional information is available at 'www.fitchratings.com'.
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. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
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
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=797141
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