SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'F1+' to the following Riverside, CA (the city) bond anticipation notes (BANs):
--$30 million taxable pension obligation refunding BANs, 2014 series A.
The BANs are expected to sell via negotiation the week of May 5. Proceeds will be used to refund the city's outstanding taxable pension obligation BANs, 2013 series A, which Fitch affirms at 'F1+'.
In addition, Fitch affirms the following ratings:
--$15.3 million general obligation (GO) bonds, series 2004 at 'AA';
--$20.7 million taxable pension obligation bonds (POBs), series 2005A at 'AA-';
--$20.7 million COPs, series 2010 (Recovery Zone Facility Hotel Project) at 'AA-';
--$19.1 million lease revenue COPs, series 2006 (Galleria at Tyler Public Improvements) at 'A+'.
Riverside Public Financing Authority:
--$41.2 million lease revenue refunding bonds, series 2012A at 'AA-'.
The Rating Outlook is Stable.
SECURITY
The pension obligation BANs and POBs are secured by the city's absolute and unconditional obligation, payable from any legally available funds.
The GO bonds are secured by the city's full faith and credit and unlimited ad valorem property tax pledge.
The lease revenue refunding bonds and COPS are secured by lease payments made by the city to the authority from any legally available resources of the city for use and occupancy of city facilities. The lease revenue COPs are secured by lease payments made the by city to the City of Riverside Municipal Improvements Corporation from any legally available resources of the city for use and occupancy of city facilities. Lease payments are subject to abatement, the risk of which is mitigated by rental interruption and provisional property loss insurance. The leased premises consist of the city hall complex and policy patrol facility for series 2012A; two libraries and two fire stations for series 2010; and a parking structure addition to a privately owned retail center (the Galleria at Tyler), a second parking structure at the Tyler Mall, and two arterial streets that bound the mall for series 2006.
KEY RATING DRIVERS
CONSISTENTLY GOOD FINANCIAL PERFORMANCE: The city maintains healthy reserves, aided by expenditure flexibility and diverse revenue sources. Fitch expects the city to manage cost pressures within its limited growth revenue framework.
WEAK ECONOMY STABILIZING: The economy continues to improve after being severely impacted by the housing led downturn. Home prices and the employment base are both recovering steadily.
REVENUE DIVERSITY: The city benefits from charter-approved transfers from its utilities which account for about 18% of gross operating revenue. This insulates the city somewhat from the volatility in its property and sales taxes.
COMPLEX DEBT PROFILE: The city's debt is moderate, and its pension plans are well-funded; however, variable rate and short term obligations represent a combined 40% of total debt, exposing the city to liquidity and market risk.
SHORT-TERM RATING: The 'F1+' rating on the BANs reflects anticipated market access based on the city's long-term 'AA' rating as well as its access to significant internal liquidity.
GENERAL FUND OBLIGATIONS: The COPs, lease revenue bonds, and POBs are rated one notch below the GO bonds as they are payable solely from any legally available funds. The 'A+' lease revenue COP rating (series 2006) further reflects the non-essential nature of the leased assets.
RATING SENSITIVITIES
ABILITY TO MAINTAIN BALANCE AND RESERVES: As the modest recovery continues, the city will be challenged to maintain fiscal balance amid salary and pension cost pressures.
CREDIT PROFILE
The city is the county seat of Riverside County (implied GO rating of 'AA-' by Fitch) and the 12th largest city in California. Located in the western portion of the county about 60 miles east of downtown Los Angeles, the city encompasses 81.5 square miles and has a population of 308,511.
WEAK ECONOMY STABILIZING
The city's economy is continuing its slow recovery after the severe economic downturn. Employment growth has been steady at about 1%-2% per year which, combined with some labor force contraction, brought the unemployment rate down to 9.2% in December 2013 from 11.2% a year prior. The city benefits from sizeable government and education sectors, including county operations and four colleges and universities; however, the region's unemployment rate remains elevated in part due to the previously high level of construction employment.
Per capita income is well below state and national levels, possibly due to larger household sizes and the large student population, estimated at about 52,000 (one-sixth of the total city population). Median household income is more on par with both state and U.S. averages.
The city's assessed value (AV) continued to grow through fiscal 2010 due to rising property values and new commercial and residential development. However, it declined a combined 10.3% in fiscals 2011 and 2012, reflecting home price declines of more than 50% from their peak. Home prices recovered nicely over the last year, gaining about 22% according to Zillow.com. AV has been flat recently but is projected to increase at least 2.6% for fiscal 2015.
CONSISTENTLY GOOD FINANCIAL PERFORMANCE
Riverside has maintained a sound financial position over the last five years despite revenue declines. The city entered the recession with a good financial cushion. After using some fund balance for planned capital spending and several years of deficits, it posted surpluses after transfers in fiscals 2010, 2011 and a gain of about $2.8 million (1%) in fiscal 2013.
Operating revenues rebounded nicely in fiscal 2013 by about 6.5%. These gains were offset by increasing expenditures, primarily from increased public safety pension contribution rates and liability insurance trust fund charges.
Projections as of March 31, 2014, indicate a draw on general fund balance at year-end of about $3.6 million. This includes a $5 million payment to the water fund as part of a settlement of litigation challenging the city's water fund transfer. The total $10 million settlement will be paid in fiscals 2014, 2015 and 2016. Voters validated the transfer in June 2013, ensuring its continuation.
The fiscal 2015 budget has not yet been submitted to council, but management expects revenues to be fairly flat relative to fiscal 2014. With several labor contracts expiring in 2014, management's ability to balance the budget will hinge on the outcome of negotiations that are set to begin next month. The city settled a major two year contract with one group in November 2013 with a total 1% COLA, offset by increased employee pension contributions.
SOUND RESERVE POLICY
The city has exceeded its unreserved general fund balance policy (i.e. maintenance of at least 15% of the following year's spending) for the past decade. Budget adjustments to date have not been severe and include non-public safety hiring freezes, expenditure increase rollbacks, and pension and benefit reforms. The recently instituted pension reforms took effect over fiscals 2011 and 2012. Changes include increased contributions, pension benefit formula changes, increased retirement age, and elimination of deferred contributions for certain employees.
REVENUE DIVERSITY
Revenues are diverse, with sales and property taxes comprising 23% and 21% of general fund revenues, respectively. Utility user tax receipts make up 12.5%, and a utility transfer of 11.5% of gross utility revenues generates about 19% of general fund revenues. Water revenue bonds are rated 'AA+' and electric revenue bonds are rated 'AA-' by Fitch. Sales taxes increased 12% in fiscal 2011, 8% in fiscal 2012 and another 5.2% in fiscal 2013, largely due to the recovery of auto dealerships and lumber yards hard hit during the recession. For fiscal 2014, the city budgeted a 4.5% increase in property tax revenues.
In June 2013, city voters approved the water transfer to the general fund (not to exceed 11.5% of gross revenues) as part of the above-referenced settlement. The transfer is equal to about $6.5 million annually (3% of revenues). Although the transfer was part of the city charter since 1907 and voted on twice since then, Proposition 218 required voter approval after 1996.
COMPLEX DEBT PROFILE
The city's direct debt burden is low, and its total burden is moderate. About one-third of the total is one issue of synthetically fixed variable rate bonds, which exposes the city to counterparty and termination risk (the swap had a negative $50 million mark to market value as of June 30, 2013). However, the city has expressed that it intends to reduce its variable-rate exposure over time. Amortization of debt is about average with 45% of principal retired within 10 years.
The city's pensions are well funded and annual required contributions (ARC) are routinely made. Carrying costs, including debt, pension ARC, and OPEB contributions, are manageable at about 19% of fiscal 2013 non-capital, non-redevelopment governmental spending.
The current offering will refund all of the city's outstanding taxable pension obligations BANs. Management continues to utilize this financing vehicle to realize interest savings. The refinancing risk of the BANs is mitigated by the city's significant liquidity. According to the city, it has access to $334 million in interfund borrowing from various funds, including the electric, water, and sewer funds if needed.
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.
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
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