SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has rated Yountville Finance Authority, California's (the authority) bonds as follows:
--$4.2 million lease revenue bonds (LRBs), series 2013 at 'A+'.
The bonds will sell via competitive sale on Jan. 15. Proceeds will be used to fund a seismic retrofit of the town hall, to repair roads, and to upgrade sewer infrastructure.
In addition, Fitch assigns the following rating to the town of Yountville (the town):
--Implied general obligation (GO) rating of 'AA-'.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a covenant to budget and appropriate lease payments from the town to the authority for use of the town hall and town center, subject to abatement. The bonds are additionally secured by capitalized interest that pays for a portion of debt service six months past the anticipated retrofitting completion date. There is no debt service reserve fund (DSRF). The town intends to pay debt service from transient occupancy taxes (TOT) and from sewer revenues for the portion of the bonds that finances utility upgrades, however, debt service is payable from any general fund source.
KEY RATING DRIVERS
--SOUND FINANCIAL MANAGEMENT AND OPERATIONS: The rating reflects the town's sound financial operations, as exhibited by at least four years of structural general fund surpluses before capital spending, solid fund balance levels as a percentage of spending, ample liquidity, high expenditure flexibility, and prudent management practices. However, the town's nominal fund balance is small.
--UNUSUALLY HIGH REVENUE CONCENTRATION: Despite impressive recent financial performance, the rating considers that the majority of general fund revenue is generated by TOT, which is susceptible to economic sensitivity. Further concern derives from the highly concentrated TOT payer base which consists of only 11 payers.
-- SOLID ECONOMIC PERFORMANCE: The town benefits from being a high-profile tourist destination with an extremely high concentration of world-class restaurants and upscale hotels in the center of Napa Valley. The town proved impressively resilient during the housing-led recession, with no assessed valuation (AV) losses and just one year of TOT losses over the past decade.
--EXTREMELY HIGH ECONOMIC CONCENTRATION: The town is very small with a population of just under 3,000 residents and its commercial base consists mostly of hotels and restaurants. Concentration concerns are offset somewhat by a strong local economy with limited developable land.
--ADEQUATE DEBT PROFILE: Debt levels are moderate to high although somewhat offset by the large visitor base relative to permanent population. No further debt issuances are planned, and capital needs are manageable though debt amortization is somewhat slow. The town prudently has made progress towards fully funding its other post-employment benefit (OPEB) annual required contribution (ARC) and has implemented pension reforms that will slow out-year pension cost hikes.
--SOUND LEGAL STRUCTURE: The 'A+' LRB rating reflects a sound legal structure, including ample capitalized interest that mitigates construction delay risks, a covenant to budget and appropriate lease payments, rental interruption insurance, and essential leased assets. However, there is no DSRF requirement.
CREDIT PROFILE
Yountville serves a small population of 3,000 residents in Napa County about 60 miles north of San Francisco. The town benefits from being a highly desirable tourist destination with an extremely high concentration of upscale hotels and world class restaurants in the heart of Napa Valley's wine country. Management estimates the town receives about 120,000 visitors annually. The town is predominantly built out, with a stable population and limited new construction.
ECONOMY IS STRONG AND RESILIENT, YET HIGHLY CONCENTRATED
The town's economic indicators are strong. Per capita income levels are high at 129%, 152%, and 162%, respectively, of county, state, and national levels. A number of the town's residents are affluent retirees. Unemployment data is not available for the town, but October county levels of 6.9% are lower than the respective state and national rates of 9.8% and 7.5%. Based on the town's high income levels and its status as a significant net importer of workers, Fitch believes local unemployment levels likely are lower than the county's.
Yountville's property tax base is highly concentrated among the top 10 payers, of which most are hotels, but proved to be quite resilient during the economic downturn. AV climbed continuously during the recession, expanding an average annual 5.3% from fiscal 2008-2013. The top 10 taxpayers make up a high 31% of AV, and seven of the top 10 payers are hotels.
About a third of the town's population resides at the Veteran's Home, the largest such military retirement community in the country, and the town's largest employer with 900 employees. The home was subject to funding cuts during the recession, resulting in some furloughs and layoffs. However, its resident population reportedly has remained steady, and management is not aware of any issues that should significantly impact the home in the foreseeable future.
The town is home to several world-class restaurants and 11 hotels and inns. The restaurant sector has performed well in recent years while the hotel sector has recovered rapidly from one year of TOT contraction in fiscal 2009. Hotel occupancy rates recently rose to 72% from a multi-year low of 65.9% in fiscal 2010, while average daily room rates jumped to a high of $353 in fiscal 2012 from a low of $275 also in fiscal 2010. Additionally, two hotels were opened between fiscal years 2009 and 2010 while other hotels have been adding capacity.
SOUND FINANCIAL OPERATIONS
The town's financial operations have performed impressively, even during the recession. Before consideration of capital spending, the general fund produced operating surpluses each year since at least fiscal 2009. Audited fiscal 2012 general fund operations produced a $1 million surplus, raising the total and unrestricted fund balances to $2.9 million (39% of expenditures and transfers out). Additionally, $1 million in the capital projects fund could be transferred to the general fund for any operational purpose, raising the town's total financial cushion to $3.9 million (52.9%). Management indicated that the town does not intend on materially spending down its fund balance from current levels and has a history of transferring surpluses to its capital projects fund.
Fitch believes that the town's exceptionally high economic and revenue concentration levels necessitate a high fund balance at the 'AA-' implied GO rating level. In addition, while high relative to the budget the nominal amount of reserves is small.
The general fund is budgeted to produce nearly balanced operations in fiscal 2013. However, the budget incorporates significant elements of conservatism that have historically resulted in material actual revenue outperformance. Management estimates that general fund operations likely will produce a $400,000 surplus in fiscal 2013, which subsequently may be transferred to the town's capital projects fund and irrevocable OPEB trust.
The town employs several strong management practices. The general fund must include emergency and revenue stabilization reserves sized at 20% of expenditures ($1.3 million in fiscal 2012) and 10% of TOT ($480,000), respectively. Major revenues are budgeted based on three-year averages and are tracked and reported to town council monthly. Fund balances may only be used for non-recurring expenditures. The town also has general and legal contingency reserves that are sized annually.
GOOD EXPENDITURE FLEXIBILITY
Yountville enjoys a good degree of expenditure flexibility, should it be needed. The town also makes sizeable annual contributions to its capital fund for pay-as-you-go projects, and expects to contribute $375,000-$400,000 annually moving forward. These projects could be scaled back, deferred, or cancelled as desired. Finally, since fiscal 2011 the town has been paying about $300,000 annually for legal fees related to a major construction project in fiscal 2008 that contained significant defects. Management expects the issue to be resolved by the close of fiscal 2013, at which time these legal fees would cease and the town could receive a settlement of up to $2 million, half of which would be used to reimburse the town for legal expenses.
CONCENTRATED REVENUE STREAMS
Nearly 60% of the general fund's revenues derive from TOT, which are generated solely from the town's 11 hotels and inns. Among these 11 accommodations, the three largest make up over 60% of the town's total rooms. Despite these exceptionally high concentration levels, TOT performance has been strong. In the past 10 years, TOT declined only in fiscal 2009, by 7%, before rising thereafter. TOT increased to record levels in fiscal 2011, and then increased by a substantial 24% in fiscal 2012 to $5 million. Given the built-out nature of the town and the currently healthy state of the local lodging sector, future TOT growth will likely be more subdued. The town's other major revenue sources include property taxes (16%) and sales taxes (11%). These revenue sources are also concentrated in the top payers, but have been resilient.
In an effort to minimize risk related to the economic concentration, the town purchases business interruption insurance on all of its inns and hotels, and its two largest restaurants. This insurance mitigates the risk of businesses shutting down temporarily due to natural disasters, though it does not protect against poor economic or business conditions. Strong historical economic conditions combined with a lack of developable land have resulted in new businesses replacing shuttered ones.
ADEQUATE DEBT PROFILE
The town's debt profile is adequate overall. Overall debt levels are high at $8,377 per capita. Fitch's concerns about this high level are mitigated by the high visitor base which contributes, through TOT and other revenue, to debt repayment. Debt is moderate at 4.5% when compared to AV. Capital needs are manageable, and the town makes significant use of pay-as-you-go capital financing. However, principal amortization is slow with just 37% of debt retired over 10 years.
The town has a sizeable capital improvement plan, but projects are implemented on the basis of surplus funding availability. Management indicated the town has no plans for further debt issuances. Yountville participates in CalPERS' retirement system and implemented a second tier benefit plan over the last few years while raising all employees' pension contribution rates to 8% of wages. Formerly the town made the full pension contributions on the employees' behalf. The town offers OPEB benefits, but has scaled back benefits and tightened eligibility requirements. The related liability is manageable and town council approved a phased-in increase of contribution rates that is expected to fund ARC at or near 100% by fiscal 2015. The town currently is paying 8% of wages into an irrevocable OPEB trust, and this payment will rise 100 basis points annually over the next two fiscal years.
The town's carrying costs (annual debt service, OPEB, and pension costs) equal a manageable 18% of general fund expenditures and transfers out.
SOUND LEASE PROVISIONS
The 2013 LRBs enjoy solid legal provisions. The bonds include a standard lease-leaseback structure, and the more valuable of two leased assets, town hall, is considered by Fitch to be essential. Asset substitutions are allowed, subject to multiple restrictions. One such provision requires the substituted asset to be at least as essential as the original asset.
Total estimated asset values after construction completion are expected to equal $5.5 million, which would overcollateralize the bonds' $4.3 million par value. Of the leased assets, $4.2 million will be subject to abatement while town hall is under construction for seismic retrofitting. The construction is expected to be completed in November 2013, and the structure includes capitalized interest to last six months past the estimated construction completion date on this portion of the bonds.
Other legal provisions includes a covenant to budget and appropriate lease payments, 24 months of rental interruption insurance, and a covenant to maintain standard comprehensive insurance. The structure does not include a DSRF, which is a concern but does not lead Fitch to make a notching distinction. Budget delay risks are mitigated by the timing of semiannual lease payments well past the beginning of the fiscal year.
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. 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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