SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings affirms the following ratings for Sacramento County, California (the county):
--$977 million pension obligation bonds series 1995A, 2003B, 2004C-3, 2008, 2011A and 2011B at 'A-';
--$172 million certificates of participation (COPs), series 2006, 2007 and 2010 at 'A-';
--Implied general obligation (GO) bond rating at 'A'.
The Rating Outlook is Stable.
SECURITY
The POBs are absolute and unconditional obligations imposed by law and are payable from any money lawfully available to the county.
The COPs are secured by the county's covenant to budget and appropriate lease payments for use and occupancy of certain essential facilities. Lease payments are subject to abatement and supported by cash-funded debt service reserves.
KEY RATING DRIVERS
LIMITED FINANCIAL FLEXIBILITY: The county's financial flexibility remains constrained due to ongoing personnel cost pressures, slow revenue recovery, and minimal reserve levels. Operating margins continue to improve but general fund cash balances remain weak, requiring ongoing intra-year internal borrowing. In addition, the general fund retains a substantial balance owed to non-general fund sources, with no fixed schedule for repayment.
SLOW ECONOMIC RECOVERY: The local housing market has rebounded strongly over the past year but home values remain well below pre-recession peaks. Employment levels have also shown steady gains over the past two years but at below-average rates, likely due to continued weakness in the dominant government employment sector.
LONG-TERM OBLIGATIONS MIXED: County debt ratios are moderate but pension obligation debt, in combination with pension contributions, comprises a large and rising share of general fund expenditure requirements. Capital needs are limited and revisions to other post-employment benefits (OPEBs) have reduced associated liabilities substantially.
RATING SENSITIVITIES
FINANCIAL FLEXIBILITY KEY: The rating is sensitive to changes in fundamental credit characteristics, particularly financial flexibility, as indicated by unrestricted general fund balance and cash levels. Further deterioration in either metric would increase downwards rating pressure while sustained improvement would raise prospects for upwards ratings movement.
CREDIT PROFILE
Sacramento County is home to California's state capital and nearly 1.5 million residents, while also serving as a regional employment center. In addition to countywide operations, the county provides a broad range of municipal services to more than one-third of residents living in unincorporated areas.
LIMITED FINANCIAL FLEXIBILITY
The county's financial flexibility remains constrained despite steady improvements over the last several years. Additions to unrestricted fund balance were equal to about 1.6% of general fund spending in 2011 and 1.4% in 2012, raising unrestricted fund balance to a still negative 0.2% at the end of 2012. General fund cash balances have also experienced steady increases but remained somewhat low at $207 million (equal to 1.3 months of spending) at the end of 2012.
Continued financial improvements in 2013 appear likely to raise general fund cash and unrestricted balances further, but the county's financial condition remains weak due to drawdowns of reserves and advances from non-general fund sources during the recent downturn. Fund balances plummeted between 2006 and 2009 while subsequent gains have been relatively modest. In addition, the county's balance sheet retains $71 million (equal to 3.7% of 2012 general fund spending) in long-term advances from special revenue and internal service funds, with no fixed schedule for repayment. The county also borrows funds from its substantial treasury pool on an intra-year basis to support general fund liquidity.
MODEST REVENUE GAINS
General fund revenues are well below pre-recession levels but have begun to show improvements. Management projects a 2.5% increase in property tax revenues for 2014, which Fitch considers reasonable based on recent taxable assessed value gains. Sales tax receipts also appear poised for growth following an estimated 5% increase in 2013 and with generally improving economic conditions. While such increases are positive news, the county's revenues remain depressed relative to earlier years. Management estimates of discretionary general fund revenues for 2014 are 17.5% below 2009 levels despite recent gains.
ONGOING EXPENDITURE PRESSURES
Rising pension and debt service costs, in combination with labor demands, continue to pressure the county's general fund. Estimated annual required contributions for pensions (all funds) for 2014 were one-third higher than 2010 levels, while general fund debt service costs are set to rise by more than 20% over the next ten years. Recent multi-year contracts for public safety personnel have deferred COLAs in the short term, but commit the county to higher compensation levels in future years. The majority of the county's other labor contracts expired on June 30, 2013 and pressure for wage increases appears likely following concessions made in recent years.
SLOW ECONOMIC RECOVERY
The local housing market has rebounded strongly over the past year but continues to suffer from past declines. Zillow.com reports a 34% year-over-year increase in home values as of June 2013, raising average values to 41% below pre-recession peaks. Employment gains have been slow but steady, with 23 consecutive months of year-over-year increases. Unemployment rates have fallen below the state average as a result but remain elevated at 8.3% as of April 2013. While lagging government employment has likely slowed employment gains, recent improvements in the finances of the region's largest employer, the State of California (GO bonds recently upgraded to 'A' by Fitch), should support continued economic recovery.
LONG-TERM OBLIGATIONS MIXED
Overall debt levels are moderate at 4.2% of assessed value and $3,651 per capita but pension obligation debt, in combination with pension contributions, make up a large and rising share of general fund expenditure requirements. Capital needs are limited and 2010 revisions to other post-employment benefits have reduced associated liabilities substantially. Carrying costs for debt service and retiree benefits remain relatively affordable at 16% of noncapital governmental expenditures in 2012.
The county has made considerable progress in restructuring a substantial derivatives portfolio in recent years but retains one structured POB issue which accounts for approximately one-quarter of outstanding direct debt. An associated swap had a negative termination value of $107 million as of July 2013, but improved county finances and the renegotiation of a ratings trigger in 2012 have reduced the risk of a potential forced termination.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's U.S. Local Government 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, Zillow.com, and National Association of Realtors.
Applicable Criteria and Related Research:
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
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=799789
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