NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed El Paso de Robles, California's (the city) outstanding obligations as follows:
--$28.6 million general obligation (GO) bonds at 'AA'.
The Rating Outlook is Stable.
SECURITY
The bonds are general obligations of the city, payable from unlimited ad valorem taxes levied within the city.
KEY RATING DRIVERS
STRONG FINANCIAL PERFORMANCE THROUGH RECESSION: The city's solid financial position has shown consistent growth following the economic downturn. City finances benefit from conservative budgeting, proactive financial planning, active expenditure management and the recent adoption by voters of a temporary half-cent sales tax.
ECONOMICALLY SENSITIVE REVENUE PROFILE: Solid reserve levels mitigate concerns to some degree regarding the general fund's dependence on sales and transient occupancy taxes, which are derived from a fairly narrow economic base.
LIMITED LOCAL ECONOMY: Local economy is largely centered on wine production and tourism, with a growing presence of biotechnology and software engineering concerns. Wealth levels and unemployment are comparable to the national averages.
POSITIVE DEBT PROFILE: Overall debt levels are low and amortization is rapid. There are no near-term plans for debt issuance and the recent passage of a dedicated half-cent sales tax is expected to help the city address its capital needs. Pension costs will likely rise over the next several years, subject to future state legislative action, to address unfunded liabilities.
RATING SENSITIVITIES
The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
CREDIT PROFILE
The city is located in San Luis Obispo County (implied GO rating of 'AAA'; Stable Outlook) about halfway between San Francisco and Los Angeles, about 15 miles from the coast. The city's population as of 2013 was 30,556.
STRONG FINANCIAL PERFORMANCE AND MANAGEMENT
The city has demonstrated consistently strong financial performance, due largely to active expenditure management and conservative budgeting and planning. The city was able to manage costs well during the recession through the elimination of discretionary spending and the reduction of general fund full time equivalent staffing by 35% through frozen positions and retirement incentives. As a result, the city was able to close a structural imbalance in fiscal year 2011 that was created in fiscal years 2009 and 2010. The city has been adding back positions in the time since.
The city is projected to finish fiscal year 2014 with a modest operating surplus after transfers. Four consecutive fiscal years of surpluses, in addition to a fund balance reclassification in fiscal year 2011, are projected to bring total general fund balance to a very strong $17.1 million, or 65.2% of spending, in fiscal year 2014 from $10.7 million, or 40.7% of spending, in fiscal year 2011.
The preliminary fiscal year 2015 budget shows another modest surplus and the city's five year forecast shows continued structural balance. Fitch considers the city's projections to be reasonable given conservative assumptions for the city's collection of sales and transient occupancy tax revenues and a recently passed half-cent sales tax measure that will relieve some pent-up capital spending pressures on the general fund.
FINANACIAL STRENGTH OFFSETS REVENUE VOLATILITY CONCERNS
The city's sound reserves and policy's regarding the maintenance of these reserves reduce concerns regarding the city's significant degree of reliance on economically sensitive revenues. Sales tax revenue and transient occupancy tax revenue account for 29% and 13%, respectively, of fiscal year 2013 general fund revenues. Property taxes, which Fitch views as an inherently more stable revenue source, accounted for a somewhat low 27.7% of the general fund revenue base. Sales and property tax revenue both saw declines related to the recession; however, both revenue sources have nearly fully recovered to peak levels as of fiscal year 2013. Transient occupancy tax collections, which are typically very economically sensitive, proved to be a resilient revenue source during this past recession.
Management's informal policy is to maintain no less than 25% of spending in general fund balance. Reserves have remained well above this level and management does not anticipate a reduction in general fund reserves over the near term.
AVERAGE ECONOMIC PROFILE
The city's local economy is mainly based on wine production and tourism, with a growing presence of higher-paying software engineering and biotechnology concerns. Tourism continues to grow, as evidenced by year-over-year increases in sales and transient occupancy tax collections and the on-going construction of 7-8 new high-end hotels within city limits. The city also participates in the broad and diverse San Luis Obispo county regional economy with a large state government and utility presence.
Unemployment has trended above the national rate but below the state's high rate since the economic downturn. The December 2013 unemployment rate decreased to 6.7% from 8.6% in the prior year, as employment growth outpaced a mild labor force contraction. Wealth indicators are generally at or below regional and national averages.
The city's 2013 population of 30,556 has grown by an above-average annual rate of 2.1% over the past decade, but Fitch does not detect signs of related capital pressures. Taxable assessed valuation (TAV) posted solid growth in fiscal year 2014 and has nearly returned to its prerecession peak. The housing market has also posted decent recovery.
FAVORABLE DEBT POSITION
Overall debt levels are low at $2,028 on a per capita basis and 1.7% of TAV. Amortization is above average, with nearly 65% of principal retired within 10 years. The city's capital needs are minimal and are nearly completely funded by grants, gas tax revenue, and the revenue generated by the new half-cent sales tax. The city does not anticipate issuing further debt over at least the near term.
The city participates in the state pension plan, the California Public Employees' Retirement System or CALPERS and is likely to face ongoing increases in contribution rates to address substantial unfunded liabilities. The city has historically funded 100% of its annual required contribution (ARC) to CALPERS, which totaled $2.8 million (7.4% of spending) in fiscal year 2013. The city funds its other post-employment benefit (OPEB) liability on a pay-go basis but the unfunded OPEB liability is a very low .2% of the city's TAV as of the most recent valuation on June 30, 2012. Overall carrying costs for debt service, pension and OPEB costs are manageable at 18.2% of governmental spending.
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
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