SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'F1+' rating to the following Riverside, CA (the city) bond anticipation notes (BANs):
--$30 million taxable pension obligation refunding BANs, 2016 series A.
The BANs are expected to sell via negotiation the week of May 9. Proceeds will be used to refund the city's outstanding $30 million taxable pension obligation BANs, 2015 series A, which Fitch has affirmed at 'F1+'. The city rolls the BANs annually to maintain its original strategy to keep the $30 million series B portion of 2005 pension obligation bonds in short-term, interest-only mode through 2020.
In addition, Fitch has affirmed the following ratings:
--$13.5 million general obligation (GO) bonds, series 2004 at 'AA';
--$16 million taxable pension obligation bonds (POBs), series 2005A at 'AA-';
--$20.7 million certificates of participation (COPs), series 2010 (Recovery Zone Facility Hotel Project) at 'AA-';
--$38.6 million lease revenue refunding bonds, series 2012A at 'AA-' issued by the Riverside Public Financing Authority (the authority);
--the city's Issuer Default Rating (IDR) at 'AA'.
In addition, Fitch has upgraded the $18.1 million lease revenue COPs, series 2006 (Galleria at Tyler Public Improvements) to 'AA-' from 'A+'. The upgrade reflects application of Fitch's revised 'U.S. Tax-Supported Rating Criteria', published April 18, 2016. The revised criteria includes more focused consideration of project factors in ratings for appropriation-backed debt; the series 2006 bonds do not carry any of the additional risk features that Fitch identifies for rating more than one notch below the IDR.
The Rating Outlook on the long-term ratings is Stable.
SECURITY
The pension obligation bonds and pension bond anticipation notes are supported by the city's absolute and unconditional obligation, payable from any legally available funds. They are rated one notch below the city's IDR.
The GO bonds are supported by the city's full faith and credit and unlimited ad valorem property tax pledge.
The lease revenue refunding bonds 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 two years of rental interruption as well as provisional property loss insurance.
KEY RATING DRIVERS
The city's healthy financial performance is supported by diverse revenue sources and solid expenditure flexibility, which mitigate to some extent its limited ability to increase revenues. Its long-term liability profile is moderate.
Economic Resource Base
The city's economic base is fairly diverse with low concentration. It benefits from four universities, government (county seat), and proximity to labor markets in Los Angeles and Orange Counties as well as the rest of Riverside County. Wealth levels are average to below average (due in part to a large student population). The housing market was one of the hardest hit during the last recession, though the tax base declined only moderately and has since rebounded.
Revenue Framework: 'a' factor assessment
The property and sales taxes along with the utility transfers that support the city are expected to continue to yield growth in line with or above that of the overall U.S. economy. However, the city's independent legal ability to raise revenues is limited by state law.
Expenditure Framework: 'aa' factor assessment
The city has demonstrated a solid ability to cut spending at times of economic and revenue decline. On average, growth in spending is likely to be generally in line with revenue growth over time.
Long-Term Liability Burden: 'aa' factor assessment
The city's pension obligations are well-funded and it has limited capital needs, resulting in a long-term liability total that is a moderate burden on resources.
Operating Performance: 'aa' factor assessment
The combination of the city's demonstrated expenditure cutting flexibility and solid reserve funding levels leaves it well positioned to address cyclical downturns. The city has strong budget management and a demonstrated commitment to bolstering its financial cushion as needed at times of economic recovery.
RATING SENSITIVITIES
Ability to Maintain Balance and Reserves: Continued strong budget management amid salary and pension cost pressures will be essential to maintaining the rating at this level.
CREDIT PROFILE
Revenue Framework
Riverside's revenues are fairly diverse as it benefits from transfers in from its utilities, especially the electric utility. Utility transfers are charter permitted up to 11.5% of gross receipts and are currently at their maximum. In fiscal 2015, property taxes and sales taxes each accounted for a quarter of revenues, the utility users tax another 11%, and the utility transfers 17.5%. Voters approved a measure in June 2013 to guarantee continuation of the annual utility transfers, a portion of which had been at risk.
Historical revenue growth has been above the level of inflation, and Fitch expects it to remain so given the opportunities for continued development growth. State law limits property tax revenue increases to the lesser of CPI or 2% annually and requires state approval for increases of the sales tax rate, leaving the city with no independent legal control over revenue raising.
Expenditure Framework
Public safety is the city's largest expenditure area, representing about half of total spending. The pace of spending growth absent policy actions is likely to be in line with to moderately above expected revenue growth given rising pension costs along with a growing economy. Carrying costs, less the pension obligation BANs that the city rolls over annually, are moderate. In addition, a considerable portion of the city's debt (about 40%) is paid from non-general fund sources. The collective bargaining framework allows some flexibility to make adjustments to personnel spending as needed. The new administration recently agreed to a police contract that provided retroactive pay increases, among other benefits, and added a $3.9 million mid-year appropriation, equal to about 1.1% of general fund spending and transfers. The city held salaries flat for the prior seven years.
Long-Term Liability Burden
The city has moderate debt levels, with limited capital needs. Given the limited additional borrowing plans, Fitch expects the debt burden to remain moderate. Pension funding ratios are good, and the liability related to other post-employment benefits is manageable.
Operating Performance
The city's financial resilience comes primarily from its expenditure cutting flexibility, as well as reserves. The city has demonstrated a strong commitment to supporting financial flexibility. Its use of non-recurring revenues and deferral of spending items is limited to periods of economic decline and modest even at such times. The city expects about a $4.3 million fiscal 2016 end of year deficit due in part due to spending related to new police contracts. In addition, management indicated it expects to develop a long-term plan for sufficient funding of the city's deficit in its self-insurance trust fund, which stood at $27.6 million as of fiscal year end 2015.
Although an unaddressed moderate economic downturn scenario shows reserves falling below the level consistent with an 'aa' financial resilience assessment, Fitch expects that in the event of an actual revenue decline of this magnitude the city would maintain reserves above that level through active expenditure management, as was demonstrated during the most recent recession.
Fitch views Riverside's financial sensitivity to an economic downturn as overstated in a scenario that focuses on general fund revenues due to the treatment of utility revenues as transfers to the general fund rather than as general fund revenues. The utility transfer has represented a consistent and stable approximately 20% of total general fund revenues and mitigates to some degree the volatility in other revenues.
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 informed by information from Creditscope.
Applicable Criteria
Rating U.S. Public Finance Short-Term Debt (pub. 17 Nov 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873508
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1003352
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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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