Fitch Ratings has affirmed the following ratings for Vista, CA:
--$114 million certificates of participation (COPS) series 2007 at 'AA-';
--Implied unlimited tax general obligation (ULTGO) rating at 'AA'.
The Rating Outlook is Stable.
The COPs are secured by lease payments made by the city for use and occupancy of several city facilities. Lease payments are subject to annual appropriation and full or partial abatement.
KEY RATING DRIVERS
STRONG FINANCIAL PERFORMANCE AND RESERVES: Strong management practices are enabling the city to successfully navigate through the economic downturn and revenue and expenditure pressures. Solid operating performance is evidenced by consistently high reserve levels and conservative budget practices.
MODERATE OVERALL DEBT: Overall debt levels are moderate with an increasing debt service schedule expected to remain manageable given identified repayment source, limited future capital needs and no debt issuance plans.
STABILIZING TAX BASE: Modest recent assessed value (AV) declines followed consistent yearly growth over the past decade. Fitch expects modest recent permit activity to continue to stabilize the diverse tax base.
BELOW AVERAGE ECONOMIC INDICATORS: Some economic weakness is reflected in above average city unemployment levels and below average income levels.
LEASE APPROPRIATION RISK; ESSENTIAL ASSETS: The COPs rating reflects annual appropriation risk of lease payments balanced by the essential nature of the leased assets which include fire stations and city offices, and sound structural features including a cash-funded debt service reserve and rental interruption insurance.
The city of Vista, with a population of over 97,000, is located in northern San Diego County (rated 'AAA' implied GO by Fitch), 30 miles north of San Diego and about 5 miles east of Carlsbad and the Pacific Ocean, midway between San Diego and Orange County.
STRONG FINANCIAL PERFORMANCE
The city continues to address significant budgetary pressures through careful review of spending and services coupled with conservative revenue forecasting. Fitch views as a credit positive management's ability to successfully contain wage and benefit costs through the use of furloughs. Over the past three years, total filled positions are down a 10% and management successfully negotiated 5% pay reductions through use of furloughs for FY 2012 and 2013 which saves the general fund $600,000 annually. Expenditure savings coupled with modest increase in property and sales tax revenues has enabled the city to maintain strong reserve levels.
In FY 2012, the city added $2 million to unrestricted general fund balance which has consistently averaged over 40% of spending net of debt proceeds. Management continues to evaluate expenditure savings including selective service reductions and privatizations. Fitch views the adopted FY 2013 budget as sound as it includes moderate revenue increases based on improving economic factors demonstrated by positive AV trend, continuing personnel cost savings as well as other minor expenditure reductions with no decrease in services. Fitch expects reserve levels to remain strong given management's sound budgetary processes.
MODERATE OVERALL DEBT
The city's direct debt is low but the overall debt profile is more moderate at $4,027 per capita and 4.5% of market value due in part to sizable overlapping redevelopment agency debt outstanding. The city maintains an annual capital improvement budget with most project needs funded with operating funds. Future capital needs are not significant, somewhat offsetting concerns about the slow COP debt amortization of 10% in five years and 25% in ten years. Maximum COP debt service (MADS) of $10.9 million occurs in 2037, due to the increasing debt service schedule. Nonetheless, MADS is manageable at 16% of current expenditures given the availability of Proposition L sales taxes (described below).
MANAGEABLE CARRYING COSTS
The city participates in CalPERS and contributes 100% of the required annual payment. Pension payments have been level at around $4 million annually but are expected to rise given recent plan return assumption changes and performance. The city has no postemployment benefit obligations.. Total carrying costs for debt and pensions are manageable at 13% of the operating budget.
STABILIZING AV; WEAKER ECONOMIC INDICATORS
City AV declined between 2008 and 2010 by a modest 6% and returned to modest growth over the past two years. Fitch expects current retail development activity to further stabilize property and sales tax revenues at least for the near term.
The tax base is diverse with the top ten taxpayers representing just 6% of AV comprised of a mix of real estate holdings and small local manufacturers. The city's economy, proximate to San Diego, remains somewhat weaker than the region as demonstrated by above average unemployment rates and below average income levels. Fitch believes the city's tax base will continue to remain diverse.
SOUND LEASE STRUCTURE
The COPs are secured by lease payments made by the city in a typical lease transaction including a city covenant to annually budget and appropriate lease payments and a cash-funded debt service reserve fund equal to the lesser of 100% of maximum annual debt service, 125% of annual average debt service or 10% of the original par amount. Projects funded with COP proceeds have been completed on time and within budget.
Annual COP debt service is expected to be covered by revenues generated by the 2006 voter-approved one-half cent sales and use tax (Proposition L). Proposition L revenues have been growing, up $1.4 million or 26% in total since 2010 to $6.7 million in 2012, as the local economy continues to rebound and benefit from recent retail development activity including a new automobile dealership and several hotels. Proposition L revenues in fiscal 2012 adequately covered annual COP debt service of $6.1 million in 2012. Debt service increases by approximately 2.5% annually to $10.9 million at final maturity in 2037. Annual growth of sales taxes may be challenged to keep pace with the rising debt service, but the structure allows for the accumulation of excess revenues.
Since 2007 approximately $7.4 million of excess Proposition L sales tax revenues over expenditures has been accumulated due to capitalized interest and is available to support future debt service if needed. These funds are not pledged and are part of the unrestricted general fund balance so, while not intended, could be used for other purposes.
State sales tax revenue forecasts indicate average annual growth of 5% over the next ten years, well above the 2.5% average annual growth in COP debt service. Fitch believes the city's reliance on sales tax revenues for both debt service and operations (30% of total general fund revenues in fiscal 2011) is a vulnerability offset in part by the city's ability to maintain budgetary balance and sizeable reserve levels.
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, University Financial Associates, S&P/Case-Shiller Home Price Index and IHS Global Insight.
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
U.S. Local Government Tax-Supported Rating Criteria
Bernhard Fischer, +1-212-908-9167
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Karen Ribble, +1-415-734-5611
Amy Laskey, +1-212-908-1568
Elizabeth Fogerty, New York, +1 212-908-0526
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