Fitch Affirms El Paso de Robles, CA's GOs at 'AA'; Outlook Stable
--$25.5 million general obligation (GO) bonds at 'AA'.
In addition, Fitch has affirmed the city's Issuer Default Rating (IDR) at 'AA'.
The Rating Outlook is Stable.
The bonds are general obligations of the city, payable from unlimited ad valorem taxes levied within the city.
KEY RATING DRIVERS
The 'AA' IDR reflects the city's strong operating performance, low long-term liability burden, and moderate fixed costs. The city's limited legal ability to raise revenues could present challenges in adverse economic conditions, but strong reserve levels and budgetary flexibility are likely to offset such weaknesses.
Economic Resource Base
El Paso de Robles is located in San Luis County, (IDR 'AAA', Outlook Stable), midway between San Francisco and Los Angeles, about 15 miles from the coast. The population is 31,580. The economic base has supported solid tax base growth over the past couple of years, in contrast to a somewhat sluggish recovery immediately after the great recession.
Revenue Framework: 'a' factor assessment
Revenues have outpaced inflation and U. S. national economic performance over the last decade, in part due to a local sales tax measure, but the city's legal ability to raise revenues is constrained by Proposition 13, which requires voter approval for tax increases.
Expenditure Framework: 'aa' factor assessment
Moderate carrying costs and a number of limitations on the city's ability to control its work force contribute to the 'aa' assessment of this key rating factor. Growth in spending is likely to be in line with revenue gains over time.
Long-Term Liability Burden: 'aaa' factor assessment
Overall debt is low and the city participates in an adequately funded pension plan, resulting in a long-term liability that is low relative to its resource base.
Operating Performance: 'aaa' factor assessment
Reserve levels are very strong and would allow the city to readily withstand a moderate recession scenario. Fitch anticipates that management would made consistent efforts to improve financial flexibility following a moderate economic decline.
IDR SENSITIVE TO FINANCIAL PERFORMANCE: The 'AA' IDR could come under downward pressure if the city fails to maintain satisfactory financial flexibility, including reserves sufficient to address periodic economic volatility.
The city is well-known for wine production and tourism, although general consumer goods production and a transportation sector account for a greater proportion of economic activity. The growing presence of software engineering and biotechnology concerns has helped generate higher-paying employment. The city also participates in the broad and diverse San Luis Obispo regional economy, with a large state government, university, and utility presence. Wealth indices are mixed compared to those of the nation, and recently the unemployment rate has dipped below the national average.
Property taxes comprised 35.1% of fiscal 2015 general fund revenues, while general sales tax collections contributed 21.6%. The city in 2012 enacted a half-cent sales tax measure dedicated to capital projects; collections, although a small percentage of total revenues, relieve the general fund of capital spending requirements. Transient occupancy taxes, at just under 14% of operating revenues, have demonstrated consistent growth over the past decade, reflecting the increasing role of tourism.
Fitch believes future general fund revenue growth is likely to be solid, outpacing inflation in the absence of policy actions. Population growth above the national average is expected to continue, supporting the revenue growth prospects.
The state constitution requires voter approval of tax increases, limiting the ability of the city to control revenues. Property tax growth is constrained by the fixed tax rate and an annual limit on assessed value increases on taxable property (absent a change in ownership). The city does not possess the authority to independently raise either sales or transit occupancy taxes.
The city provides a broad range of municipal services, including police and fire, parks and recreation, and public works. Public safety, the largest spending category, accounted for 43% of fiscal 2015 general fund expenditures.
The rate of spending growth is expected to be in line with to marginally above expected revenue growth in the absence of policy action, despite rising pension system (CalPERS) contributions.
The city retains solid expenditure flexibility. Carrying costs, consisting of annual debt service, actuarially determined pension payments, and pay-as-you-go other post-employment benefits (OPEB) expenditures were artificially high in fiscal 2015 at 23.7% of governmental expenditures. The total included an OPEB contribution that exceeded the actuarially determined amount in order to compensate for reduced OPEB funding during the recession. Had the city remitted the actuarially determined amount for OPEB, carrying costs would have equaled approximately 19.2% of government spending.
A structured but reasonably flexible collective bargaining framework has allowed the city to reduce the size of its workforce when needed. The city has reinstated some positions and programs over the past few years as the economy has improved, providing flexibility if required.
Long-Term Liability Burden
The long-term liability burden is moderate relative to the city's significant economic resource base, with unfunded pension liabilities, direct debt and overlapping debt totaling about 8.4% of personal income. Maintenance of the long-term liability's current assessment relies to an extent upon any future debt issuance by the local school district, which comprises a notable proportion of overlapping debt. The city has no current plans to issue new tax-supported debt. Amortization is rapid, with about 77% of principal repaid in 10 years. The city participates in an adequately funded state pension plan, CalPERS.
The city has exceptionally strong gap closing capacity. The Fitch Analytical Sensitivity Tool suggests the city would likely experience only modest revenue losses in a moderate recession, despite the city's revenue volatility. Current reserves are sufficient to offset such a revenue loss even if policymakers took no action to raise revenues or adjust spending. The city is expected to maintain substantial reserves and financial flexibility across business cycles.
The city maintains structural budgetary balance by creating and adhering to conservative five-year financial forecasts. Voter-approved sales taxes have been set aside to support capital improvements, the city has made one-time contributions to reduce long-term liabilities, and unrestricted general fund reserves are notably high. Conservative budgeting and solid expenditure management would enable to city to swiftly replenish reserves after an economic downturn.
Fiscal 2015 represents the fifth consecutive year the city concluded with positive operations. The $1.4 million surplus, equal to 4.3% of spending, increased general fund reserves to a high 47.7% of spending. Current projections indicate continued positive operations, which Fitch considers reasonable given the city's recent performance.