Fitch Rates Midpeninsula ROSD, CA's Green Bonds 'AAA'; Affirms Outstanding
--$57.4 million Green Bonds, 2016 refunding.
The bonds are expected to sell via negotiation during the week of Sept. 5. Proceeds will refund outstanding debt for interest savings.
In addition, Fitch has affirmed the followings:
--Issuer Default Rating (IDR) at 'AAA';
--$40 million general obligation (GO) bonds series 2015A at 'AAA;
--$5 million GO bonds series 2015B (federally taxable) at 'AAA';
--$23.6 million refunding promissory notes 2015 at 'AAA';
--$30.3 million refunding promissory notes series 2012 (1999 project lease) at 'AAA';
--$20.4 million Midpeninsula Regional Open Space District Financing Authority series 2011 lease revenue bonds (LRBs) at 'AA+'.
The Rating Outlook is Stable.
The Green Bonds and notes are payable from a senior lien on the district's share of countywide property tax. The GO bonds are supported by an unlimited ad valorem tax on all taxable property within the district. The LRBs are payable from lease payments from the Midpeninsula Regional Open Space District Financing Authority to the district for use of various parcels of open space. The district does not maintain debt service reserve funds on any of these obligations.
KEY RATING DRIVERS
The 'AAA' IDR reflects the district's robust operating performance, supported by a strong economic base, steady revenue growth, manageable expenditure requirements, and limited long-term liabilities.
Economic Resource Base
The district's economic base encompasses mostly wealthy suburban cities in portions of Santa Clara and San Mateo counties with mature and stable housing stocks, as well as headquarters of many of the nation's leading technology companies. Income levels are high, unemployment is low, and home prices have increased rapidly in recent years. Over the past 30 years assessed valuation (AV) has risen at a compound annual growth rate of 6.5%.
Revenue Framework: 'aa' factor assessment
General fund revenues, primarily property taxes, have increased well above the level of overall U. S. economic performance historically. The district's independent ability to raise revenues, however, is limited by state constitutional provisions requiring voter approval for tax increases.
Expenditure Framework: 'aaa' factor assessment
Based on its current spending profile, the district's pace of spending growth appears likely to remain below expected revenue growth. The district also retains ample ability to reduce expenditures through decreased spending on its substantial capital program.
Long-Term Liability Burden: 'aaa' factor assessment
Overall debt and unfunded pension liabilities are low relative to the district's substantial resource base.
Operating Performance: 'aaa' factor assessment
The district's substantial reserves and a history of limited revenue volatility provide it with exceptional gap closing ability in the event of a moderate economic downturn. Budget management is conservative and the district's financial position has strengthened following the last recession.
Robust Revenue Bond Coverage
Pledged revenues provide strong support of debt service requirements on the district's Green Bonds and notes and appear unlikely to be diminished by revenue declines or additional parity obligations.
Operating Performance: The IDR is sensitive to the district's continued stable operating performance, which has benefited from both strong revenue growth and conservative financial management. The Stable Outlook indicates Fitch's expectation that changes in these attributes are unlikely.
Maintained Coverage: Ratings on the district's revenue bonds are sensitive to reduced coverage of debt service requirements, which is considered unlikely in light of expected revenue growth and no plans for further leveraging.
The district serves approximately 720,000 residents in predominantly wealthy portions of northwest Santa Clara County (69% of the tax base) and San Mateo County (31%). Established in 1972, the district's primary objective is to preserve and maintain open space. Its chief method for doing so is to acquire land using district property tax revenues, state and federal grants, gifts of open space land and joint projects with other governmental agencies and private nonprofits.
Approximately 90% of district revenues derive from a share of the 1% countywide property tax. In addition, the district receives grants and donations of land in support of its mission to preserve open space.
Revenue growth for the district has exceeded U. S. GDP by a large margin over the past 10 years, reflecting strong AV growth of the district's underlying tax base. Over the past 30 years AV has increased at a compound annual growth rate of 6.5%, providing parallel increases for district tax revenues. Based on current trends in the local housing and commercial property markets, Fitch expects district revenue growth to remain robust for the foreseeable future.
Like other local governments in California, the district's legal ability to raise revenues is constrained by state constitutional provisions, adopted under Proposition 13, that require voter approval for tax increases.
District expenditures for staff salaries and benefits, in combination with debt service, have accounted for roughly 70% of general fund spending in recent years, with the balance dedicated to capital outlays.
Based on the district's history of strong property tax growth and conservative budgeting, Fitch expects that overall spending will increase at a slower pace than revenue gains.
The relatively high proportion of district expenditures on capital outlays provides it with exceptional budget cutting flexibility in the event of an economic downturn. Although carrying costs for debt service and retiree benefits account for a relatively high share of district expenditures at 29% of fiscal 2015 general fund spending, the district spends nearly one-third of its budget on capital and could adjust such expenditures as needed to offset a revenue shortfall.
Long-Term Liability Burden
The district has historically supported its goals of open space acquisition and maintenance through pay-go financing and limited tax revenue bonds. In 2014 local voters authorized a $300 million general obligation bond program for the district, which is expected to provide long-term financing for capital improvements and accelerate the completion of targeted projects.
The district participates in a state-sponsored pension plan with adequate funding and has regularly made its annual required contributions. OPEB liabilities are fully funded in an irrevocable trust. Long-term liabilities including anticipated district debt issuances, net district liabilities for retiree benefits, and overlapping debt are a low 8.7% of estimated total personal income for the district.
District reserves are very large relative to anticipated revenue declines in a moderate economic recession, providing superior gap closing ability in such circumstances.
Budget management is conservative and is supported by a long-term model of anticipated revenue and expenditure growth that is updated annually. The district has added to reserves in the wake of the recession and has also strengthened financial flexibility by shifting future capital financing from pay-go and revenue bonds to unlimited tax GOs.
Robust Revenue Bond Coverage
The Green Bonds and outstanding notes are supported by a pledge of the district's general fund revenues, primarily consisting of its share of the 1% countywide tax on all property within the district. Historic growth of this revenue stream has been strong, and in combination with limited leverage, provides the bonds with robust coverage (3.9x MADS in fiscal 2015); coverage is expected to remain strong through future economic cycles. The somewhat weak additional bonds test of 1.25x maximum annual debt service is mitigated by the district's recent GO authorization, which is expected to serve as its primary source of capital financing in future years.
Pledged revenues in excess of debt service requirements support the district's ongoing operations, capping Fitch's rating on the revenue bonds at the district's IDR, currently at 'AAA'.