Fitch Rates City of Rocklin, CA's 2016 LRBs 'AA'; Downgrades IDR on Criteria Change; Outlook Stable
--Approximately $9.2 million lease revenue bonds (LRBs) series 2016.
The bonds are expected to sell via competitive sale the week of Sept. 26. Proceeds will be used to refinance the remaining obligations of the authority's certificates of participation (COPs) bonds (police facilities and refunding) series 2003 and to borrow additional funds to finance capital improvement projects.
Fitch also downgrades the Issuer Default Rating (IDR) on the city of Rocklin, CA to 'AA+' from 'AAA' and the rating on approximately $1 million of outstanding COPs, series 2003 (pre-refunding) to 'AA' from 'AA+'.
The Rating Outlook is Stable.
The 2016 LRBs are payable by a first pledge of and lien on revenues received by the authority from the city under a lease agreement for the use of certain real property. The city of Rocklin has covenanted to budget and appropriate lease payments, subject to abatement, and payments can be made from any available funds of the city. The bonds do not include a debt service reserve.
KEY RATING DRIVERS
The downgrade of the IDR to 'AA+' reflects implementation of Fitch's revised criteria for U. S. state and local governments, which was released on April 18, 2016. Underlying credit factors since the time of Fitch's last review of the city are stable; however, the revised criteria place increased focus on Fitch's expectations on the independent legal ability to increase revenues relative to potential revenue declines in a moderate economic downturn, which Fitch assesses as consistent with the 'bb' category. The 'AA+' IDR reflects the city's solid expenditure control, low long-term liabilities, exceptional reserves and financial resilience and budget management practices. The 'AA' rating on the LRBs and COPs is one notch below the city's IDR reflecting the slightly higher degree of optionality associated with the lease payments backing these obligations.
Economic Resource Base
The City of Rocklin is located within Placer County, 22 miles northeast of the city of Sacramento and approximately 100 miles from San Francisco. The city is primarily a bedroom community with a current population of 61,213. The city has experienced population growth and job growth due to its relative affordability, regionally important employment base, and proximity to Sacramento. The city is home to regional offices for Oracle and UPS in addition to higher education institutions Sierra College and William Jessup University.
Revenue Framework: 'a' factor assessment
Revenues have grown steadily in recent years outperforming U. S. GDP growth and inflation. Fitch expects growth prospects will continue to improve due to the city's broadening tax base and economic activity including new developments in retail, single and multifamily housing. The city's legal ability to raise revenues, however, remains constrained by Proposition 13, which requires voter approval for tax increases.
Expenditure Framework: 'aa' factor assessment
The city's natural pace of spending growth is likely to be in line with revenues. The city has ample spending flexibility underpinned by its low fixed costs related to debt service and retiree benefits. Sound legal controls over employee headcount were utilized to control spending during the last recession. The city contributes above the actuarially determined level for pension and other-post employment benefits (OPEB) which could be a source of expenditure flexibility in the future if needed.
Long-Term Liability Burden: 'aaa' factor assessment
The city's overall liability burden is low relative to its resource base. The city does not anticipate the need for additional debt in the near future.
Operating Performance: 'aaa' factor assessment
The city's operational performance is exceptionally strong underscored by its high reserve balances and more moderate controls on revenue and spending, and management's demonstrated ability to negotiate labor concessions to address periods of revenue uncertainty or decline and to produce favorable variances relative to budgeted outcomes.
RATINGS SENSITIVE TO FINANCIAL PERFORMANCE: The 'AA+' IDR and all other ratings are sensitive to the city's ability to maintain satisfactory financial flexibility sufficient to address challenges associated with periodic economic and revenue volatility.
Rocklin continues to experience growth in the residential, retail and commercial sectors, benefiting from its favorable location in close proximity to Sacramento and adjacent I-80, availability of developable land, and well regarded school system.
Property and sales and use taxes comprise the majority of city revenues. The city posted 7.8% and 8.5% taxable assessed value (AV) growth for fiscal year (FY) 2015 and 2016, respectively; the current taxable value is $8.3 billion which is 5.8% over FY 2016. Sales tax revenue is projected to increase 12.9% for FY 2016.
Revenue growth over the past 10 years has surpassed both GDP growth and inflation. Expansion of the city's economic base positions it continue steady growth of revenues.
State law requires voter approval of tax increases, limiting the ability of the city to independently offset cyclical revenue declines via management or policy initiatives. Property tax growth is constrained by an annual limit on AV increases on taxable property absent a change in ownership. The city however estimates the ability to raise revenues related to user fees by 10% if needed, which would only translate to roughly $550,000 in additional revenue, or a rather modest 1% of spending.
The city provides a broad range of municipal services. Public safety accounts for 46% of the city's expenditures.
The rate of spending growth is expected to be in line with, to marginally above, expected revenue gains in the absence of policy action. The city is expected to maintain ample overall expenditure flexibility.
The city has a demonstrated history of reducing personnel costs via labor concessions or changes to headcount when necessary. During the previous recession, the city eliminated 73 fulltime positions or roughly 25% of its total workforce. Additional saving measures were enacted through employee benefit cuts and furloughs. Some of the prior cuts have been restored, mostly through expanded use of contractual services. Management has indicated it would likely return to such strategies if needed to address new revenue declines.
The city's policy is to maintain a 25% general fund operating reserve. Once the reserve policy is met the city allocates 50% of any budgetary surplus in the ensuing year to pay down its unfunded pension liability. The city has contributed more than $1.7 million in FY 2014 and $3.2 million in FY 2015 (or 4.5% and 7.6% of general fund spending, respectively) above the actuarially determined contribution to CalPERS and an other post-employment benefits (OPEB) trust fund with the California Employers' Retiree Benefit Trust (CERBT) established in 2014. These additional payments could also be reduced or postponed if the city found it necessary to reduce its expenditures. The city also maintains an expenditure rule of 75% designated for personnel spending and 25% for operations and maintenance expenditures.
Long-Term Liability Burden
Long-term liabilities are estimated by Fitch at roughly $260 million or less than 8% of the city's personal income, of which close to $210 million is derived from the debt of overlapping governments (primarily the city school system). The city's continual focus on reducing its pension UAAL and subsequent fiscal actions has resulted in a drop in the city's proportionate share of the CalPERS net pension liability from approximately $44 million in FY 2012 to $30 million in FY 2015.
The city's ample reserves and more moderate expenditure and revenue flexibility contribute to an expectation the city will maintain a high level of fundamental financial flexibility in a moderate economic downturn.
The city has a history of maintaining exceptionally strong reserves, significantly higher than its 25% internal policy which Fitch views as important given a relatively high level of general fund revenue volatility. The unrestricted general fund balance in FY 2015 totaled $32.8 million or 74% of spending. Fitch's expectation is that the city would use a combination of its moderate budget flexibility and ample reserves to offset any recessionary revenue declines.