OREANDA-NEWS. Fitch Ratings has affirmed the following San Juan Capistrano (the city), California general obligation (GO) bonds at 'AAA':

--$1.9 million GO refunding bonds, series 1998A (Open Space Program).

The Rating Outlook is Stable.

SECURITY

The bonds are payable from ad valorem property taxes, unlimited as to rate or amount, levied on all taxable real property in the city.

KEY RATING DRIVERS

ABOVE-AVERAGE SOCIOECONOMIC CHARACTERISTICS: The city benefits from significantly above-average wealth levels and a diverse tax base that continues to grow. The city includes both high-end residential communities and a large commercial component which is currently growing, while maintaining significant protected open space.

STRONG GENERAL FUND POSITION: The city has successfully restored its general fund balance, reserves, and liquidity to pre-recessionary levels through increased revenues, expenditure control, efficiency improvements, and labor concessions.

SOUND FISCAL MANAGEMENT: The city continues to focus on fiscal soundness, regular financial reporting, reviewing its financial management policies every two years, efficiency initiatives, and economic/business development.

MANAGEABLE DEBT BURDEN: The city's debt profile is largely conservative with no plans to issue further debt. Retirement and post-employment liabilities are manageable, particularly given labor concessions and the setting aside of funds to pay down the city's relatively small OPEB liability. However, the weakly funded pension system will likely require contribution increases in the future.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices and continued economic/business development.

CREDIT PROFILE

ABOVE-AVERAGE SOCIOECONOMIC CHARACTERISTICS
The city is a wealthy municipality located in southern Orange County midway between Los Angeles and San Diego. The city is noted for the historic Mission of San Juan Capistrano as well as gated master planned residential communities with an equestrian focus capitalizing on the city's commitment to open space (44% of the city's land). Wealth levels in the city are well above-average. The local unemployment rate is a low 4.4% (September 2015), down from 5.8% a year prior and below the state's rate of 5.5% and the national rate of 4.9%. While the impact of the recession significantly slowed the pace of residential development, taxable assessed valuation (TAV) fell by only 2.7% between fiscal years 2010-2012, subsequently rebounding 17.7% through fiscal 2016.

The city's tax base is diversified with a low 5.5% concentration among the top 10 taxpayers. There is a large economic base which includes retail and auto dealerships, service sector employment, and private schools. The commercial sector continues to expand, new residential developments are underway, and the city is considering permitting applications for further commercial and residential development projects.

STRONG GENERAL FUND RESULTS
The city returned to positive operations in fiscal years 2011-2014 after general fund deficit spending in fiscal years 2008-2010, when the city failed to curb its expenditures during a period of declining revenues. Consequently, the unrestricted general fund balance has grown to $14.4 million in fiscal 2014 (a very strong 64.6% of spending) from $8 million in fiscal 2011 (35.7% of spending).

The city is projecting a further increase in its unrestricted general fund balance to $15.6 million (67.7% of spending) in fiscal 2015. This is largely due to ongoing general fund revenue growth which increased 3.2% year-over-year. While general fund expenditures are projected to grow at a faster rate (4.4%, largely due to rising personnel costs), the year is still projected to end with a $1 million surplus. The city anticipates generating a net general fund surplus again in fiscal 2016, largely due to increasing tax revenues despite the use of budgeted reserves and encumbrances for already known one-time expenses.

The general fund contingency reserve (a component of the unrestricted general fund balance) grew during fiscal years 2011-2015 to a projected 47% of current expenditures excluding capital improvement project transfers, from 23.1% (less than the minimum 25% policy goal). In addition to this reserve, the city also has access to borrowable funds in the event of an emergency from the facilities operations fund ($2.8 million) and the sewer enterprise fund ($11.4 million).

The city's general fund liquidity position is much improved. At fiscal 2015 year end, the cash and investments balance is projected at a strong $14.4 million (quick ratio of 7.6), compared to just $1.4 million at fiscal 2011 year end (quick ratio of 0.8).

MANAGEABLE DEBT BURDEN
The city's debt burden remains low, due in part to significant pay-as-you-go capital financing. Direct debt consists mostly of general obligation bonds and tax allocation bonds issued by the city's former community redevelopment agency. Including overlapping debt, total obligations were $2,357 per capita or 1.3% of fiscal 2015 taxable assessed valuation. Direct debt amortization is average at approximately 52% in 10 years when successor agency tax allocation bonds are taken into account. The city has no upcoming debt issuance plans. The series 1998A bonds will mature in August 2017.

The city contributes its full annually required pension contribution (ARC) to the Orange County Employers' Retirement System (OCERS) each year ($2.2 million in fiscal 2014). In fiscal 2014, OCERS had a funded ratio of 69.8% based on a 7.25% discount rate. Using Fitch's more conservative 7% discount rate, OCERS was only 67.9% funded. Either metric suggests that higher contributions could well be required in the future. All staff began contributing the full employee share on July 1, 2013.

The city funds OPEB on a pay-as-you-go basis and has a manageable OPEB unfunded actuarial accrued liability (UAAL) of only $1.2 million for which it has already set aside $0.7 million but not in an irrevocable trust.

The city's fiscal 2014 carrying costs for debt service, pension ARC, and OPEB pay-go represented a manageable 17.4% of its total governmental spending that year.