Fitch Rates Successor Agency to San Bernardino RDA, CA's $51.5MM TABs 'A'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has assigned an 'A' rating to the following tax allocation bonds (TABS) issued by the Successor Agency to the Redevelopment Agency of the City of San Bernardino (the agency):
--$35.4 million tax allocation refunding bonds, series 2016A;
--$16 million tax allocation refunding bonds, series 2016B (Federally taxable).
The TABs are expected to sell via negotiation in mid-March. Proceeds will be used to refinance a portion of the outstanding indebtedness of the former Redevelopment Agency of the City of San Bernardino (former agency).
The Rating Outlook is Stable.
Agency bonds are payable from a subordinate lien on tax increment revenue generated in all project areas of the agency, net of the county administrative fees and senior pass-through obligations. The lien is subordinate to that of the former agency's bonds that will remain outstanding after the refunding (senior obligations).
KEY RATING DRIVERS
SOUND DEBT SERVICE COVERAGE: Fitch-calculated debt service coverage on the bonds is sound at about 1.54 times (x) maximum annual debt service (MADS) based on fiscal 2016 revenues. The 29% assessed value (AV) cushion should support debt repayment even under adverse economic conditions.
DIVERSE; VOLATILE TAX BASE: The project area includes a relatively diverse tax base within a large geographical size. Tax base performance was somewhat volatile through the recession but has been growing steadily since fiscal 2014. Moderate outstanding appeals do not pressure revenues materially.
WEAK ECONOMIC INDICATORS: The city's economic indicators are relatively weak with elevated unemployment and poverty rates and below average income levels.
CONTINUED AV GROWTH: Continued AV growth, increasing debt service coverage and the AV cushion could lead to a rating upgrade over the medium term.
UNEXPECTED VOLATILITY: Material decline in the tax base could place downward pressure on the rating.
San Bernardino is located about 60 miles east of Los Angeles and 55 miles west of Palm Springs. The city's population of 215,000 in 2014 grew at about the same pace as the state's, reflecting its relative maturity within the rapidly growing inland empire.
SOUND DEBT SERVICE COVERAGE AND AV CUSHION
The project area's AV increased about 3.2% in fiscal 2016 after gaining 2.1% the year prior. This follows tax base volatility during the recession in which AV declined 10% in fiscal 2010 and rose 11% in fiscal 2011 before declining 3% and 2% in fiscal 2012 and 2013, respectively.
The number of outstanding appeals declined substantially in fiscal 2015 to 27 from a high 131 in fiscal 2014. Applying the historical rate of the granted reduction as a percent of requested reduction (35%) to the outstanding appeals' aggregate requested reduction ($315.7 million) results in an estimated $110 million in value at risk, which is equal to a moderate 3.5% of incremental value and pledged revenue.
DEBT SERVICE COVERAGE RESILIENT UNDER STRESS
Fitch's base case reduces AV by the above-noted value at risk as well as assumes 1% AV growth in fiscal 2017 and tax collections at 98%. The resulting estimated fiscal 2017 revenues of $28.4 million cover estimated maximum annual all-in debt service of $17.7 million by a satisfactory 2.07x.
A stress scenario aggregating the recent 15% AV decline as well as the other assumptions from the base case would result in fiscal 2017 debt service coverage of an adequate 1.67x.
Fitch calculates the AV cushion (the amount AV would need to decline from fiscal 2016 levels to result in 1.0x debt service coverage) at an sound 46%, consistent with the 'A' rating.
LARGE, DIVERSE PROJECT AREA
The former agency had 14 project areas in various parts of the large 59 square mile city. For the refunding bonds, these have all been combined to a single project area. Top 10 taxpayer concentration is relatively low for a project area at about 14% of fiscal 2016 AV. Top taxpayers are all commercial or industrial, reflecting the warehousing and industrial nature of the tax base.
The city's economy remains weak, with elevated poverty (33%) and below average income (household income is about 63% of the state and 73% of the national level). Unemployment remains elevated at 7.6% in November 2015 though this is much improved from 9.4% from the year prior. Labor force growth is currently robust, well exceeding state and national rates of growth. Its location near several interstates and an international airport have contributed to its role as a distribution and warehousing center.
Zillow reports that home prices are up about 10% year over year; however, most of the project area AV is commercial and industrial.
Chapter 9 of the U.S. bankruptcy code defines special revenues to include tax increment revenues, and Fitch has received an opinion from counsel that pledged revenue are special revenues. As special revenues of the SA, revenues pledged for repayment of the bonds will not be affected by the city of San Bernardino's bankruptcy proceeding, which has been ongoing since 2012. Consistent with that, the bankruptcy has not resulted in a payment interruption of agency bonds and agency bonds are not included in the plan of adjustment.