Fitch Affirms Atwater RDA, CA's TABs at 'BBB '; Outlook Stable
--\\$6 million TABs, series 1998A and 2007A;
--\\$1.6 million housing TABs, series 2007B.
The Rating Outlook is Stable.
The non-housing series 1998A and 2007A TABs are payable from gross tax increment within the sole project area, net of the 20% housing set-aside and county administrative fee. The bonds are additionally payable from the housing set-aside increment revenues. The housing TABs are secured by the 20% housing set-aside. The debt service reserve requirement is being met through a surety-funded debt service reserve fund.
KEY RATING DRIVERS
IMPROVING COVERAGE FROM A LIMITED BASE: Fiscal 2016 housing and non-housing bond coverage are projected by Fitch at 1.74x and 1.89x maximum annual debt service (MADS), respectively. Fitch considers the improving coverage and the project area's relative tax base stability to be major mitigants to historical concentration.
ADEQUATE ADMINISTRATIVE PERFORMANCE: The agency appears to be in compliance with material indenture and statutory requirements, and is continuing to segregate tax increment revenues from the city's pooled cash fund.
RECOVERING WEAK ECONOMY: The city is geographically remote with weak employment and income indicators and an economy dominated by agriculture. However, the employment base has experienced continued growth, and construction and permitting activity continues at a modest pace.
NO IMPACT FROM ANALYTICAL REFINEMENT: Fitch recently refined its analysis of California TABs and is now considering their liens to be effectively closed and surplus housing revenues to be available to pay non-housing debt service. This action did not result in a material improvement of the TABs' credit risk profile.
TAX BASE PERFORMANCE: Sustained growth in the project area's tax base and MADS coverage will likely result in positive rating action.
The agency is located in the city of Atwater, about six miles north of Merced in California's Central Valley.
IMPROVING DEBT SERVICE COVERAGE
Fitch estimates fiscal 2016 net revenues of \\$1.4 million will cover non-housing and housing MADS a solid 1.89x and 1.75x, respectively. Fitch estimates assessed value (AV) would need to decline by approximately 38% for MADS coverage to reach 1.0x on the non-housing and housing TABs. This compares quite favorably to the project area's cumulative recessionary AV loss of 5.6%.
Fiscal 2016 AV increased a solid 7.8% due to both organic growth and the completion of new construction in the project area. There are currently no appeals outstanding within the project area among taxpayers exceeding \\$500,000 in AV, and management pointed to factors that could spur modest additional AV growth over the near term, including expanded investment among top taxpayers and increased demand for residential real estate. A chain restaurant and an insurance office space currently under construction are expected to appear on the tax rolls in fiscal 2017. Residential construction permit activity has remained healthy after recovering from admittedly low recessionary levels.
SMALL, CONCENTRATED PROJECT AREA IN WEAK ECONOMIC ENVIRONMENT
The project area is somewhat small at 840 acres, and contains high concentration levels, with the top 10 taxpayers making up 27% of AV (or 29% of incremental value [IV]). The largest taxpayer, Teasdale Quality Foods, constitutes 8% of AV, 9% of IV.
The city's population was severely affected by the housing-led recession, with unemployment peaking at nearly 20%. The project area's AV fared better than expected, however, as continued industrial development offset rapidly falling residential valuations. As a result, the project area's peak-to-trough AV loss was just 5.6%, well out-performing a number of project areas in the Central Valley.
Although the project area's AV held up fairly well through the downturn, other economic indicators remain weak. Unemployment is down significantly from its peak, but is still very high at 13.1% as of December 2015, driven predominantly by labor force losses over the last year.
As is typical of an agricultural community, income levels are low. Median household income levels are at 68% and 78% of the state and national averages, respectively. Per capita incomes are even lower, suggestive of relatively large family sizes. Educational attainment and poverty rates both lag the state and nation.
SATISFACTORY IMPLEMENTATION OF DISSOLUTION PROCEDURES
Management appears to be implementing RDA dissolution procedures (per AB 1X26) in a satisfactory manner. The agency was issued a Finding of Completion from the California Department of Finance (DOF) and is using administrative procedures approved by DOF to balance its six-month cash flows with the help of a private consultancy.
The agency is continuing to maintain a separate cash account solely for the agency's TAB debt service. The agency formerly commingled its debt service funds in a pooled cash account with the fiscally stressed city of Atwater. Fitch was concerned by the possibility that the city might borrow from the agency for its own general governmental purposes, as it did with certain city-owned enterprise funds. The agency's continued use of a special reserve and its ongoing commitment to separating the agency's debt service funds is required to maintain the TABs' current credit rating.
ANALYTICAL REFINEMENT CONSIDERS POSITIVE EFFECTS OF DISSOLUTION
In May 2015, Fitch refined its California RDA analysis pertaining to the beneficial impact of dissolution legislation (AB 1X 26). Fitch now considers TAB liens to be closed and surplus housing revenues to be available for non-housing TAB debt service. Although Fitch views these factors as positive credit characteristics, they were not sufficiently material to result in a positive rating action.
Fitch formerly excluded positive dissolution factors from consideration, reflecting a conservative approach to a dissolution environment marked by legislative, administrative, and judicial uncertainty. Three-and-a-half years and seven recognized obligation payments schedule (ROPS) cycles have passed since dissolution, during which the factors have benefitted TAB credit quality with no successful legal challenges to date. Although uncertainties remain, Fitch views the continued presence of closed TAB liens and surplus housing revenue availability as more likely than not to remain a feature of California TABs.