Fitch Downgrades Yuba City Financing Authority, CA's COPs to 'A+'; Outlook Stable

SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings has downgraded Yuba City Financing Authority, California's (the authority) certificates of participation (COPs) to 'A+' as follows.

--$11.5 million (Gauche Park/Aquatic Complex) COPs 2006 to 'A+' from 'AA-'.

In addition, Fitch has assigned an implied general obligation rating (GO) as follows:

--Implied GO at 'AA-'.

The Rating Outlook is Revised to Stable from Negative.

SECURITY

The certificates are secured by Yuba City, California's (the city) covenant to budget and appropriate lease payments for beneficial use and occupancy of the leased facilities. Additional security is provided through a debt service reserve surety and rental interruption insurance.

KEY RATING DRIVERS

ECONOMIC WEAKNESS PERSISTS: The downgrade reflects continued and acute economic weakness, including a 19.3% unemployment rate and three years of tax base contraction resulting from sharp real estate value losses.

LIMITED ECONOMY: Although the city is located near Sacramento, the local economy contains a large agricultural component with related persistently high unemployment and low income levels.

SOUND FINANCES DESPITE ECONOMIC CHALLENGES: The city enjoys a very high financial cushion, and three more years of anticipated operating deficits appear manageable after expenditure reductions were implemented and management fully funded an offsetting economic stabilization reserve.

GOOD MANAGEMENT PRACTICES: The city has a prudent 10% unreserved general fund balance policy, and management recently implemented a two-tier pension system, elimination of the city's implied OPEB subsidy, and narrowed a large structural operating gap by obtaining significant ongoing labor concessions and other expenditure reductions.

SOUND DEBT PROFILE: Debt levels are low, capital needs are modest, debt amortization is average, and both pension and OPEB liabilities appear manageable.

CREDIT PROFILE

ECONOMY UNDER SUBSTANTIAL RECESSIONARY PRESSURES

Yuba City serves a population of 65,000 approximately 40 miles north of Sacramento. Although the economy benefits from its affordability, availability of developable land, and its proximity to the large Sacramento employment market, the city has been under severe economic pressure for several years. Typical for an agricultural community, unemployment and income levels consistently have been weaker than state levels. In November unemployment was extremely high at 19.3%, though down from 22.1% the year prior owing to a 5.2% employment base expansion during the period. Per capita incomes in 2009 (the latest year for which such information was available) were at just 74% and 79% of state and national levels, respectively.

The city's median house value fell to $145,800 in January after having peaked at about $330,000 in 2005. This weakness caused AV to contract by 3.3% in fiscal 2012, and the tax base has fallen by a significant cumulative 11.2% since fiscal 2009. A 7.7% year over year home value decline in January does not bode well for fiscal 2013 AV, which will be based on property values as of Jan. 1, 2012. The tax base contains minimal concentration levels, with the top 10 payers making up just 7.2% of AV.

FINANCIAL OPERATIONS REMAIN STRONG DESPITE WEAK ECONOMY

Although revenues have been under recessionary pressures, overall financial operations remain quite strong. Fiscal 2011 net operations (before a special item) produced a manageable $1.3 million deficit, resulting in a high unreserved general fund balance of $8.3 million (21.2%). The deficit is net of a $2.7 million transfer in from a vehicle replacement fund, and a $436,000 transfer out to the city's unallocated capital reserve. The transfer out to the reserve is in accordance with city policy to transfer funds in excess of 10% of spending to this reserve.

The city's unreserved financial cushion is enhanced with $6.7 million of unallocated funds in a capital fund that could be transferred to the general fund for any operational purpose. When this source is considered, the city's total unreserved financial cushion rises to a robust $15 million (38.4%). Fitch relies solely on the unreserved fund balance because a significant amount of the total fund balance amount is reserved since it is a receivable owed by the city's redevelopment agency (RDA) that may never be repaid.

PRUDENT MANAGEMENT ACTIONS ENHANCE FINANCIAL PROFILE

Audited tax revenues have been under moderate recessionary pressures, falling approximately 9.2% cumulatively from fiscal years 2008 - 2011. Management prudently has enacted a number of offsetting expenditure reductions, including holding open vacant positions, furlough days, OPEB and pension reforms, and early retirement incentives. Currently the city has a large furlough program in effect that is saving the equivalent of 10% of salaries, or $2.2 million annually. Labor agreed to these concessions in exchange for a promise that there would be no layoffs for the next three years, though a material decline in revenues from current levels could re-open discussions with labor. Net of labor concessions, management estimates the city's structural deficit is about $1.5 - $1.6 million annually moving forward. The city plans to fully offset the deficit over the next three years by drawing down $4.6 million already set aside in an economic stabilization reserve (included within the unreserved general fund balance). Even after exhausting this fund, the city would hold a solid $10.3 million unreserved financial cushion (26.4%).

When the certificates were issued, management anticipated that debt service would be paid half from the RDA and half by impact fees. The housing-led recession has impacted both revenue sources and the state passed legislation that may prevent any further payments from the RDA, which will turn into a successor agency that the city intends to manage. Although management transferred four years of debt service from the RDA and impact fee fund to the trustee and a designated fund, respectively, for future payments, the portion from the RDA may be at risk pursuant to the RDA legislation. Total COP payments in fiscal 2012 equal $763,996 and are structured as roughly flat through the life of the certificates.

SOUND DEBT PROFILE

The city's debt profile is sound. Net debt levels are low at $1,611 per capita (2.5% of AV) and principal amortizes at an average rate, with 30% and 52% retired in five and 10 years, respectively. Identified capital needs are low, consisting of just $3 million needed by the city to construct an animal shelter. The COPs are secured by a sole lien on rental payments for use of Gauche Park, which includes the aquatic center financed by the COP proceeds. Although Fitch considers the leased asset to be non-essential, the one-notch distinction from the implied GO reflects the high initial equity contribution to the aquatic park, representing 42% of the cost of the project, as well as the covenant to budget and appropriate.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, S&P/Case-Shiller Home Price Index, Zillow.com, National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 15, 2011);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842

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