SAN FRANCISCO–(Business Wire) — Fitch Ratings assigned an ‘F1+’ rating to the following San Diego County, tax and revenue anticipation note program note participations (notes):
–$50 million, series 2012A.
In addition, Fitch affirms:
–Implied San Diego County general obligation at ‘AAA’;
–$787.1 million in outstanding San Diego County pension obligation bonds at ‘AA+’;
–$395.1 million in San Diego County and San Diego Regional Building Authority certificates of participation (COPs) and lease revenue bonds at ‘AA+’.
The Rating Outlook is Stable
The notes are expected to sell via negotiation during the week of June 4.
The notes are secured by a first lien on unrestricted county revenues and other monies attributable to fiscal 2013 and legally available. The pension bonds are an obligation imposed by law and have been legally validated as such. The COPs and lease revenue bonds are secured by lease rental payments for the use of various county properties, subject to abatement.
Key Rating Drivers
Large and Diverse Tax Base: As the fifth largest county in the nation, San Diego benefits from a large and diverse tax base with substantial ongoing development. Despite housing price declines of 40% from peak levels, taxable assessed value (TAV) has been relatively stable, with cumulative declines of approximately 4% over the past five years, largely due to Proposition 13’s limits on TAV growth for existing properties.
Slow But Steady Recovery: County unemployment rates remain elevated at 9.4% as of February 2012, but employment levels have risen steadily since mid-2010, albeit at modest rates.
Strong Financial Position: The county’s general fund financial trend remains stable, with healthy general fund balances and reserves, reflecting strong, institutionalized management policies and practices, including disciplined pension funding and effective actions to limit retiree pension and healthcare costs.
Low Debt: Debt management is very conservative, with significant cash financing and early debt retirements, resulting in low debt levels with above-average amortization.
Strong Coverage Levels: The notes are supported by high coverage levels that remain strong under severe Fitch stress scenarios.
San Diego County is the nation’s fifth most populous county with over three million residents and 18 incorporated cities. The core industries of its diverse economy include manufacturing, the military and related defense industries, and tourism. Employment levels have risen at a slow but steady pace since mid-2010, yet unemployment persists at a stubbornly high level (9.4% in February 2012). Wealth and Income indicators for the county remain above average.
Large and Diverse Tax Base
The county’s tax base has retained much of its value during the recent downturn despite housing price declines that have exceeded the national average. Between 2006 and 2011 housing prices fell 40%, yet TAV levels dropped only 4% from peak levels. Proposition 13’s restrictions on TAV growth in prior years explains much of this discrepancy, as more than half of taxable properties have base values established prior to 2003. Proposition 13’s stabilization of TAV levels has been a key financial factor for the county, as it relies on property tax for 84% of general purpose revenues.
Strong Financial Position
The county has achieved consistently strong general fund results with positive operating margins in four of the past five fiscal years. Results for fiscal 2012 are expected to continue this positive trend, with a projected addition of $182.6 million to fund balance. Unrestricted fund balance (the sum of committed, assigned, and unassigned fund balance per GASB 54) at the end of fiscal 2011 was a healthy 35.7% of general fund spending.
The county’s strong financial results are supported by forward-looking management policies and practices which include clear reserve targets, disciplined funding of capital needs and long-term obligations, and conservative budgeting. In addition, the county has instituted numerous expenditure controls over the past several years, reducing both near-term and future cost pressures through strategic reductions in spending on employee and retiree benefits.
The county benefits from its low debt burden as a result of a preference for cash financing of projects and early debt defeasance. Overlapping debt levels are moderately low at $3,622 per capita and 2.8% of TAV. Amortization is above average with 64% of outstanding principal repaid within ten years.
The county retains a substantial unfunded liability for retiree pension costs which is expected to increase over the several years due to recent investment losses. In 2007 the county eliminated post-retirement healthcare benefits for active employees, capping its liability for other post-employment benefits.
Fitch notes as a credit positive the county’s full funding of its actuarially annual required contribution for both pensions and OPEB which together with debt service consumed a low 10% of fiscal 2011 general fund spending.
Strong Coverage Levels
The series 2012A notes are supported by high coverage levels (in excess of 20 times) from general fund operations as well as substantial borrowable resources. The county plans to set aside the monies needed to repay the notes’ principal and interest in January 2013 (60%) and April 2013 (40%), well ahead of the June 28, 2013 final maturity. In addition, the county general fund retains access to $296.6 million in cash available for interfund borrowing. Note coverage levels are high even without such borrowable resources and remain high under Fitch stress scenarios.