Fitch Rates Riverside County (CA) TRANs 'F1+'; Affirms Implied GO at 'AA-'; Outlook Stable

SAN FRANCISCO--(BUSINESS WIRE)--

Fitch Ratings has assigned the following rating to Riverside County, California's (the county) tax and revenue anticipation note (TRANs) as noted below:

--$250 million 2013-2014 TRANs 'F1+'.

The TRANs will sell via negotiated sale the week of June 3. Proceeds will fund ongoing operations of the county and the county's pre-payment to CalPERS.

Fitch also affirms the 'AA-' implied unlimited tax general obligation (ULTGO) rating in addition to various long-term county ratings as detailed at the end of this rating action commentary.

The Rating Outlook is Stable.

SECURITY

The TRANs are general obligations of the county, secured by unrestricted general fund revenue attributable to fiscal 2014.

Outstanding lease revenue bonds (LRBs) and certificates of participation (COPs) are secured by the county's pledge to covenant and appropriate payments for the use of various leased assets, subject to abatement. The pension obligation bonds (POBs) have been legally validated as an absolute and unconditional obligation of the county.

KEY RATING DRIVERS

STRONG TRANS DEBT COVERAGE: The 'F1+' TRANS rating reflects strong debt service coverage with consideration of extensive borrowable resources and some set-asides that occur well in advance of note maturity.

OPERATIONS BALANCED BUT VULNERABLE: The county's financial operations are balanced in fiscal 2013 and revenue projections have improved with the economy. However, out-year operations will be pressured by a multi-year negotiated wage hike, recent public safety service enhancements, and a correctional facility opening scheduled in fiscal 2017.

COUNTY HOSPITAL CONCERNS: The county's hospital enterprise is expected to begin fiscal 2014 with a $50 million structural deficit that may drain the enterprise's limited cash resources and necessitate a cash flow loan from the county treasury, though management is working to reduce the deficit.

DIVERSE ECONOMY IN RECOVERY: The county's economy is large, diverse, and well-situated for growth given its proximity to the Los Angeles and Orange County employment regions with competitive home prices and ample developable land. The housing-led recession severely affected the region, but recent data concerning housing, employment, and sales tax revenues suggest the economy is continuing to recover at a moderate pace.

SATISFACTORY DEBT PROFILE: The county's pension plans are adequately funded, the OPEB obligation is minimal, debt amortization is moderate, and carrying costs are low. However, debt levels are moderate to high and adequate pension levels are the result of recent year's POB issuances.

RATING DISTINCTION REFLECTS APPROPRIATION: The one-notch distinction between the implied 'AA-' ULTGO rating and the 'A+' rating on the LRBs and POBs reflects standard California abatement and appropriation risks, tempered by the bonds' mostly essential leased assets and sound legal structures.

RATING SENSITIVITIES

STRUCTURAL BALANCE: An inability to maintain structurally balanced general fund operations, leading to an actual or likely drawdown of fund balance to low levels, would result in a downgrade. Fitch specifically will focus on the county's ability to deal with rising labor and service provision costs, as well as the hospital enterprise's challenged financial operations.

CREDIT PROFILE

SOUND TRANS DEBT SERVICE COVERAGE, AMPLE BORROWABLE RESOURCES

Fitch's 'F1+' rating reflects the sound note repayment structure, strong coverage of all note repayment set-asides when borrowable funds are included, and the large size of the borrowable resources relative to the set-aside amounts. The notes equal 9.9% of the county's annual revenues, which Fitch views as moderate.

The series A notes mature on March 31, 2014 and are tied to a January set-aside that pays 100% of note principal and interest. The series B notes mature on June 30, 2014 and are tied to set-asides in April and May that pay half of the note's principal and roughly half of interest on each date.

Debt service coverage (DSC), as measured by projected month-end cash balances plus note debt service over note debt service, on the series A notes is sound for the set-aside date at 1.79x and jumps to an extremely high 15.9x with consideration of $1.8 billion of borrowable resources. DSC on the series B notes is a somewhat low 1.09x for the April set-aside, but rises to an extremely high 29.4x with borrowable resources. The May set-aside enjoys DSC in excess of 2.0x and over 30x with borrowables.

The county is not exposed to any lawsuits or contingent liabilities that management believes would materially impact its cash position in fiscal 2014. Cash management policies are prudent, including daily cash flow reports, monthly cash flow meetings, and cash flow reports provided publicly on a quarterly basis. The county's updated estimates for cash flow in fiscal 2013 are very close to initial projections on a net basis and Fitch rates the county's investment pool 'AAA'.

MIXED ECONOMIC CONDITIONS; LONG-TERM GROWTH POTENTIAL

The populous western portion of the county is within commuting distance to the large economic centers of Los Angeles and Orange counties. Prior to the housing-led recession, population growth was very high, growing from 1.5 million in 2000 to 2.1 million in 2007 and slowing considerably thereafter.

The county's economy is large, diversified, and is well-situated for long-term growth. These strengths are offset, however, by below-average income levels, a distressed housing market that has only recently shown signs of recovery, and a tax base that has contracted significantly since its peak.

County per capita income levels lag the state and nation at 83% and 88% of their averages, respectively. Household income levels are higher, reflective of larger household sizes, and poverty rates are moderate.

The county's housing market was one of the worst-affected in the nation, with average home values falling 55% from their $433,000 peak in 2006 to a trough value of $196,600 in 2012, according to Zillow. These severe price declines caused a cumulative multi-year property tax base contraction of 15.7% from fiscal years 2009-2013. Recently the housing market has showed signs of stabilization, including a year-over-year price gain of 16% through March 2013. Strong valuation performance is reflected in the assessor's preliminary estimate of a 3.5% 2014 assessed value (AV) gain.

Pre-recession growth was spurred by the area's housing affordability, ample developable land, proximity to other employment centers, and location along a major distribution route. As the economy and housing market continue to recover, Fitch believes these attributes will continue to drive population growth moving forward, though not to the extent of pre-recession years.

ECONOMY CONTINUING TO RECOVER FROM HOUSING-LED RECESSION

The local economy is in its fourth year of employment recovery following severe jobs losses in 2008 and 2009. A substantial amount of job losses occurred in the construction industry, which today employs about two-thirds of its 2008 workforce and continued to contract year-over-year through February 2013 despite an uptick in the state's construction industry. Gains in other employment sectors lowered unemployment to a still high 10.9% from 12.7% over the same period. Total employment increased 3.1% to 849,965, a level nearly equal to the county's 2007 employment base.

Sales tax revenues derive from a large and diverse base and are in their third year of improvement. The recession caused a severe cumulative decline of roughly 25% from 2006-2009, but revenues have increased in each year since hitting bottom. The recovering economy and recently positive trends in the housing market, if sustained, could bode well for sales tax revenues moving forward. The county conservatively budgeted for $21 million of sales tax revenues in fiscal 2013, but the county's economic consultants are projecting receipts at $27.1 million.

FINANCIAL OPERATIONS RETURN TO BALANCE; VULNERABILITIES REMAIN

The county's revenue base suffered over the recession, with fiscal 2012 audited revenues about 6% below their fiscal 2008 peak, and while spending was cut the county ran sizeable deficits for several years. Nonetheless, general fund operations for fiscal 2013 are expected to produce a small surplus, raising the total and unrestricted balances to adequate levels of $351 million (14.2% of projected disbursements) and $240 million (9.7%), respectively. Positive fiscal 2013 performance reflects years of cost-cutting, including hiring freezes, furlough days, early retirements, attrition, and layoffs.

Fitch believes the county's structural balance is vulnerable to four main challenges moving forward. First, the county agreed to a multi-year cumulative 8% wage increase as part of a broader pension reform measure that requires employees to pay their portion of pension contributions, formerly funded by the county, and implemented a two-tier pension system. The pension savings are projected to be significant but will accrue over a longer time horizon, whereas the wage increases will be acute and will phase in over four to five years.

Second, the board of supervisors recently enhanced public safety programs by $40 million. Fitch is concerned that several years of cut-backs could lead to similar pressures for further service provision enhancements moving forward.

Third, the county's exposure to underperforming hospital operations is growing. The county estimates its hospital enterprise fund will begin fiscal 2014 with a $52 million structural deficit and just $22 million of cash. Management has hired a consultant and believes the hospital will narrow its deficit to well below its starting level however, the enterprise is still expected to borrow from the county treasury next year for cash flow purposes. While Fitch believes the county will be able to lower the fiscal 2014 deficit, as it has in prior years, not only is the size of the deficit increasing but Fitch is concerned that one-time sources used for prior budget balance may be dwindling. The county's fiscal 2013 hospital subsidy totaled a manageable $15 million but will grow absent structural fixes.

The hospital is ultimately back-stopped by the county's general fund, so a hypothetical inability or unwillingness to close the hospital's operational deficits could directly impact the general fund and could lead to a rating downgrade. To the extent that the hospital requires sizeable loans from the county treasury to fund operations, Fitch may view such loans as an offset to general fund balances if repayment of such loans is unlikely over the near term. The financial implications of the Affordable Healthcare Act are now unknown.

Fitch's fourth concern regarding potential operating pressure relates to the new correctional facility to open in 2017. Management anticipates that related operating costs of $40 million to $50 million will be fully paid by increased Prop 172 sales tax revenues, which the county has begun prudently setting aside in anticipation of the opening of the facility. The county uses sales tax projections from Beacon Economics and CSU Fullerton, who project Prop 172 sales tax growth ranging from 5.7% to 8% annually through fiscal 2018. Fitch believes these growth rates may be less than conservative with consideration of average annual sales tax growth of 6.1% over the past 17 years. To the extent that rising sales tax revenues would not cover increased operational costs, the general fund likely would be affected.

SATISFACTORY DEBT PROFILE

The county's debt profile is sound overall. Carrying costs (pension, OPEB, debt service costs over non-capital total governmental expenditures) are low at 10%, though the county's debt burden is moderate to high at $3,633 per capita (5.5% of AV), reflective of high overlapping debt levels and recent years' AV losses. Debt amortizes moderately, with 19% and 42% of principal maturing within five and 10 years, respectively.

The county's capital improvement plan consists largely of the correctional facility and new or renovated office facilities for the county's information technology and public defender departments. The office facilities will be financed with an anticipated $65 million lease revenue bond to be issued in June. The correctional facility is expected to be paid for from roughly $135 million to $150 million of lease debt and a $100 million state grant.

The county offers five pension plans through CalPERS. The two largest plans, offered to safety and miscellaneous employees, are adequately funded at 86% and 88% (or a still adequate 81% and 83% based on Fitch's more conservative 7% investment return assumption), respectively. However, the funded ratios reflect substantial POB issuances. Management prudently has established two-tier pension systems, and has negotiated for labor groups to pay the employee portion of pension contributions, as noted above. The county's unfunded OPEB obligation is small.

Fitch additionally affirms the following ratings:

--Riverside County POB), taxable series 2005A at 'A+';

--Riverside County COPs, series 2003, 2003A, 2003B, 2005A, 2005B, 2007A, 2007B, 2009at 'A+';

--Riverside County Asset Leasing Corporation (CORAL) COPS, series 2006A and LRBs, series 1993B, 1997A, 1997B, 1997C, 2000A at 'A+';

--Riverside County Palm Desert Financing Authority lease revenue bonds (LRBs), series 2003A at 'A+';

--Riverside County Public Financing Authority LRBs series 2012 at 'A+';

--Southwest Communities Financing Authority LRBs series 2008A at 'A+'.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=792004

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