Fitch Downgrades Santa Cruz County Redevelopment Agency, CA's TABs to 'A'; Outlook Stable

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SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings has downgraded Santa Cruz County Redevelopment Agency, California's $157.7 million outstanding tax allocation bonds (TABs) to 'A' from 'A+'.

The Rating Outlook is Stable.

KEY RATING DRIVERS

Reduced Coverage: The downgrade reflects the reduced debt service coverage due to the further leveraging of the agency's tax increment revenue. Annual debt service (ADS) coverage in 2012 is projected at 1.25 times (x) and 1.21x for the agency's non-housing and housing TABs, respectively. Maximum annual debt service (MADS) coverage is modest at 1.21x for both the non-housing and housing TABs.

Large, Stable Project Area: The project area is relatively large at 3,760 acres and almost fully developed. Assessed value has remained stable with a modest decline in fiscal 2010 followed by two consecutive years of very limited growth.

Diverse Tax Base: The tax base is diverse, likely due to its largely residential nature, with the top 10 taxpayers comprising 3.8% of total assessed value (AV) and 4.9% of incremental value.

Sound Local Economy: The local economy is somewhat exposed to the tourism and high technology sectors, but remains fundamentally sound with above average wealth levels and an unemployment rate just below the state average,

Legislative Changes: Recently adopted state legislation provides for the dissolution of redevelopment agencies in California unless they make specific ongoing payments of tax increment to the state. The Santa Cruz County Redevelopment Agency intends to make all payments required to continue operations under the new legislation, which is currently under review by the state supreme court. Transfers of tax revenue to the state, should they be upheld, are expected to remain subordinate to debt service.

SECURITY

The bonds are secured by a first pledge and lien on net incremental property tax revenues generated by the Soquel/Live Oak project area. The revenues are net of county administration fees, tax-sharing agreements, AB 1290 pass-through obligations, and the statutory 20% housing set-aside, except for the portion of the TABs that financed low and moderate income housing qualifying projects. The debt service reserve requirement is satisfied through a combination of cash-funded reserve and surety bonds from Ambac Assurance Corporation and National Public Financial Guarantee Corporation.

CREDIT PROFILE

The rating downgrade to 'A' reflects reduced debt service coverage resulting from additional debt issuance and further leveraging of the agency's tax increment amid stagnant revenue growth. In fiscal 2012, projected ADS coverage is 1.25x and 1.21x for the agency's non-housing and housing TABs, respectively, which is significantly reduced from fiscal 2010 when ADS coverage was 1.35x and 2.05x for non-housing and housing TABs. MADS coverage for both the non-housing and housing TABs is projected at a modest 1.21x in fiscal 2012. The additional bonds test is slightly below average requiring historic pledged revenue to cover MADS including the proposed issue at least 1.20x.

The reduced coverage levels increases the risk posed by potential AV volatility with only a 13.6% decline necessary to reach 1.0x MADS coverage. While debt service coverage is below average for the rating level, the project area benefits from several strengths including a sound local economy and a diverse and stable tax base, anchored primarily by residential tax payers in a mature and developed area.

The Soquel/Live Oak project area consists of 3,760 acres in unincorporated Santa Cruz County located between the cities of Santa Cruz and Capitola. The incremental value of the project area is approximately 3.7x its base value and has grown at a 7% compounded average rate from fiscal 2003 through fiscal 2012. The tax base is diverse and stable. The top 10 taxpayers comprise only 3.8% of total project area AV, or 4.9% of incremental value, which is likely due to the residential nature of the project area. AV has increased every year since fiscal 2003 with the exception of a 1.7% decline in fiscal 2010. However, AV growth in fiscal years 2011 and 2012 was very modest at 0.3% and 0.5%, respectively.

The project area is largely developed and mature with limited area remaining for new development. Since Fitch's last review in 2009, the project area has seen some additional development with the more notable activity including the opening of a new Marshall's department store and a 20,000 square foot Palo Alto Medical Foundation medical office building. Management reported that Redwood Square, the project area's commercial center, continues to perform well with Safeway, Best Buy, and Home Depot acting as the principal anchors to the retail center.

Agriculture, tourism, education, technology and the service sector continue to play important economic roles in the local area. Large employers include the University of California Santa Cruz, Pajaro Valley Unified School District, Dominican Hospital, Cabrillo College, the Santa Cruz Boardwalk and Seagate Technology. The Santa Cruz-Watsonville metropolitan statistical area (MSA) unemployment rate of 11.5% in June 2011 was slightly below the corresponding state average of 12.1%. Wealth levels in the MSA are above average with per capita and median household income at 124% and 125%, respectively, of the national average.

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, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, National Association of Realtors.

Applicable Criteria and Related Research:

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

--'U.S. Local Government Tax-Supported Rating Criteria', dated 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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