TEXT-Fitch cuts Baldwin Park Financing Auth, Calif. TABs to 'BB'
July 11 - Fitch Ratings has downgraded the following Baldwin Park Financing Authority, CA's sales tax and tax allocation bonds (TABS): --$4.1 million sales tax and tax allocation refunding bonds, series 2003 to 'BB' from 'BBB'; The TABS are placed on Rating Watch Negative. SECURITY The series 2003 bonds are limited obligations of the authority, payable from a first lien on sales tax and incremental property tax revenues derived from the Puente Merced project area and surplus tax increment revenues of the San Gabriel River, Delta and Sierra Vista project areas. These three project areas were merged with the Puente Merced project area in April 2000 by ordinance of the City of Baldwin Park (the city). The bonds are additionally secured by a cash-funded debt service reserve fund (DSRF) equal to maximum annual debt service (MADS). KEY RATING DRIVERS REVENUE DISRUPTION; DSRF DRAW: The downgrade reflects information received by the Successor Agency to the Baldwin Park RDA (SA) that it will tap its DSRF to pay upcoming August and September debt service requirements on three of its four outstanding TABS. The draw is due to much lower than expected tax increment distributions from the county under AB 1X 26, insufficient available cash reserves and lack of clarity as to the nature of the discrepancies. Payment of series 2003 August 1st debt service will not require a DSRF draw due to pledged sales tax revenues on hand and an advance on budgeted/anticipated sales tax revenues. INCREASED RELIANCE ON SALES TAX: Credit quality is further eroded by the increased dependence upon volatile sales taxes to pay series 2003 debt service as a result of the shortfall in tax-increment distributions. Sales taxes generated within a small commercial development have fluctuated falling 40% between fiscals 2007 and 2008. Collections have failed to fully cover maximum annual debt service (MADS) in recent years. ADEQUATE HISTORIC DEBT SERVICE COVERAGE: Coverage of series 2003 annual debt service from pledged Puente Merced tax project area increment and sales taxes and surplus revenues from the merged project areas has averaged an adequate 1.6x over the past two years. DECLINING TAXABLE VALUES: Taxable assessed values (AV) within the merged project area (Puente Merced, San Gabriel River, Delta and Sierra Vista) have fallen by 5.6% over the past two years. A recent increase in appeals activity may signal further AV reductions, although expected AV losses would total a moderate $25 million or 4% of incremental assessed value (IV) based on average historical rates of success. TAXPAYER CONCENTRATION RISK: Moderately high concentration exists within the merged project area, with the top ten taxpayers representing 26% of IV. Top taxpayers include Wal-Mart ('AA' with a Stable Outlook by Fitch Ratings), Home Depot ('A-'; Stable Outlook), and several multi-tenant offices and retail buildings. INCREMENTAL REVENUE STABLITY: The merged project area is mature with a high IV ($614.2 million) relative to the base year ($88 million). As a result, tax increment revenues respond less dramatically to changes in total AV. BELOW AVERAGE SOCIOECONOMIC PROFILE: Baldwin Park is a lower income community, exhibiting a high incidence of individual poverty, and high levels of unemployment. WHAT COULD TRIGGER A RATING ACTION ADDITIONAL REVENUE SHORTFALLS: The SA plans to have enough funds from sales tax revenues both on hand and expected over the course of the year, to fully cover the $430,000 series 2003 debt service payment on Aug. 1, 2012. If issues between the county and SA remain unresolved, further draws on the DSRF to pay non Fitch-rated bonds are likely, putting overall downward pressure on the rating. CREDIT PROFILE SUCCESSOR AGENCY PLANS ON EXTENSIVE DSRF DRAWDOWN; BURGEONING CASH NEEDS The Baldwin Park Successor Agency (SA), the designated successor agency to the RDA, is planning to draw approximately $1.4 million from its pooled debt service reserve funds (DSRF) to cover debt service coming due on either August 1 or September 1 for three of its four outstanding TABS. The Fitch-rated series 2003 TABs, however, will be paid from a combination of pledged sales taxes already received from the Puente Merced project area and a loan from the city for sales tax receipts budgeted for fiscal 2013 without resort to DSRF monies. The RDA historically borrowed internally from either RDA reserves or the city to cover timing mismatches between tax revenue receipts and debt service payments. The internal loans were repaid from subsequent tax increment revenues. However, lack of available RDA cash reserves and lower than expected tax distributions have significantly raised the SA's borrowing needs. Cash in the pooled DSRFs totals $2.9 million which is more than sufficient to fund approximately $1.4 million of August and September debt service requirements ($1.8 million total less $430,000 attributable to the series 2003 bonds). City officials decided to tap the DSRF rather than lend funds to the SA for upcoming debt service due to uncertainty that future tax distributions from the county will be sufficient to repay the loan. Officials are projecting that the SA will receive $1.8 million net of prior tax increment allocations for their January 2013 tax distribution that would be sufficient to replenish the DSRF draw and, with expected sales tax collections, meet all requirements for their February and March bond payments. Fitch believes that this projection may be overoptimistic given recent trends. LOWER THAN EXPECTED TAX PAYMENTS FROM THE COUNTY The downgrade to 'BB' reflects the SA's extensive use of the DSRF to fund debt service costs as a result of much lower than expected June 1st tax-increment distribution received by the SA from the county. Fitch notes as a key credit concern the fact that officials from the county and the SA have yet to mutually establish the reasons for the discrepancy which calls into question the adequate and continuous flow of sufficient revenue to cover obligations. The state department of finance approved the SA's Recognized Payment Schedule (ROPS) for both the January through June and July through December periods. The amount approved for the latter period was approximately $2.6 million. The SA's $1.7 million June 1st distribution from the Redevelopment Property Tax Trust Fund (RPTTF) represented tax increment collected within four project areas from February to May. The distribution was approximately 27% below the $2.3 million available to the RDA for the same period in 2011 and below the $2.6 million approved on the ROPs. Based on 2012 taxable values among the four merged project areas, tax increment revenues should be about 5% lower than the prior year level. After payment of senior lien pass-through payments and administration fees to Los Angeles County, about $790,000 was actually distributed to the SA. Most of those funds were used to repay prior obligations. This resulted in only a token amount remaining for current needs. PLEDGED SALES TAX PROVIDES ADDITIONAL BUT VOLATILE SECURITY The shortfall in tax-increment distributions has increased reliance upon sales taxes to meet series 2003 debt service requirements; the only outstanding RDA TABS additionally secured by a sales tax derived the pledged project area. The use of pledged sales taxes to pay RDA debt service is not subject to semi-annual state approval. The city will provide a small loan (advance of budgeted sales tax receipts) along with sales tax revenues on hand, to pay the series 2003 August 1st debt service requirement without drawing on the DSRF. Officials indicate that the availability of sales tax revenues offers a higher probability that the loan will be repaid, given the still unresolved issue of lower tax receipts received in the June 1 disbursement than expected. Sales tax collections are derived from the Puente Merced project area; a small commercial district. Collections have proven volatile, declining by 40% between fiscals 2007 and 2008 although collections have since been more stable. Sales taxes did increase by about 8% in fiscal 2011. Credit quality is further eroded by the resulting increased dependence upon volatile sales taxes to pay series 2003 bond debt service. PROJECT AREA PROFILE The Puente Merced project area consists of 16 acres adjacent to the San Bernardino I-10 Freeway. Development includes the Baldwin Park Towne Shopping Center with Home Depot as its main anchor, and a Marriott Courtyard Hotel. Fiscal 2012 project area AV totalled $39 million, down 0.4% from the prior year. The tax base is highly concentrated with the top 10 taxpayers accounting for 98% of AV. Five of the city's six project areas were merged in 2000 including the Puente Merced project area. The merged project area totals 788 non-contiguous acres in the city's downtown area, largely comprising commercial and industrial properties with a small residential component. The merged project area IV for fiscal 2012 totals $614.2 million or 7.0 times the base year AV of $88 million. The ratio of incremental AV over the base year AV reduces volatility in incremental tax revenue to changes in the AV of the project area. The merged project area AV has declined by a total of 5.6% over fiscals 2011 and 2012, preceded by two years of robust growth. The merged project area tax base is somewhat concentrated although much more diverse than Puente Merced valuations as the top 10 taxpayers account for 23% of AV and 26% of IV. Wal-Mart and Home Depot are the two largest taxpayers at 4.3% and 2.7% of AV, respectively. Pending appeals within merged project area increased significantly in both number and value in fiscal 2011, particularly in the San Gabriel River and Sierra Vista project areas. The AV of pending appeals more than doubled from $54 million (8.6% of IV) in fiscal 2010 to $116 million in fiscal 2011 (16% of AV) while the average success rate jumped from 14% to 22%. The heightened level of appeals signals further reductions in AV although based on average success rates, the tax base would lose about $25 million or a more manageable 4% of IV. BELOW-AVERAGE SOCIOECONOMIC PROFILE Fitch considers the city's economic and demographic profile weak. A very young population contributes to per capita income levels that equal 52%-56% of the state and U.S. average. Median household income approaches the national average but is only 84% of the state. The city's individual poverty rate is also high. The educational achievement of the local labor force is well below the state and nation, contributing to high levels of unemployment. Unemployment remains high at 13.8% in May 2012 compared to 10.4% in California and 7.9% nationally, although lower than the prior year's unemployment rate of 14.9%. Baldwin Park is located in western Los Angeles County, approximately 20 miles east of downtown Los Angeles. The city encompasses 6.7 sq. miles in area and is near fully built-out. The city had previously experienced strong growth due to infill development, but the city's population trends were static between 2000 and 2010. The city is served by I-10 (the San Bernardino Freeway), I-605 (the San Gabriel River Freeway), and I-210 (the Foothill Freeway) making the greater Los Angeles metro area easily accessible for local residents. 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 the 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' (Aug. 15, 2011); --'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011). Applicable Criteria and Related Research: Tax-Supported Rating Criteria U.S. Local Government Tax-Supported Rating Criteria
- Tweet this
- Share this
- Digg this