TEXT-Fitch may still cut Santa Cruz Cty Redevelopment Agency, Calif. TABs

July 20 - Fitch Ratings maintains the Rating Watch Negative for the following Santa Cruz County Redevelopment Agency, CA's (the RDA) tax allocation bonds (TABs): --$157.6 million TABs, series 2000, 2000A, 2000B, 2003, 2005A, 2005B, 2007, and 2007A, rated 'A'. SECURITY The bonds are secured by a first pledge and lien on net incremental property tax revenues generated by the sole 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. KEY RATING DRIVERS IMPLICATIONS OF AB 1484: The governor signed this trailer bill to the state's fiscal 2013 budget on June 27, 2012. The bill includes what Fitch believes are improvements to the ROPS approval process and other procedures going forward. However, it required repayment by many Successor Agencies (SAs) of property tax distributions from December 2011 and January 2012 that the state believes should have been directed to other taxing entities. The SA made a partial repayment and expressed an inability to make the full payment from available funds so that sufficient funding would be available to meet debt service obligations. The bonds remain on Rating Watch Negative pending a resolution of this dispute. Fitch is concerned that full repayment amount may leave the SA insufficient funds to make its upcoming debt service payment. PROGRESS ON AB 1X26 IMPLEMENTATION: Santa Cruz County has been recognized as the SA to the RDA. The recognized obligation payment schedules (ROPS), which include calendar 2012 debt service, have been approved by the oversight board and state. The SA has received sufficient payments, along with available cash reserves, to cover the debt service included in the ROPS. HOUSING REVENUE AVAILABILITY: The lack of distinction between former housing set-aside revenue and total tax increment under AB 1X26 did not affect Fitch's assessment of credit quality as debt service coverage does not materially change assuming this commingling. CASH FLOW TIMING RESERVE: The SA intends to request a cash flow reserve on future ROPS to deal with the uneven debt service payments. Fitch assumes in its rating that such a reserve will be approved in accordance with AB 1484 (the trailer bill). Therefore the dissolution act poses no additional cash flow timing issues. Additional information on the RDA is available in Fitch's Oct. 31, 2011 release, available at 'www.fitchratings.com'.