TEXT-Fitch rates Riverside County lease revs 'A+'
Sept 26 () - Fitch Ratings has assigned a rating to the following Riverside County, CA bonds: --$19 million Riverside County Public Financing Authority lease revenue refunding bonds (county facility projects) series 2012 rated 'A+'. The bonds are expected to sell via negotiation during the week of Oct. 8, 2012. Proceeds will refund the county's outstanding 2003A lease revenue bonds (LRBs) for interest savings. In addition, Fitch affirms the following ratings: --Riverside County implied general obligation (GO) bond rating at 'AA-'; --Riverside County pension obligation bonds (POBs), taxable series 2005A at 'A+'; --Riverside County certificates of participation (COPs), series 2003, 2003A, 2003B, 2005A, 2005B, 2007A, 2007B, 2009 at '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+'; --Southwest Communities Financing Authority LRBs, series 2008A at 'A+'. The Rating Outlook is Stable. SECURITY The LRBs and COPs are secured by the county's pledge to covenant and appropriate payments for the use of various leased assets, subject to abatement. The POBs have been legally validated as an absolute and unconditional obligation of the county. KEY RATING DRIVERS STRENGTHENING ECONOMY: Riverside County was among the nation's hardest hit regions during the recent recession, but its economy has shown steady improvement in recent months. The county has experienced 28 consecutive months of year-over-year employment gains, enabling it to recover more than half of total employment losses from peak levels. Housing prices remain depressed after declines of more than 50%, but have also shown recent signs of improvement. RETURN TO BALANCED BUDGET: The county's fiscal 2013 budget was balanced without the use of reserves following four years of deficit operations. RISING LABOR COSTS: Recently negotiated multi-year labor contracts will increase compensation costs in the near term while reducing long-term pension costs. A slow recovery in revenues, in combination with increased expenditure requirements, is likely to pressure the county's finances over the next several years. REALIGNMENT IMPACTS: The state's realignment of certain correctional responsibilities has increased the county's jail population and contributed to both early releases of inmates and demands for additional jail capacity. The county expects to address capital needs with additional borrowing, but increased operating costs appear likely to exceed available state realignment funding and may add to strains on the county's general fund. WHAT COULD TRIGGER A RATING ACTION FAILURE TO MAINTAIN STRUCTURAL BALANCE: A return to deficit operations would likely decrease financial flexibility, reducing unrestricted fund balance to a level inconsistent with current ratings. CREDIT PROFILE STRENGTHENING ECONOMY Riverside County was deeply affected by the recent recession but has begun to show signs of recovery, with gains in both employment and real estate in recent months. The county achieved its 28th consecutive month of year-over-year job growth in July 2012, adding back more than half of jobs lost from March 2007 peak levels. Unemployment rates remain elevated (12.6% as of June 2012) despite recent improvements and continue to exceed state and national averages by a wide margin. The county's housing market received national attention for the depth of home value declines during the recent recession, but modest price gains during the first two quarters of 2012 point to recovery in this sector as well. Home values are unlikely to return to pre-recession peaks for years, but the trajectory for the housing market at last appears positive. Continued recovery in the real estate market is supported by the same advantages that contributed to the region's outsized growth prior to the recession: above-average population growth spurred by affordable housing and access to the large and vibrant southern California labor market. BALANCED 2013 BUDGET The county's fiscal 2013 budget was balanced without the use of reserves following four years of deficit operations. Total fund balances dropped sharply during this period, from a healthy 25.8% of general fund spending in fiscal 2007 to approximately 14.7% at the end of 2011. Following the planned drawdown of $28 million in fund balance for fiscal 2012, unrestricted fund balance (the sum of committed, assigned, and unassigned fund balances per GASB 54) appears likely to fall below 10% of general fund spending (approximately $215 million). Revenue growth continues to be slow and will constrain further improvements in the county's financial position. Total general fund revenue fell by 7% between fiscals 2008 and 2011, while tax revenues declined by 28% during this period. The county is highly dependent upon property tax revenues, which comprise more than three-quarters of discretionary funding, and the weak housing market is likely to hold back recovery in this key revenue source for some time. Taxable sales in the county have improved steadily since mid-2009, but the recent incorporation of several cities has reduced the county's share of related revenues. ONGOING OPERATING CHALLENGES Cost pressures are likely to challenge the county's ability to maintain structural balance over the next several years. Recently approved multi-year labor agreements provide for a shift of employer pickup - the county's longstanding payment of employees' share of pension costs - back to employees, but provide offsetting wage increases in return. The new agreements also increase maximum compensation through the addition of steps at the top of existing pay ranges and provide for accelerated movement up revised scales. County management expects that increased costs will be absorbed within existing departmental budgets, setting the stage for future cuts if revenues fail to keep pace. County responsibilities for jails and indigent health care present additional risks to operating balance. Jail capacity has been a longstanding issue for the county, which remains subject to a 1993 court order on overcrowding, and the shift of state prisoners to the county under realignment has led to both early releases and increased demands for new jail capacity. A new jail planned for completion in 2016 will be partially funded through a state grant, but increased operating costs will be borne by the county alone and funding sources have not yet been identified. The county also projects a $23.6 million deficit in fiscal 2013 for its hospital enterprise. Management has indicated that they expect the deficit to be addressed within the hospital's budget, but this enterprise remains the county's responsibility and any ongoing deficit could fall to the county general fund. The county currently provides the hospital with $15 million in annual support. MANAGEABLE LONG-TERM LIABILITIES Overlapping debt levels are moderate to high at $3,601 per capita and 5.4% of market value with below-average amortization. General fund requirements for debt and pension costs are manageable at 3.3% and 6.5%, respectively, of spending. OPEB liabilities are relatively modest due both to earlier actions to limit benefits and some pre-funding in recent years. 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, and Beacon Economics. Applicable Criteria and(New York Ratings Team)
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