TEXT-Fitch rates Indio PFA, Calif. lease revs 'BBB'
Oct 1 - Fitch Ratings has assigned the following rating to the Indio Public Financing Authority (authority) lease revenue bonds: --$23.4 million lease revenue refunding bonds, series 2012 (public capital improvements) at 'BBB'. In addition, Fitch assigns an 'A-' implied general obligation (GO) bond rating to the city of Indio (city). Proceeds will be used to refund a portion of the authority's 2007A bonds and all of the authority's 2007B bonds. The bonds are expected to sell competitively on Oct. 10. The Rating Outlook is Stable. SECURITY The lease revenue bonds are limited obligations, secured by the city's covenant to budget and appropriate annual lease rental payments for use and occupancy of the essential and non-essential assets, subject to abatement. Additional security is provided by a standard cash funded debt service reserve fund, property insurance, and two years of rental interruption insurance. Leased assets include the city's public works yard, a senior center, and three parks. KEY RATING DRIVERS IMPROVED FINANCIAL PERFORMANCE: The 'A-' GO rating reflects the city's improved financial performance under a new management team, with positive financial margins in fiscals 2011 (adjusted) and 2012 (unaudited) and the restoration of a positive unrestricted general fund balance. The fiscal 2013 budget is balanced without the use of reserves or other one-time revenues. SECURITY FEATURES: The lease revenue bonds are rated two notches below the city's GO rating, reflecting the non-essential nature of the majority of the leased assets, abatement risk, and the city's weak though improved financial position. VULNERABLE FINANCIAL PROFILE: Notwithstanding recent improvements, the city's overall financial profile remains vulnerable with low unrestricted general fund reserves, negative fund balances in two internal service funds, liquidity pressures, and future budgetary challenges stemming from increasing costs associated with labor, benefits, and other city commitments. HIGH DEBT RATIOS: Overall debt levels are high due to overlapping debt. The city has no additional planned debt issuances. The amortization rate is slow with only 39% of outstanding principal retired within 10 years. LIMITED ECONOMY: The city's economic profile is characterized by a relatively high unemployment, below average income levels, and a contracting property tax base. CREDIT PROFILE IMPROVED FINANCIAL PERFORMANCE; LOW RESERVES The city's financial performance improved significantly in fiscals 2011 and 2012 (unaudited) after several years of large operating deficits led to a negative $4 million (-7.2% of spending) unreserved general fund balance in fiscal 2010. Under a new management team, the city aggressively reduced expenditures by implementing furloughs equal to 10% of worker's salaries, reducing the city's workforce, and re-organizing the city's management structure for significant savings. In addition, the city benefited from revenue increases associated with a voter-approved increase in the utility user tax and a rebound in sales and use tax revenue. Fiscal 2011 was the first year of balanced general fund performance since fiscal 2008. After adjusting for a one-time revenue increase from the sale of property ($1.6 million) and a one-time cost of recognizing a loss on property held for resale ($3.5 million), the general fund recorded a small operating surplus of approximately $46,000 (0.1% of spending). Financial results improved in fiscal 2012 (unaudited) with a net operating surplus of $1.5 million (3.3% of spending) after adjusting for one-time revenue ($2 million) resulting from a restructured lease agreement with the Indio Water Authority. The city's unrestricted general fund balance (combined committed, assigned, and unassigned fund balances under GASB 54) increased to an unaudited $1.9 million (4.2% of spending) in fiscal 2012. While the ending balance is still low, it is the city's first positive ending balance since fiscal 2009. The increased fund balance and growing cash reserves have mitigated some of the city's liquidity concerns. Management expects to utilize internal borrowing to meet cash-flow needs in fiscal 2013 and does not plan to issue cash-flow notes. BALANCED 2013 BUDGET; FUTURE BUDGETARY CHALLENGES The city's fiscal 2013 budget is balanced without the use of reserves or other one-time revenues. Fitch believes overall revenues are projected conservatively with an estimated 6.3% decline compared to fiscal 2012 (unaudited) levels. Expenditures are budgeted to decline by 3% after the city eliminated 13 positions, including 11 lay-offs. The city is ending furlough days to meet work demands as building permit issuances and other city services are increasing. The city faces continuing budgetary challenges from rising labor and pension costs and other commitments that include debt service on the lease revenue bonds and other loans. In addition, the city has negative balances, though declining, in two internal service funds (Risk Management and Buildings) with a total negative balance estimated at $1 million at the end of fiscal 2012. To address these challenges, management has adopted more comprehensive and forward-looking budgetary practices than used previously. Most significantly, these practices include quarterly budget reporting with five year forecasts that explicitly state and quantify upcoming obligations. Management's ability thus far to correct structural deficits and cure the negative unrestricted general fund balance offset some of Fitch's concerns regarding the future budgetary challenges. However, a reversal of the positive actions to date, including the use of reserves or other one-time measures to balance financial operations would exert negative pressure on the rating. HIGH DEBT BURDEN The city's overall debt burden is high at $5,819 per capita and 7.7% of taxable assessed value (AV). The high debt loads are generally due to overlapping debt issued by the local school district and community college district, Riverside County, and Indio's numerous special districts. Indio has no additional debt issuance plans following the refunding as capital needs are reportedly minimal after significant local investment prior to the recession. Outstanding debt amortizes at a slow rate with approximately 38.5% of outstanding principal retired within 10 years. OTHER LONG-TERM LIABILITIES MODERATE The city participates in a statewide pension program and makes its full annual actuarial contribution. In fiscal 2011, the city reported that its total pension contribution was $2.8 million or 6.1% of general fund spending. Management estimates that this increased to $3.2 million (6.8% of fiscal 2011 spending) in fiscal 2012. Future contribution increases are likely due to investment losses and a recently lowered assumed rate of return. While the city did not have an estimate of cost-savings associated with the pension reform recently signed by the Governor, most of the changes are expected to provide medium and long-term benefits. The city funds other post-employment benefits (OPEB) on a pay-as-you-go policy. In fiscal 2011, the city contributed $1.5 million or 3.1% of spending. The full actuarially based annual required contribution was $3.2 million or 6.9% of spending. The city does not plan on prepaying the plan's unfunded liability, estimated at $36.5 million (0.6% of fiscal 2012 AV). Fitch expects future increases in annual OPEB contributions to continue exerting budgetary pressure. LIMITED ECONOMY Indio is a general law city that covers approximately 33 square miles of the Coachella Valley in Riverside County. The city experienced rapid population growth over the past decade with a 4.3% compound annual growth rate and an estimated population of 77,780 (2011). During the city's large annual festivals, including the Coachella and Stagecoach music festivals, the city's population nearly doubles generating additional revenues for the city from hotel and sales taxes and providing additional employment opportunities. Music festival promoters and the city are working on a long-term agreement to replace the current contract set to expire in 2013 that would keep, and potentially expand, the music festivals in the city. The city's wealth indicators point to below-average wealth levels. In 2010, per capita and median household incomes were 73% and 85%, respectively, of the state average, although both measures were only modestly below the regional average. In addition, the individual poverty rate was 19.7%, which is significantly higher than that of the state (13.7%) and regional area (14.1%). Indio has a rapidly growing labor force and a regional labor market that includes most of Coachella Valley. However, the unemployment rate is a high 13.6% (June 2012) despite a 2.2% increase in year-over-year employment. Local employers are non-concentrated and include different levels of government, healthcare, retail, and construction. Additional growth in governmental jobs is expected as the county undertakes a significant expansion of a jail and the College of the Desert builds a new satellite campus in the downtown area. The local property tax base contracted 20.4% from fiscal 2009 through fiscal 2012 due to foreclosures and significant declines in home values. However, the rate of AV decline slowed to 1.5% for fiscal 2013 compared to 5.3% for fiscal 2012. The housing market is showing some signs of stability with relatively flat home prices and limited residential construction. 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. 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
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