TEXT - Fitch affirms Kern County, California pension obligaton bonds
Jan 17 - Fitch Ratings has affirmed the following Kern County (the county), CA's outstanding pension obligation bonds (POBs) at 'A+'. --$212.7 million POBs, series 2003A. In addition, Fitch affirms the county's 'AA-' implied general obligation (GO) rating. The Rating Outlook is Stable. SECURITY The bonds are an unconditional obligation of the county. KEY RATING DRIVERS SOLID FINANCIAL PROFILE DESPITE PRESSURES: The county maintains a solid financial profile with healthy unrestricted reserves, positive operating margins, and generally conservative budgeting and financial practices. Substantial pension liabilities have not yet affected these results but remain a concern. GROWING PENSION LIABILITY: The county's pension liability and annual funding commitment will continue to consume a growing share of the discretionary budget, potentially pressuring the county's financial position over time. EXPOSURE TO HOSPITAL OPERATIONS: The county's hospital enterprise requires substantial ongoing general fund support and cash-flow loans. CHALLENGED ECONOMY: Unemployment rates remain high and wealth levels are below average, although the county has benefited from its natural resource base with growing and diversifying energy and agricultural sectors. CONCENTRATED TAX BASE: The county's tax base is highly concentrated in the oil and gas sector, which has performed well over the past few years and offset weakness in the housing market to bolster the county's taxable assessed value (AV). MODERATE DEBT LEVELS: Overall debt levels are expected to remain at low to moderate levels given the lack of additional debt issuance plans. CREDIT PROFILE SOLID FINANCIAL PROFILE The county maintains a solid financial profile with positive financial margins, healthy unrestricted reserve levels, and generally conservative budgeting and financial practices. Financial operations in fiscal 2011 and 2012 recorded operating surpluses (after transfers) of $11.8 million (1.8% of spending) and $55.4 million (8.8%), respectively. Operating results in both years were aided by one-time sales and use tax revenue due to various construction activities in the county, which management conservatively budgeted to save as reserves for future one-time expenses. The county budgeted for balanced financial operations in fiscal 2013, but is likely to add to reserves given the higher than baseline sales tax revenues projected for the year. The unrestricted fund balance (combined committed, assigned, and unassigned fund balance under GASB 54) increased to $177.9 million (28.1% of spending) in fiscal 2012 from $111.7 million (17.3%) in fiscal 2011. Approximately $48.5 million of the unrestricted balance (and about $10 million in restricted balance) is on loan to the Kern Medical Center due to the medical center's weak financial position and low cash levels and may not be available for immediate needs, if necessary. However, the unrestricted fund balance remains healthy at approximately 20.5% of spending after removing the funds on loan. EXPOSURE TO MEDICAL CENTER The county provides ongoing support to its medical center, which is reported as an enterprise fund in the county's financial statements. General fund support of the enterprise includes cash flow loans (amounting to $58.6 million in fiscal 2012) and transfers ($36.9 million in 2012). These amounts represent an increase of approximately $27 million, the large majority from cash flow loans, over fiscal 2011. However, total general fund support in fiscal 2011 was notably less (approximately $19.3 million) than in fiscal 2010. Fitch views the county's current commitment to the medical center as manageable given its solid financial performance and healthy reserves. However, the county's responsibility for hospital operations increases potential volatility to its overall financial profile. PENSION PAYMENTS POSE FUTURE BUDGETARY CHALLENGE The county's increasing pension liability may pose significant budgetary challenges in future years. As of fiscal year 2012, the estimated unfunded actuarial accrued liability was $1.9 billion or 2.2% of AV. The funded ratio is estimated at 60.5% using a 7.75% discount rate and is estimated to be reduced to 54.8% when unrecognized investment losses are included. Already high contribution rates (approximately 11.6% of governmental spending in fiscal 2012) are expected to continue rising for the foreseeable future, pressuring the county's financial position and likely requiring additional spending reductions. MODERATE DEBT LEVELS Overall debt levels for the county are moderate at $2,471 per capita and 2.5% of AV. The county is planning on constructing a new jail facility and is evaluating the issuance of up to $24 million in debt, which would have a minimal impact on current debt ratios. Management expects most of the costs of constructing the jail to come from the state and from accumulated reserves. The impact of operational costs is yet to be determined. Debt amortization is somewhat above average with approximately 60% of outstanding principal retired within 10 years. CONCENTRATED ECONOMY AND TAX BASE Kern County is located at the southern portion of California's Central Valley, about 100 miles northwest of Los Angeles. Its county seat and economic hub is the city of Bakersfield, which has been diversifying out of the county's historically dominant agricultural and energy sectors. Nonetheless, sector concentration remains, and typical of an agriculturally-dominated region, unemployment and income levels are weak. September unemployment was a high 12%, and per capita income levels are at just 69% and 74% of the state and nation, respectively, although this is somewhat offset by a relatively lower cost of living. The tax base is highly concentrated with approximately 35% of AV attributed to oil and gas values and the top three taxpayers, all from the oil and gas industries, comprising approximately 28% of AV. While the concentration increases the county's exposure to volatility inherent in the energy sector, higher oil prices and the presence of significant oil reserves have largely driven the county's relatively solid AV growth throughout the economic downturn. AV declined in only one year (by 6.1% in fiscal 2010) despite a significant drop in housing prices during the recession. AV rose in fiscals 2012 and 2013, respectively, by 2.6% and 7.6%. Recent data indicates that home prices are rising in the county, particularly in and around Bakersfield, although values remain well below pre-recession levels.
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