TEXT - Fitch affirms California's Santa Cruz Cty Redevelopment Agency

Fri Mar 1, 2013 2:29pm EST

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March 1 - Fitch Ratings has affirmed and subsequently removed from Rating
Watch Negative its 'A' rating on the following Santa Cruz County Redevelopment
Agency (RDA), CA's tax allocation bonds (TABs). 

--$150.1 million TABs, series 2000, 2000A, 2003, 2005A, 2005B, 2007, and 2007A.

The Rating is assigned a Stable Outlook.

SECURITY 

The TABs are secured by a first pledge and lien on net incremental property tax 
revenues generated by the 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 reserves and surety bonds from Ambac Assurance Corporation and 
National Public Financial Guarantee Corporation.

KEY RATING DRIVERS

AB1484 DISPUTE RESOLVED: The Successor Agency (SA) for Santa Cruz County RDA and
the state's Department of Finance (DOF) resolved their dispute regarding the 
SA's AB1484 July 12, 2012 repayment. The legally binding stipulated agreement 
between the parties eliminates the requirement that the SA repay $11 million in 
previously received property tax revenue. 

THIN BUT STABLE COVERAGE: Debt service coverage is estimated at 1.21x in fiscal 
2013. The relatively thin coverage levels are mitigated to some extent by the 
tax base's stability. 

Stable Project Area: The project area is relatively large at 3,760 acres and 
almost fully developed. Assessed value (AV) has remained stable with a modest 
decline in fiscal 2013. The tax base remains diverse.

Sound Local Economy: The local economy is somewhat exposed to the tourism and 
high technology sectors, but remains fundamentally sound with above-average 
wealth levels and above-average growth in employment and labor force. 

RATING SENSITIVITY: 

TAX BASE CONTRACTION: An unexpected contraction in the tax base that reduces 
coverage levels below historical norms would likely lead to a downgrade. 

CREDIT PROFILE

DISPUTE WITH DOF RESOLVED

The SA and DOF reached a formal agreement resolving their dispute over the SA's 
repayment of property tax revenue that the state believed should have been paid 
on July 12, 2012 to other taxing entities. Fitch believes this resolution 
removes a significant potential risk to bondholder repayment. The amount in 
dispute, approximately $11 million net of the SA's partial payment ($599,079), 
was not paid by the SA on July 12, 2012 in order to retain sufficient funds to 
make debt service payments due Sept. 1, 2012. Under the agreement, the SA is no 
longer required to make any additional payments and the state is prohibited from
assessing penalties to obtain the unremitted funds.

The agreement also allows the SA to receive a Finding of Completion following 
DOF's ongoing due diligence review of the SA's funds. The Finding of Completion 
would allow the SA to expend some stranded bond proceeds and continue with the 
process of winding down the RDA.

THIN DEBT SERVICE COVERAGE

The rating reflects the projected reduction in debt service coverage resulting 
from a modest 1.5% decline in fiscal 2013 AV. Fitch calculated debt service 
coverage for fiscal 2013 is 1.21x compared to 1.23x in fiscal 2012. Maximum 
annual debt service coverage (MADS) is projected at 1.18x based on estimated 
fiscal 2013 revenues.

The reduced coverage levels increase the risk posed by potential AV volatility 
with only a 12% decline necessary to reach 1.0x MADS coverage. While debt 
service coverage is below average for the rating level, the project area 
benefits from a sound local economy and a diverse and stable tax base, anchored 
primarily by residential tax payers in a mature and developed area. 

STABLE, DEVELOPED TAX BASE

The Soquel/Live Oak project area consists of 3,760 acres in unincorporated Santa
Cruz County located between the cities of Santa Cruz and Capitola. The 
incremental value of the project area is approximately 3.6x its base value and 
has grown at a 6% compounded average rate from fiscal 2003 through fiscal 2013. 
The tax base is diverse and stable. In fiscal 2011, the top ten taxpayers 
comprised only 3.8% of total project area AV, or 4.9% of incremental value. The 
low concentration is likely due to the residential nature of the project area. 

Project area AV has increased every year since fiscal 2003 with the exception of
a 1.7% decline in fiscal 2010 and a 1.5% decline in fiscal 2013. The most recent
decline was largely due to the periodic revaluation of certain types of 
property, the reclassification of some previously taxable property to 
tax-exempt, and the successful appeal of AV assessments by some commercial 
operations. The rating reflects Fitch's expectation that significant future AV 
declines are unlikely, which is supported by a recovering housing market and 
limited additional development.   

The project area is largely developed and mature with limited area remaining for
new development. Recently completed or currently ongoing development includes a 
relatively minor residential subdivision consisting of four homes (all sold) and
a four-building commercial development. Management reported that Redwood Square,
the project area's commercial center, remains stable with Safeway, Best Buy, and
Home Depot acting as the principal anchors to the retail center. 

SOUND ECONOMY

Agriculture, tourism, education, technology and the service sector continue to 
play important economic roles in the area. Large employers include the 
University of California Santa Cruz, Pajaro Valley Unified School District, 
Dominican Hospital, Cabrillo College, the Santa Cruz Boardwalk and Seagate 
Technology. 

The Santa Cruz-Watsonville MSA unemployment rate of 11% in December 2012 was 
higher than the corresponding state average of 9.7%. However, both employment 
growth (5.9% year over year) and labor force growth (4.1%) are significantly 
above state and national averages. Wealth levels in the MSA are above average 
with per capita income at 118% of the national average.
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