Nov 30 - Fitch Ratings maintains the following San Jose Redevelopment Agency
(RDA) tax allocation bonds (TABs) on Rating Watch Negative:
--$232 million merged area redevelopment projects TABs, series 2003, 2008A and
2008B at 'BB';
--$1.4 billion merged area redevelopment projects TABs, series 1993, 1997, 1999,
2002, 2004A, 2005A, 2005B, 2006A-T, 2006B, 2006C, 2006D, 2007A-T, 2007B at
--$233 million housing set-aside TABs at 'A'.
The merged area TABs are secured by gross tax increment revenue from the project
area net of certain senior pass-throughs and the 20% set-aside for housing. The
housing TABs are secured by the 20% housing set-aside. All TABs are also secured
by debt service reserve funds; however, only the merged area redevelopment
project TABs, series 2003 and 2008A and 2008B, benefit from a cash-funded
KEY RATING DRIVERS
NEGATIVE WATCH REFLECTS STATE DISPUTE: The Negative Watch reflects concerns
about the on-going dispute between the Successor Agency to the San Jose
Redevelopment Agency (SA) and the state Department of Finance (DOF) over certain
AB 1484 payments. A key assumption in Fitch's analysis is that DOF will continue
to act in accordance with its stated intention to protect bondholder rights;
however, revenues available for debt service could be impaired if the resolution
is not achieved prior to the January 2nd tax distribution.
DISPUTE WITH COUNTY STILL A CONCERN: The Negative Watch further reflects a
disagreement with the county over whether revenue derived from voter-approved
tax overrides belongs to bondholders or other taxing entities. A judgment
against the SA would likely cause a downgrade though would not impair debt
service. A decision is expected in February 2013.
STRAINED RELATIONSHIP WITH COUNTY: While the SA and DOF appear to be working
together to resolve the AB 1484 dispute, Fitch expresses concern that the
apparent strained relationship between the SA and the county could impede
progress on current and future issues that may arise.
LARGE INCREASE IN APPEALS; NARROW COVERGE: Fiscal 2013 assessed value (AV)
supports improved debt service coverage to about 1.11x; however, depending on
the timing and amount of resolved appeals, coverage could dip lower. Appeals
increased steeply in 2012 but are not yet available for 2013.
HIGHLY CONCENTRATED, VOLATILE TAX BASE: Taxpayer and industry concentration
remains a concern. Fiscal year 2012 top 10 taxpayers represent 32% of AV with
the largest taxpayer at 15%. Furthermore, the concentration in the volatile
technology sector poses additional risk.
BIFURCATION OF RATINGS DUE TO RESERVES: The lower rating on the merged project
area TABs without cash-funded debt service reserve funds reflects the minimal
value Fitch places on debt service reserve fund surety policies.
HOUSING TABS STILL SOUND: The affirmation of the 'A' rating on the housing TABs
reflects their satisfactory debt service coverage. Housing bonds' debt service
coverage is an estimated 1.9x in fiscal 2013.
WHAT COULD TRIGGER A RATING ACTION
ADVERSE OPINION FROM STATE: Lack of final resolution with DOF in favor of the SA
prior to the Jan. 2, 2013 tax revenue distribution, absent mitigating
information, would trigger a downgrade.
ADVERSE OPINION ON LAWSUIT WITH COUNTY: If the lawsuit with the county is
decided in favor of the county, debt service coverage would be reduced and could
result in a downgrade.
San Jose, with a population of about 970,000, is located in the center of
Silicon Valley, about 55 miles south of San Francisco. The SA's merged project
area covers over 8,000 acres and or roughly xx% of the city.
STATE APPEARS COMMITTED TO MAINTAINING BOND SECURITY DESPITE DISPUTE
The AB 1484 dispute is regarding the payment by the SA of certain property tax
distributions from December 2011 and January 2012 that the state believes should
have been directed to other taxing entities. The SA disputes the amount due
(about $39 million) as a calculation error and has not made any payment. The DOF
generally acknowledges that there were some errors made in calculating the
so-called 1484 payments.
DOF has stated that they currently do not intend to enforce non-payment
penalties on the SA or other SAs in similar circumstance while the matter is in
dispute. Furthermore, DOF is working on a process for handling the disputes on a
case by case basis, which Fitch views positively. If not resolved prior to the
Jan. 2, 2013 tax revenue distribution, however, it is possible the SA would have
insufficient funds for its August 2013 debt service payment, though funds for
the February 2013 payment would be sufficient.
Fitch notes that both parties appear to be working towards a solution by the end
of the year and that the state has generally taken action to maintain bondholder
security during the wind-down process for redevelopment agencies. However, Fitch
remains concerned due to the execution risk inherent in the process.
COUNTY LAWSUIT COULD REDUCE DEBT SERVICE COVERAGE BUT WOULD NOT IMPAIR DEBT
The SA and the county resolved part of their dispute over about $20 million in
tax revenues which had been withheld in June 2012. At the direction of the state
auditor-controller, the county ultimately transferred most of the disputed funds
to the SA prior to the August 1 debt service due date. Debt service was paid in
full. A material event notice had warned that the SA did not have sufficient
funds on hand from the June 1 tax revenue distribution to make full debt service
However, the SA has filed a lawsuit in superior court over about $7 million in
annual tax revenue derived from voter-approved tax overrides it believes is
pledged to bondholders. In the meantime, these funds will be kept in escrow as
they are received semi-annually. A decision is expected in February 2013. If the
SA loses the $7 million, debt service coverage on the merged project area TABs
would drop to about 1.06x in fiscal 2013.
UNDERLYING CREDIT PRESSURED BUT IMPROVING
San Jose's economy continues to improve markedly. Job growth is among the
fastest in the country and was an impressive 3.3% from August 2011 to August
2012. Employment in the city now exceeds the previous peak of 2008. The city
benefits from above-average economic indicators, including median household
income and per capita income at 150% and 123% of the national averages,
respectively, and a poverty rate about 74% of the national average.
The county assessor reported an increase to the SA's fiscal 2013 AV of about
1.95% over fiscal 2012. This is better than the 1.7% previously forecast.
Despite this improvement, AV remains under pressure due to appeals. The number
and value of unresolved appeals in the project area increased steeply in fiscal
2012 (fiscal 2013 appeals are not yet available). There are over 1,200 pending
appeals for the 2011 and 2012 tax years with a combined disputed value of $5.6
Total disputed value for all outstanding appeals for fiscal years 2007-2012
totals $9.4 billion, up from $7.7 billion as of January 2011 (for fiscal years
2007-2010). Fitch believes long-term prospects for economic growth in the city
and project area are favorable, but the appeals may result in a somewhat uneven
AV recovery in the tax base.
LARGE PROJECT AREA; HIGHLY CONCENTRATED
The merged project area is sizeable, covering 28 non-contiguous square miles and
spanning 20 miles north to south. It encompasses 21 component areas including
industrial, downtown, and neighborhood business districts. The
commercial/industrial component is the largest and includes companies such as
Cisco Systems Inc., eBay, Hitachi and Adobe and others which are a vital part of
the regional, state and national economy.
Despite its large size, the project area tax base is highly concentrated in its
top taxpayers and in the high technology sector. This sector has experienced
significant volatility in recent years. The tax base also includes high levels
of personal property & equipment (PP&E), whose AV tends to be more volatile:
increasing steeply with an up-cycle as investments in business equipment are
made and then declining in a down-cycle as the equipment is depreciated and not
replaced or becomes obsolete.
The vast majority of total project area AV is for industrial - primarily
research and development - and commercial uses, with a moderate residential
component. In addition, unsecured property, mostly personal property, accounts
for a large amount of project area AV.
Taxpayer concentration remains above average with fiscal 2012 top 10 taxpayers
representing 32% of AV and 34% of incremental AV (IV). The largest taxpayer,
Cisco, constitutes 15.1% of the project area's IV. Total PP&E represents a high
23% of fiscal 2012 total AV, but this is down substantially from a high of 30.1%
in fiscal 2002.
VOLATILE AV; NARROW COVERAGE; MINIMAL ADDITIONAL RESOURCES
Along with AV and IV, pledged revenue trends have been volatile in recent years,
ranging from a gain of 32.6% in fiscal 2002 to 14% and 12% losses in fiscal
years 2004 and 2005, respectively. The bulk of the AV losses stemmed from
reductions in AV for PP&E, which can fall steeply during economic downturns.
After increasing in fiscal years 2007 through 2010, AV declined in fiscal 2011
and 2012 by 7.5% and 1.8%, respectively.
Additional revenue pressure occurred in fiscal 2012 when the assessor retained
about $5.9 million due to appeals granted and/or supplemental changes, resulting
in a total decline in revenue by 5% for fiscal 2012. Pledged revenues of about
$137.8 million covered $133 million in debt service by a low 1.04x.
A Fitch base case assumes total fiscal 2013 AV increases 1.5% (based on the
estimated 1.9% increase in AV and somewhat offset by additional appeals), but in
fiscal 2014, 1% projected underlying AV growth is more than offset by appeals
granted on all outstanding appeals at the historical appeals success rate
($1.325 billion). This would result in a 6.2% decline in AV bringing debt
service coverage to a very narrow 1.02x (without consideration of tax credits
from prior years). An AV decline of 8% would lower coverage to just 1.0x.
For the housing bonds, projected fiscal 2012 revenue of $36.7 million covers
senior maximum annual debt service ($19.8 million) about 1.76x. The Fitch base
case assumes fiscal 2013 AV increases 1.5% as expected but in fiscal 2014, a 1%
underlying growth in AV is more than offset by the appeals granted, resulting in
a 6.2% decline in AV. This would lower debt service coverage to a still solid
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,
IHS Global Insight, National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria