Jan 7 - Fitch Ratings has rated Yountville Finance Authority, California's
(the authority) bonds as follows:
--$4.2 million lease revenue bonds (LRBs), series 2013 at 'A+'.
The bonds will sell via competitive sale on Jan. 15. Proceeds will be used to
fund a seismic retrofit of the town hall, to repair roads, and to upgrade sewer
In addition, Fitch assigns the following rating to the town of Yountville (the
--Implied general obligation (GO) rating of 'AA-'.
The Rating Outlook is Stable.
The bonds are secured by a covenant to budget and appropriate lease payments
from the town to the authority for use of the town hall and town center, subject
to abatement. The bonds are additionally secured by capitalized interest that
pays for a portion of debt service six months past the anticipated retrofitting
completion date. There is no debt service reserve fund (DSRF). The town intends
to pay debt service from transient occupancy taxes (TOT) and from sewer revenues
for the portion of the bonds that finances utility upgrades, however, debt
service is payable from any general fund source.
KEY RATING DRIVERS
--SOUND FINANCIAL MANAGEMENT AND OPERATIONS: The rating reflects the town's
sound financial operations, as exhibited by at least four years of structural
general fund surpluses before capital spending, solid fund balance levels as a
percentage of spending, ample liquidity, high expenditure flexibility, and
prudent management practices. However, the town's nominal fund balance is small.
--UNUSUALLY HIGH REVENUE CONCENTRATION: Despite impressive recent financial
performance, the rating considers that the majority of general fund revenue is
generated by TOT, which is susceptible to economic sensitivity. Further concern
derives from the highly concentrated TOT payer base which consists of only 11
-- SOLID ECONOMIC PERFORMANCE: The town benefits from being a high-profile
tourist destination with an extremely high concentration of world-class
restaurants and upscale hotels in the center of Napa Valley. The town proved
impressively resilient during the housing-led recession, with no assessed
valuation (AV) losses and just one year of TOT losses over the past decade.
--EXTREMELY HIGH ECONOMIC CONCENTRATION: The town is very small with a
population of just under 3,000 residents and its commercial base consists mostly
of hotels and restaurants. Concentration concerns are offset somewhat by a
strong local economy with limited developable land.
--ADEQUATE DEBT PROFILE: Debt levels are moderate to high although somewhat
offset by the large visitor base relative to permanent population. No further
debt issuances are planned, and capital needs are manageable though debt
amortization is somewhat slow. The town prudently has made progress towards
fully funding its other post-employment benefit (OPEB) annual required
contribution (ARC) and has implemented pension reforms that will slow out-year
pension cost hikes.
--SOUND LEGAL STRUCTURE: The 'A+' LRB rating reflects a sound legal structure,
including ample capitalized interest that mitigates construction delay risks, a
covenant to budget and appropriate lease payments, rental interruption
insurance, and essential leased assets. However, there is no DSRF requirement.
Yountville serves a small population of 3,000 residents in Napa County about 60
miles north of San Francisco. The town benefits from being a highly desirable
tourist destination with an extremely high concentration of upscale hotels and
world class restaurants in the heart of Napa Valley's wine country. Management
estimates the town receives about 120,000 visitors annually. The town is
predominantly built out, with a stable population and limited new construction.
ECONOMY IS STRONG AND RESILIENT, YET HIGHLY CONCENTRATED
The town's economic indicators are strong. Per capita income levels are high at
129%, 152%, and 162%, respectively, of county, state, and national levels. A
number of the town's residents are affluent retirees. Unemployment data is not
available for the town, but October county levels of 6.9% are lower than the
respective state and national rates of 9.8% and 7.5%. Based on the town's high
income levels and its status as a significant net importer of workers, Fitch
believes local unemployment levels likely are lower than the county's.
Yountville's property tax base is highly concentrated among the top 10 payers,
of which most are hotels, but proved to be quite resilient during the economic
downturn. AV climbed continuously during the recession, expanding an average
annual 5.3% from fiscal 2008-2013. The top 10 taxpayers make up a high 31% of
AV, and seven of the top 10 payers are hotels.
About a third of the town's population resides at the Veteran's Home, the
largest such military retirement community in the country, and the town's
largest employer with 900 employees. The home was subject to funding cuts during
the recession, resulting in some furloughs and layoffs. However, its resident
population reportedly has remained steady, and management is not aware of any
issues that should significantly impact the home in the foreseeable future.
The town is home to several world-class restaurants and 11 hotels and inns. The
restaurant sector has performed well in recent years while the hotel sector has
recovered rapidly from one year of TOT contraction in fiscal 2009. Hotel
occupancy rates recently rose to 72% from a multi-year low of 65.9% in fiscal
2010, while average daily room rates jumped to a high of $353 in fiscal 2012
from a low of $275 also in fiscal 2010. Additionally, two hotels were opened
between fiscal years 2009 and 2010 while other hotels have been adding capacity.
SOUND FINANCIAL OPERATIONS
The town's financial operations have performed impressively, even during the
recession. Before consideration of capital spending, the general fund produced
operating surpluses each year since at least fiscal 2009. Audited fiscal 2012
general fund operations produced a $1 million surplus, raising the total and
unrestricted fund balances to $2.9 million (39% of expenditures and transfers
out). Additionally, $1 million in the capital projects fund could be transferred
to the general fund for any operational purpose, raising the town's total
financial cushion to $3.9 million (52.9%). Management indicated that the town
does not intend on materially spending down its fund balance from current levels
and has a history of transferring surpluses to its capital projects fund.
Fitch believes that the town's exceptionally high economic and revenue
concentration levels necessitate a high fund balance at the 'AA-' implied GO
rating level. In addition, while high relative to the budget the nominal amount
of reserves is small.
The general fund is budgeted to produce nearly balanced operations in fiscal
2013. However, the budget incorporates significant elements of conservatism that
have historically resulted in material actual revenue outperformance. Management
estimates that general fund operations likely will produce a $400,000 surplus in
fiscal 2013, which subsequently may be transferred to the town's capital
projects fund and irrevocable OPEB trust.
The town employs several strong management practices. The general fund must
include emergency and revenue stabilization reserves sized at 20% of
expenditures ($1.3 million in fiscal 2012) and 10% of TOT ($480,000),
respectively. Major revenues are budgeted based on three-year averages and are
tracked and reported to town council monthly. Fund balances may only be used for
non-recurring expenditures. The town also has general and legal contingency
reserves that are sized annually.
GOOD EXPENDITURE FLEXIBILITY
Yountville enjoys a good degree of expenditure flexibility, should it be needed.
The town also makes sizeable annual contributions to its capital fund for
pay-as-you-go projects, and expects to contribute $375,000-$400,000 annually
moving forward. These projects could be scaled back, deferred, or cancelled as
desired. Finally, since fiscal 2011 the town has been paying about $300,000
annually for legal fees related to a major construction project in fiscal 2008
that contained significant defects. Management expects the issue to be resolved
by the close of fiscal 2013, at which time these legal fees would cease and the
town could receive a settlement of up to $2 million, half of which would be used
to reimburse the town for legal expenses.
CONCENTRATED REVENUE STREAMS
Nearly 60% of the general fund's revenues derive from TOT, which are generated
solely from the town's 11 hotels and inns. Among these 11 accommodations, the
three largest make up over 60% of the town's total rooms. Despite these
exceptionally high concentration levels, TOT performance has been strong. In the
past 10 years, TOT declined only in fiscal 2009, by 7%, before rising
thereafter. TOT increased to record levels in fiscal 2011, and then increased by
a substantial 24% in fiscal 2012 to $5 million. Given the built-out nature of
the town and the currently healthy state of the local lodging sector, future TOT
growth will likely be more subdued. The town's other major revenue sources
include property taxes (16%) and sales taxes (11%). These revenue sources are
also concentrated in the top payers, but have been resilient.
In an effort to minimize risk related to the economic concentration, the town
purchases business interruption insurance on all of its inns and hotels, and its
two largest restaurants. This insurance mitigates the risk of businesses
shutting down temporarily due to natural disasters, though it does not protect
against poor economic or business conditions. Strong historical economic
conditions combined with a lack of developable land have resulted in new
businesses replacing shuttered ones.
ADEQUATE DEBT PROFILE
The town's debt profile is adequate overall. Overall debt levels are high at
$8,377 per capita. Fitch's concerns about this high level are mitigated by the
high visitor base which contributes, through TOT and other revenue, to debt
repayment. Debt is moderate at 4.5% when compared to AV. Capital needs are
manageable, and the town makes significant use of pay-as-you-go capital
financing. However, principal amortization is slow with just 37% of debt retired
over 10 years.
The town has a sizeable capital improvement plan, but projects are implemented
on the basis of surplus funding availability. Management indicated the town has
no plans for further debt issuances. Yountville participates in CalPERS'
retirement system and implemented a second tier benefit plan over the last few
years while raising all employees' pension contribution rates to 8% of wages.
Formerly the town made the full pension contributions on the employees' behalf.
The town offers OPEB benefits, but has scaled back benefits and tightened
eligibility requirements. The related liability is manageable and town council
approved a phased-in increase of contribution rates that is expected to fund ARC
at or near 100% by fiscal 2015. The town currently is paying 8% of wages into an
irrevocable OPEB trust, and this payment will rise 100 basis points annually
over the next two fiscal years.
The town's carrying costs (annual debt service, OPEB, and pension costs) equal a
manageable 18% of general fund expenditures and transfers out.
SOUND LEASE PROVISIONS
The 2013 LRBs enjoy solid legal provisions. The bonds include a standard
lease-leaseback structure, and the more valuable of two leased assets, town
hall, is considered by Fitch to be essential. Asset substitutions are allowed,
subject to multiple restrictions. One such provision requires the substituted
asset to be at least as essential as the original asset.
Total estimated asset values after construction completion are expected to equal
$5.5 million, which would overcollateralize the bonds' $4.3 million par value.
Of the leased assets, $4.2 million will be subject to abatement while town hall
is under construction for seismic retrofitting. The construction is expected to
be completed in November 2013, and the structure includes capitalized interest
to last six months past the estimated construction completion date on this
portion of the bonds.
Other legal provisions includes a covenant to budget and appropriate lease
payments, 24 months of rental interruption insurance, and a covenant to maintain
standard comprehensive insurance. The structure does not include a DSRF, which
is a concern but does not lead Fitch to make a notching distinction. Budget
delay risks are mitigated by the timing of semiannual lease payments well past
the beginning of the fiscal year.