Fitch Affirms San Luis Obispo, CA's Lease Revs at 'AA'; Outlook Stable

SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed its 'AA' rating on the following city of San Luis Obispo, CA, lease revenue bonds:

--$5.9 million series 2001C;

--$15 million series 2006;

--$10.3 million series 2009;

In addition, Fitch affirmed its 'AA+' implied general obligation (GO) bond rating.

The Rating Outlook is Stable.

SECURITY

The lease revenue bonds are secured by lease rental payments from the city of San Luis Obispo to the San Luis Obispo Capital Improvement Board. Debt service payments are subject to annual appropriation and abatement risk.

CREDIT SUMMARY

STRONG FINANCES DESPITE RECESSION: The city's above-average credit ratings reflect a strong financial position, fundamentally sound long-term economic prospects, a low debt burden and excellent financial management in the face of considerable short-term economic and revenue volatility caused by the recent economic downturn.

KEY RATING DRIVERS

STRONG FINANCIAL POSITION: The city has maintained a strong reserve position in the face of declining revenues through disciplined expenditure cuts that have largely restored structural budget balance to the general fund.

EXCELLENT FINANCIAL MANAGEMENT: Active budget monitoring, comprehensive financial policies and the use of long-term budget planning provide a strong framework for managing through unexpected budgetary problems.

LOW DEBT BURDEN: The city's sparing use of bonded debt is a credit positive, though San Luis Obispo does have meaningful unfunded pension obligations that require increasing annual benefit contributions from the city's operating budgets.

FUNDAMENTALLY SOUND ECONOMY: San Luis Obispo is the economic center of California's Central Coast region and its tourism-, education- and government-driven economy has outperformed the state during the current deep cyclical downturn.

RESILIENT TAX BASE: Assessed value (AV) remained fairly stable in this older, more established community despite the deep housing downturn affecting California and the nation.

CREDIT PROFILE

San Luis Obispo managed through the significant declines in economically sensitive revenues during the recent recession by using some of its ample fund balance as spending cuts lagged revenue declines. Like other California municipalities, the city has little revenue raising flexibility due to Proposition 13 tax limitations, requiring it to make most budget adjustments through expenditure changes. Total general fund revenues fell 1.5% in fiscal 2009 and 7.7% in fiscal 2010 amid declines of more than 9% each year in sales tax revenues, the city's biggest revenue source. The city allowed expenditures to rise 5.2% in fiscal 2009 but cut spending by 4.2% in fiscal 2010. The city continued to reduce expenditures in fiscal 2011, as revenues recovered slightly. Unaudited results for fiscal 2011 suggest a return to budget surplus, and the city has budgeted for balanced operations in fiscal 2012. The city's unreserved general fund balance declined for a third consecutive year in fiscal 2010, but remained slightly above the city's fund balance target at a very healthy 20.5% of spending. The city expects 2011 results to push the fund balance to over 23% of spending.

The city's 2012 budget appears to be structurally balanced, but it includes about $1.3 million of unspecified labor concessions that are still to be negotiated with public employee unions. While management expects to achieve these targets, policymakers have prudently designated an equal amount of the city's excess fund balance (above the policy target) to make up for any shortfalls. San Luis Obispo's financial management is particularly strong, suggesting it would recognize and cure any return to structural imbalance if the desired compensation cuts failed to materialize. Financial management and elected officials actively monitor budget performance across the city's biennial budget cycle and have made adjustments to reduce expenditures in the face of revenue declines. While the need to negotiate major spending reductions with labor can lead to a lag in rebalancing budgets, the city's budget process includes long-term budget planning that focuses policymakers' attention on the need to align on-going revenues and expenditures to achieve structural balance.

The city's debt burden is low, and the city has no plans to issue new tax-supported bonds. Direct debt is quite low at 0.6% of AV or $907 per capita, while combined direct and overlapping debt is low at 1.2% of AV or $1,660 per capita. Amortization is about average with 24.9% of bonds repaid in five years, and 46.3% repaid in ten years. The picture is more mixed for other long-term liabilities. The city has significant unfunded pension liabilities that pose an increasing burden to its operating budgets, but the city's other post-employment benefit (OPEB) liabilities are minimal. The exact degree of the city's pension liabilities is unclear because San Luis Obispo participates in a California Public Employees' Retirement System (CalPERS) cost-sharing multi-employer plan for public safety employees, which does not report the city's share of the total unfunded accrued actuarial liabilities (UAAL). The plan's funded ratio was adequate at 82.6% as of June 30, 2009 but is likely to decline as market losses from 2009 are smoothed into asset valuations. CalPERS reported a significant city-specific UAAL of $38.9 million for the city's larger non-pooled miscellaneous employees' plan, which had a 70.2% funded ratio as of June 30, 2009. Fitch calculates that the UAAL would rise to $42.1 million and the funded ratio would decline to 67% with a 7% rate of return assumption (compared to the 7.75% discount rate used by CalPERS). The city makes its full annual required contributions to both plans each year, and pension payments are expected to rise to $11.9 million in fiscal 2015 from $6.6 million in fiscal 2010.

San Luis Obispo, a city of about 44,000 people, is the economic center of California's Central Coast region. The city's biggest industries are tourism, higher education and government, and it is a regional retailing hub. It is home to the California Polytechnic State University with about 20,000 students. The city benefits from slow, steady population growth and has generally experienced unemployment rates below the state average. The city saw a sharp rise in joblessness during the recent recession, and unemployment remained elevated - but below the state average - at 10.3% in April. The tax base has proven quite resilient in the face of the national housing downturn of recent years. AV grew 3% in fiscal 2010 and declined by less than 1% in 2011. Management expects a small increase in 2012. The relative stability of the tax base is likely due to the fact that the city is an older, more established community that did not experience rapid building during the housing boom. While the local housing market has likely experienced significant declines in market values, assessed values were well below market values after the housing boom because Proposition 13 limits assessment increases during such periods. The gap between AV and market value created a cushion that has eased the impact of home price declines on AV and on the city's property tax collections. Overall, the city's economy and tax base appears fundamentally sound, despite its current cyclical weakness.

Additional information is available at 'www.fitchratings.com'

In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, and the National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria', dated Aug. 16, 2010.

--'U.S. Local Government Tax-Supported Rating Criteria', dated Oct. 8, 2010.

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566

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