SAN FRANCISCO--()--Fitch Ratings has rated Ventura County Public Financing Authority, California's (the authority) bonds as follows:
--$293.1 million lease revenue bonds (LRBs) series 2013A at 'AA';
--$10.9 million lease revenue refunding bonds series 2013B at 'AA'.
The bonds will sell via negotiated sale on or about February 27. Proceeds from the series 2013A bonds will be used to construct a replacement wing for the county's medical center, to pay down $20.7 million of the county's commercial paper program, and to make other improvements. The 2013B bonds will defease the county's outstanding 2003 certificates of participation for net present value savings.
In addition, Fitch assigns the following rating to Ventura County, California (the county):
--Implied general obligation bonds (GOs) at 'AA+'.
The Rating Outlook is Stable.
The LRBs are secured by payments from the county to the authority for use of three essential assets, subject to abatement. Additional security includes a debt service reserve fund (DSRF) funded at 50% of maximum annual debt service (MADS).
SOLID FINANCIAL OPERATIONS: The 'AA+' implied GO rating reflects the county's good financial operations, exhibited by a sound financial cushion, years of operational surpluses, prudent expenditure reductions and pension reform measures, and a significant degree of remaining expenditure flexibility.
SOLID LEGAL STRUCTURE: The LRB's one-notch distinction from the GOs reflects the sound legal structure, including a covenant to budget and appropriate lease payments, essential leased assets, standard insurance provisions, and 24 months of rental interruption insurance. However, the DSRF is sized to just half of IRS maximum levels.
ABOVE AVERAGE LOCAL ECONOMY: The moderately diverse local economy is strong, with high income levels, a fairly mature tax base, and adequate access to the large and diverse Los Angeles employment market. However, less mature portions of the county's housing market were significantly impacted by the recession, and unemployment data is mixed.
SOUND DEBT PROFILE: The county's debt burden is low to moderate, capital needs after this issuance are limited, and the other-post employment benefits (OPEB) liability is minimal. However, debt amortization is slow and the sizable unfunded pension liability is projected to result in significant future contribution hikes.
GOOD MANAGEMENT PRACTICES: The county is working towards meeting its sound minimum fund balance policy, the budget must be structurally balanced by policy, and labor relations are good. There also appears to be good alignment between management and policymakers with regard to implementation of conservative management practices.
Ventura County serves a population of 832,000 residents, bordering Los Angeles County to the southeast and Santa Barbara to the northwest. The county benefits from adequate access to the large and diverse Los Angeles employment market, and the local economy is reasonably well-diversified.
HISTORICALLY AGRICULTURAL ECONOMY NOW MODERATELY DIVERSIFIED
In recent decades the county has diversified away from its agricultural roots, with major employers in government, health care, technology and military. However, agriculture still plays a significant role in the economy, with residents supportive of policies meant to prevent conversion of farmland to other uses. The county's largest employer is the Naval Base Ventura County, with 17,000 employees.
The local economy benefits from average to above-average income levels. Median household income equals 125% and 146% of state and national levels, respectively, though per capita levels are on par with the national average. Poverty levels of 9.9% of the population also compare well to the state and national rates of 14.4% and 14.3%, respectively.
Employment levels contracted significantly in 2009 and have not yet fully recovered. Nonetheless, employment has expanded over the past two years, and November 2012 unemployment registered at 8.6%, which compares favorably to the state's 9.6%, but is higher than the 7.4% national average.
DIVERSE, MODERATELY RESILIENT TAX BASE
The county's tax base is well-diversified, with the top 10 payers making up just 4.1% of AV. The tax base performed moderately well during the recession, with a one year 3.3% contraction in fiscal 2010 followed by very mild reductions in fiscal years 2011 and 2012. This performance was helped by the maturity of a significant portion of the county's housing stock, particularly in coastal regions. The county's December 2012 home values are a significant 29% lower than at their 2006 peak.
AV in fiscal 2013 grew slightly by 0.6%, and Fitch believes the tax base is well positioned for stronger growth in fiscal 2014 based on the county's solid home price appreciation over the past year. Zillow indicates the county's average home value increased 8.6% year-over-year through December to $427,700. If sustained, this increase could significantly increase AV for properties subject to Proposition 8 value reductions (approximately 30% of properties according to management), and likely will result in an inflationary adjustment to a significant portion of homes not subject to Proposition 8. The county is projecting a 2% AV gain in fiscal 2014, which Fitch believes is reasonable, if not somewhat conservative.
SOUND FINANCIAL PERFORMANCE, BUT RISING PENSION COSTS
The county's financial performance has been very good, with four consecutive years of general fund operating surpluses and expectations of surplus in fiscal 2013. General fund operations in fiscal 2012 resulted in an $18.9 million operating surplus (after transfers), raising the total and unrestricted fund balances to sound levels of $249.6 million (29.3% of expenditures and transfers out) and $161 million (18.9%), respectively.
The county's fiscal 2013 budget is structurally balanced, as required by county policy, but the county tends to budget expenditures conservatively, and is out-performing year-to-date.
The county has implemented prudent and incremental expenditure reductions and significant pension reforms, but has not had to make severe cuts to programs and staff. As a result, the county's expenditure flexibility remains high.
The county has been able to produce operating surpluses by freezing wages, eliminating positions through attrition, and implementing efficiencies. The county has also negotiated for both sworn and non-sworn staff to pay a portion of their pension costs in recent years, while modifying pension benefits to prevent pension spiking and establishing less generous benefit tiers.
COUNTY MEDICAL CENTER ON SOUND FINANCIAL FOOTING
The county runs a medical center. Fitch does not view this as a material credit weakness because the center has been financially well-managed and the county's operating subsidy has held steady at $15.2 million annually for five years. County policy caps the subsidy at this dollar amount moving forward. Net of the subsidy, the hospital has increased its net assets in each of the past consecutive five years, and is projected to generate surpluses over the next five years. Management believes that recent years' federal health legislation will financially benefit the system.
COUNTY LIKELY TO FACE SIGNIFICANT PENSION COST ESCALATION
The county offers Ventura County Employees' Retirement Association (VCERA), a defined benefit plan for most of its employees. The actuarially funded ratio for fiscal 2011 was 80.6%, but drops to an adequate Fitch-adjusted 72.6% after the discount rate is lowered to 7% from 8%. The unfunded liability likely will narrow faster than many other pension systems' due to a rapid 15 year amortization period and no investment loss corridor.
However, pension cost hikes are projected to out-pace revenue growth over the next few years, resulting in four years of moderate projected operating deficits ranging from $6.3 million to $14.3 million. Fitch expects that the county will continue to adhere to its policy of structurally balancing its budget.
SOUND DEBT PROFILE
The county's debt profile is good overall, but is weighed somewhat by slow debt amortization and the formerly mentioned pension cost concerns. Approximately 25% of principal retires in 10 years. Repayment is slow because most of the county's debt is new and not because debt is back-loaded.
The county's net debt burden is a moderate $2,563 per capita, or a low to moderate 2% of AV, including the series 2013 bonds. The county has no exposure to variable rate debt, and its capital needs are small after this issuance. The county's OPEB obligation is minimal, consisting largely of an implicit subsidy.
Carrying costs (debt, pension, and OPEB costs including the new debt as a percentage of operating expenditures) are low to moderate at 14.9%, but likely to rise moving forward as pension costs escalate.
GOOD LRB LEGAL PROVISIONS
The LRBs include a standard lease-leaseback arrangement, a covenant to budget and appropriate lease payments, and three essential leased assets. The assets include the portion of the Ventura County Medical Center that will not be under construction, a jail, and a juvenile justice center. These assets over-collateralize the bonds, and will be substituted for the entire medical center (including the wing being funded by this issuance) upon construction completion.
Insurance provisions are standard, including requirements for general liability, casualty, and title insurance. The structure also includes 24 months of rental interruption insurance. The debt service reserve fund is cash funded and sized at just 50% of MADS, as opposed to the IRS maximum of 100%. However, Fitch views the legal structure as sufficiently strong that a related notching distinction is not warranted.
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, Zillow, and the Underwriter.
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