Fitch Rates Riverside, CA's Pension Obligation BANs 'F1+' & Affirms GOs at 'AA'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has assigned an 'F1+' to the following Riverside, CA (the city) bond anticipation notes (BANs):

--$30 million taxable pension obligation refunding BANs, 2013 series A.

The BANs are expected to sell via negotiation on or around May 15, 2013. Proceeds will be used to refund the city's outstanding taxable pension obligation BANs, 2012 series A, which Fitch affirms at 'F1+'.

In addition, Fitch affirms the following ratings:

Riverside, CA:

--$16.1 million GO bonds, series 2004 at 'AA';

--$22.6 million taxable pension obligation bonds (POBs), series 2005A at 'AA-';

--$20.7 million COPs, series 2010 (Recovery Zone Facility Hotel Project) at 'AA-';

--$19.5 million lease revenue COPs, series 2006 (Galleria at Tyler Public Improvements) at 'A+'.

Riverside Public Financing Authority:

--$41.2 million lease revenue refunding bonds, series 2012A at 'AA-'.

The Rating Outlook is Stable.

Fitch has withdrawn the ratings on the following bond due to prerefunding activity:

--Riverside, CA (Capital Improvement Projects) COPs, series 2003.

SECURITY

The pension obligation BANs and POBs are secured by the city's absolute and unconditional obligation payable from any legally available funds.

The GO bonds are secured by the city's full faith and credit and unlimited ad valorem property tax pledge.

The lease revenue refunding bonds, and COPS are secured by lease payments made by the city to the authority from any legally available resources of the city for use and occupancy of city facilities. The lease revenue COPs are secured by lease payments made the by city to the City of Riverside Municipal Improvements Corporation from any legally available resources of the city for use and occupancy of city facilities. Lease payments are subject to abatement, the risk of which is mitigated by rental interruption and provisional property loss insurance. The leased premises consist of the city hall complex and policy patrol facility for series 2012A; two libraries and two fire stations for series 2010; and a parking structure addition to a privately owned retail center (the Galleria at Tyler), a second parking structure at the Tyler Mall, and two arterial streets that bound the mall for series 2006.

KEY RATING DRIVERS

CONSISTENTLY GOOD FINANCIAL PERFORMANCE: The city has consistently maintained healthy reserves aided by expenditure flexibility and diverse revenue sources.

WEAK ECONOMY STABILIZING: The economy is starting to stabilize as demonstrated by flattening of the tax base and modest improvement in home prices, which remain at 50% of their peak. Still high unemployment has fallen due to employment growing at a faster rate than labor.

REVENUE DIVERSITY: With about 42% of revenues generated by property and sales tax, and 18% generated from an annual transfer of 11.5% of gross operating revenues from its utilities, city revenues are diverse.

COMPLEX DEBT PROFILE: The city's debt is moderate and its pension plans are well-funded; however variable rate and short term obligations represent a combined 40% of total debt exposing the city to liquidity and market risk.

SHORT-TERM RATING: The 'F1+' rating on the BANs reflects anticipated market access based on the city's long-term 'AA' rating as well as its access to significant internal liquidity.

GENERAL FUND OBLIGATIONS: The COPs, lease revenue bonds, and POBs are rated one notch below the GO bonds as they are payable solely from any legally available funds. The 'A+' lease revenue COP rating further reflects the non-essential nature of the leased assets.

RATING SENSITIVITIES

WEAKENED ECONOMIC AND FINANCIAL PROFILES: The rating is sensitive to a reversal in recent signs of economic stabilization and shifts in the city's consistently positive financial profile. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

The city, the county seat of Riverside County (the county, implied GO rating of 'AA-' by Fitch), is located in the west portion of the county about 60 miles east of downtown Los Angeles. The twelfth largest city in California, the city encompasses 81.5 square miles and a population of 308,511.

WEAK ECONOMY STABILIZING

After several years of declining employment and a hard hit housing market, the city's economy has started to improve. Unemployment declined to 11.6% as of January 2013, down from 12.6% year over year, as employment increased faster than the labor force. The city benefits from sizeable government and education sectors, including county operations and four colleges and universities.

Per capita income is well below state and national levels, possibly due to larger household sizes and the large student population, estimated at about 52,000, or one-sixth of the total city population. Median household income is more on par with both state and U.S. averages. The city's assessed value (AV) continued to grow through fiscal 2009 due to rising property values and new commercial and residential development but declined a combined 10.3% in fiscals 2010 and 2011 reflecting home price declines of more than 50% from their peak. Reflecting a stabilizing market with modest increases in home prices, AV remained essentially flat in fiscals 2012 (down 0.3%) and 2013 (up 0.4%). The county expects a 1.4% increase in fiscal 2014 based on assessor estimates.

CONSISTENTLY GOOD FINANCIAL PERFORMANCE

Riverside has maintained a sound financial position over the last five years despite revenue declines. The city entered the recession with a good financial cushion and after using some fund balance for planned capital spending and several years of deficits, the city posted surpluses after transfers in fiscals 2010 and 2011 of $1.8 million (0.8%) and $2.8 million (1.1%), respectively. At year end fiscal 2011, the city's unreserved fund balance (consisting of the assigned, unassigned, and restricted as per GASB 54) was a good 21.4%.

The fiscal 2012 unrestricted general fund declined from $52.0 million to $45.7 million; however, as a percent of expenditures and transfers out the balance declined from 21.3% to 13.7% due to one-time $76 million transfer out of land held for resale related to redevelopment dissolution. While the assigned fund balance declined $9 million due to planned capital spending, the unassigned fund balance increased $3 million. Revenues continued to rebound while expenditures increased 7% due primarily to public safety spending increases related to a hike in pension contribution rates and liability insurance trust fund charges.

Projections as of January 31, 2013, indicate a deficit of $1.6 million for year-end fiscal 2013; however, the city has typically budgeted conservatively and expects to outperform. Management expects a balanced fiscal 2014 budget to be achieved in part by continuing to hold salaries flat and from recent pension reform savings. The city has exceeded its unreserved general fund balance policy (i.e. maintenance of at least 15% of the following year's spending) for the past decade. Budget adjustments to date have not been severe and include non-public safety hiring freezes, expenditure increase rollbacks, and pension and benefit reforms. The recently instituted pension reforms took effect over fiscals 2011 and 2012. Changes include increased contributions, pension benefit formula changes, increasing the retirement age, and eliminating deferred contributions for certain employees.

REVENUE DIVERSITY

Revenues are diverse, with sales and property taxes each comprising 21% of general fund revenues, utility users' tax making up 12.5%, and a utility transfer of 11.5% of gross utility revenues comprising 18% (water revenue bonds rated 'AA+' and electric revenue bonds rated 'AA-' by Fitch). Sales taxes increased 12% in fiscal 2011 and 8% in fiscal 2012, largely due to the recovery of auto dealerships and lumber yards hard hit during the recession. For fiscal 2013, the city budgeted a 7% increase and 1.9% increase in property tax revenues.

The city has placed the water transfer to the general fund (not to exceed 11.5% of gross revenues) on the June 2013 ballot (Measure A) as part of a settlement. The transfer is equal to about $6.5 million annually (3% of revenues). Although the transfer has been approved as part of the city charter in 1907 and voted on twice since then, Proposition 218 requires voter approval after 1996. The measure is polling above the required majority vote. According to management, if the measure fails, the net negative impact to the general fund after cost allocations would be about $4 million which the city would address through spending cuts.

COMPLEX DEBT PROFILE

The city's direct debt burden is low, and its total burden is moderate. About one-third of its total debt is variable rate, which exposes the city to counterparty and termination risk (negative $29.97 million mark to market as of June 30, 2012). However, the city has expressed that it intends to reduce its variable-rate exposure over time. Amortization of debt is about average with 45% of principal retired within 10 years.

The city's pensions are well funded and annual required contributions (ARC) are routinely fully funded. Carrying costs, including debt, pension ARC, and OPEB contributions, are manageable at about 18% of fiscal 2012 noncapital, nonredevelopment governmental spending.

The current offering will refund all of the city's outstanding taxable pension obligations BANs. The refinancing risk of the BANs is mitigated by the city's significant liquidity. According to the city, it has access to $353 million in interfund borrowing from various funds, including electric, water, and sewer if needed.

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

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

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=789346

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Contacts

Fitch Ratings
Primary Analyst
Shannon Groff, +1 415-732-5628
Director
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Karen Ribble, +1 415-732-5611
Senior Director
or
Committee Chairperson
Douglas Scott, +1 512-215-3725
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Shannon Groff, +1 415-732-5628
Director
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Karen Ribble, +1 415-732-5611
Senior Director
or
Committee Chairperson
Douglas Scott, +1 512-215-3725
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com