Fitch Upgrades San Luis Obispo County, CA's LRBs and POBs to 'AA+'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has upgraded the following San Luis Obispo County, CA (the county) obligations:

--$115.62 million pension obligation bonds (POBs) series 2003A, 2003C and 2009A to 'AA+' from 'AA';

--Implied general obligation (GO) rating to 'AAA' from 'AA+'.

In addition, Fitch upgrades the following San Luis Obispo County Financing Authority, CA (the authority) obligations:

--$18.72 million lease revenue refunding bonds, series 2012A, to 'AA+' from 'AA'.

The Rating Outlook is Stable.

SECURITY

The POBs are secured by an absolute and unconditional obligation of the county to make payments.

The lease revenue bonds (LRBs) are secured by lease payments made by the county to the authority under a covenant to budget and appropriate. The payments are subject to abatement. A debt service reserve is cash-funded at the standard three-prong test. The leased asset is the three-building original County Government Center, which after construction of a new county government center, houses the Public Works, Planning, Courts, and District Attorney offices.

KEY RATING DRIVERS

STRONG FINANCIAL PERFORMANCE THROUGH RECESSION: The upgrade reflects the county's consistently solid financial position which has improved through the economic downturn, benefiting from conservative budgeting and financial planning. The county has posted five consecutive years of surpluses resulting in significant reserve levels.

STABLE LOCAL ECONOMY: The large state government, university, and utility presence aid in the stability of the county's economy, which also has noteworthy agriculture and tourism components.

STABLE TAX BASE, MODERATE CONCENTRATION: The tax base has remained remarkably stable. The portion of assessed value (AV) attributed to PG&E, the county's largest taxpayer, continues to decline.

VERY LOW DEBT PROFILE: The county's low overall debt levels, low carrying costs, and limited capital needs are credit positives. In addition, prefunding of retiree healthcare liabilities and implementation of pension reforms have reduced its long-term liability.

GENERAL FUND OBLIGATIONS: The LRBs and POBs are rated one notch below the GO bonds as they are not a general obligation and are payable solely from any legally available funds.

RATING SENSITIVITIES

MAINTENANCE OF RESERVES: The upgrade is reflective of the county's exceptional financial performance, which is essential to mitigating a stable, but somewhat limited, economic profile.

CREDIT PROFILE

The county comprises 3,300 square miles along California's central coast mid-way between San Francisco and Los Angeles. With a population of 274,804, the county includes seven cities as well as many unincorporated communities. The county seat is the city of San Luis Obispo (implied GO rating 'AA+'; Stable Outlook by Fitch).

STRONG FINANCIAL PERFORMANCE AND MANAGEMENT

San Luis Obispo County has demonstrated consistently strong financial performance due largely to conservative budgeting and planning. As such, in fiscal 2013 the county generated an operating surplus after transfers for a fifth consecutive year, equal to $26.7 million. The county's unrestricted fund balance at fiscal year-end 2013 was a high $200.6 million, or 53.8% of spending.

Management proactively established a five-year plan in 2007 to address expected budgetary pressures that was later extended to seven years due to the longer than expected economic recovery. The county took a variety of actions to close budget gaps over the last six years as outlined in the plan. These included elimination of additional vacant positions following a board policy not to backfill cuts in state funds, which would primarily impact health and human services and public works services. As a result, the county closed annual structural imbalances ranging from $2 million to $30 million. The fiscal 2014 budget was essentially breakeven, and for fiscal 2015, a status quo budget including no revenue growth would result in a $5.5 million surplus compared with a targeted breakeven. Further, management has not included in its projections $22 million in one-time sales tax payments expected to be received over the next two years during construction of two large-scale commercial solar projects. Management plans to use these funds for reserves.

Liquidity is very strong with cash increasing in each of the last five years to $202.8 million at year-end fiscal 2013; about $30 million of the increase in fiscal 2011 was due to reclassification of funds under GASB 54. This results in an exceptionally strong quick ratio (cash and investments compared to liabilities less deferred revenue) of 13.4. In addition, the general fund is able to borrow a substantial sum equal to about $180 million in additional designated reserves if necessary without board approval, though it has not done so in the past.

STABLE ECONOMY

Government represents 19% of total employment, contributing to a stable economic profile. The county and California Polytechnic State University, with a student population of about 20,000, are the largest employers, each with about 2,500 employees. The county also has a large utility sector (19% of employment) primarily due to the presence of PG&E, which employs 1,700 people and operates the Diablo Canyon nuclear plant, whose twin reactor licenses expire in 2024 and 2025. Though PG&E had applied for a 20-year extension, its application is pending as it develops new seismic studies. Leisure and hospitality accounts for about 15% of non-farm employment compared with the national average of 10%, the result, in part, of beach and central-coast vineyard attractions.

County unemployment rates are well under the state and national averages at 5.6% as of December 2013 from 7.2% year over year. Per capita and median household income levels are about even with state averages and slightly above national averages.

STABLE TAX BASE AND MODERATE CONCENTRATION

The county's tax base remained remarkably stable through the downturn, declining only a combined 2.9% before increasing 1.1% in fiscal 2013 and 3% in fiscal 2014. Concentration is low when considering the top 10 taxpayers, which make up 7.7% of total AV, but PG&E accounts for a sizable 6.2%.

The median home value in San Luis Obispo County is $459,100 as of January 2014. County home values have risen 14.2% over the past year and Zillow predicts they will rise 5.8% within the next year.

VERY LOW DEBT PROFILE; CARRYING COSTS

The debt burden is low, with overlapping debt including accreted interest totaling $1,975 per capita, or 1.3% of AV. Amortization is moderate at 51% including accreted interest from the series 2003C capital appreciation POBs. Capital needs include a women's jail and juvenile hall, both of which will be funded with a mix of state funding and county funds that have already been set aside. No additional debt is expected in the near term.

Carrying costs, including debt service on the LRBs and POBs, and pension and other post-employment benefits (OPEB) payments, was a modest 10% of governmental spending in fiscal 2013. In 2010 the county prudently established an irrevocable trust to address its small OPEB liability of $11.7 million as of June 30, 2013. The trust's funded ratio is equal to 48.7% (at a discount rate of 7.1%).

The San Luis Obispo County Employees Retirement Plan, which includes county employees as well as superior court and other agencies within the county, had a funded ratio of approximately 74.4% as of Jan. 1, 2013 adjusted for a 7% assumed rate of return. In order to address pension costs, in fiscal 2011 the county implemented a tier II plan which raised the retirement age to 60 from 55 and limited the cost of living increase for the majority of employees. It also began shifting the employee share of the pension contribution to employees.

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.

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=827228

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Contacts

Fitch Ratings
Primary Analyst
Shannon Groff, +1 415-732-5628
Director
Fitch Ratings, Inc.
650 California St., Fourth Floor
San Francisco, CA 94108
or
Secondary Analyst
Stephen Walsh, +1 415-732-7573
Director
or
Committee Chairperson
Amy Laskey, +1 212-908-0568
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 St., Fourth Floor
San Francisco, CA 94108
or
Secondary Analyst
Stephen Walsh, +1 415-732-7573
Director
or
Committee Chairperson
Amy Laskey, +1 212-908-0568
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com