SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has upgraded San Jose Financing Authority, CA's (the authority) parking revenue bonds as follows:
--$31.7 million parking revenue bonds are upgraded to 'BBB-' from 'BB'.
The Rating Outlook is revised to Positive from Stable.
The bonds are special limited obligations of the authority, secured by a pledge of surplus tax increment revenues (tax revenue) from the redevelopment agency (subordinate to senior and subordinate tax allocation bonds [TABs]) and gross parking revenue from the city's parking enterprise fund.
KEY RATING DRIVERS
TAX INCREMENT BONDS UPGRADED: The 'BBB-' rating is based predominantly on the 'BBB-' rating on the redevelopment agency's (the agency) senior TABs. The parking bonds have a lien subordinate to senior and subordinate TABS.
SOME BENEFIT FROM PARKING SYSTEM PLEDGE: All-in debt service coverage by tax increment is estimated at 1.16 times (x) in fiscal 2015, compared to 1.24x for TABs with liens senior to the parking revenue bonds'. However, these bonds benefit somewhat from a gross pledge of parking system revenue.
OUTLOOK REFLECTS ECONOMIC STRENGTHENING: The Positive Outlook reflects the likelihood that assessed valuation gains and/or positive resolution of litigation would result in an upgrade of the senior TABs and the parking bonds.
WEAK BUT IMPROVING PARKING FUND PROFILE: The parking fund's financial profile is improving. The city estimates fiscal 2014 will be a third consecutive year of increasing revenues after several years of declines. In addition, the system maintained operating reserves.
OPERATING RESERVE SUPPORT: The city's pledge to maintain a parking system operating reserve equal to 25% of expected expenditures provides additional support to the parking system.
LAWSUIT RESOLUTION; AV GAINS: Fitch may take positive rating action if the agency prevails in the county's override lawsuit, or if underlying AV growth with limited successful appeals result in strong tax base gains and materially increased DSC.
SURPLUS TAX REVENUE EXPECTED TO BE AVAILABLE GOING FORWARD
The city anticipates that surplus tax revenue will be available to pay the parking bonds' debt service in fiscal 2015 and in the future as property values have recovered and the dissolution legislation (AB1x26) precludes the issuance of additional bonds. In addition, AB1x26 eliminated the housing set aside requirement, allowing the agency to use residual housing funds to non-housing debt service, including for the parking revenue bonds.
After property values and pledged tax revenues declined between fiscal 2010 and 2012, the parking system paid most of the debt service on the bonds during fiscal 2011-2013, in some years through drawing down the capital reserve fund to pay operating expenses or to make loans to the agency to pay debt service. It is unclear whether the agency will be allowed to repay these loans.
The 'BBB-' rating reflects Fitch's view that surplus tax revenues will continue to be available to pay debt service.
PARKING FUND PROVIDES LIMITED RATING ENHANCEMENT
The city's parking system includes eight garages, six parking lots, and on-street metered spaces. The city estimates that the city's system accounts for about 40% of the total parking supply in the downtown area.
The parking fund's financial performance improved in fiscal 2013 with parking revenues up 4.7% over fiscal 2012 after a 12.3% gain the year prior. Tax revenues were used to pay a portion of debt service for fiscal 2013 and it is still unclear whether tax revenues will be available to reimburse the parking system for fiscal 2014 debt service. However, tax revenues are expected to pay all of the debt service requirements in fiscal 2015 onward. As a result, the parking fund is projected to use net operating revenue to add to its reserves over the near term.
The parking fund's historically strong reserves were greatly reduced through operating deficits and loans to the agency for the purpose of making debt service payments on the bonds. However, at the end of fiscal 2013, the parking fund retained approximately $12.8 million in cash (equal to 427 days cash on hand). Fitch views the cash balances as a benefit to the parking system and a modest enhancement to the cushion provided by pledged tax revenue.
For more info, see 'Fitch Upgrades San Jose RDA, CA's TABS to 'BBB-'; Outlook to Positive', dated July 16, 2014.
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, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors.
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