SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings upgrades the following Indio Public Financing Authority, CA (the authority) lease revenue bonds:
--$24.5 million lease revenue refunding bonds, series 2012 (public capital improvements) to 'BBB+' from 'BBB'.
In addition, Fitch upgrades the city of Indio's implied general obligation (GO) bond rating to 'A' from 'A-'.
The Rating Outlook is revised to Stable from Positive.
SECURITY
The lease revenue bonds are limited obligations, secured by the city's covenant to budget and appropriate annual lease rental payments for use and occupancy of the essential and non-essential assets, subject to abatement. Additional security is provided by a standard cash funded debt service reserve fund, property insurance, and two years of rental interruption insurance. Leased assets include the city's public works yard, a senior center, and three parks.
KEY RATING DRIVERS
ADEQUATE RESERVES & BALANCED BUDGET: The rating upgrades reflect the city's financial turnaround that has resulted in the restoration of adequate unrestricted reserves, improved liquidity, a balanced budget, and a third consecutive year of projected positive operating performance in fiscal 2014.
BUDGETARY PRACTICES: The notable improvement in the city's financial position over the past few years reflects the city's adoption and implementation of prudent financial policies and practices.
HIGH DEBT RATIOS: Overall debt levels are high due to overlapping debt. The city has no additional planned debt issuances, although direct debt levels are expected to remain relatively stable given the slow amortization rate of outstanding principal.
LIMITED ECONOMY: The city's economic profile is characterized by an elevated unemployment rate and below average income levels. Positively, fiscal 2015 marked the second year of solid gains in assessed values, driven by continued development in the quickly growing city and an improving housing market.
SECURITY FEATURES: The lease revenue bonds are rated two notches below the city's GO rating, reflecting the non-essential nature of the majority of the leased assets and abatement risk.
RATING SENSITIVITY:
CONTINUED FINANCIAL IMPROVEMENT: A trend of continued operating surpluses along with increased reserves could result in positive rating action.
CREDIT PROFILE
Indio is a general law city that covers approximately 33 square miles of the Coachella Valley in Riverside County. The city experienced rapid population growth over the past decade with a 4.5% compound annual growth rate and an estimated population of 83,539 (2013).
SOUND FINANCIAL PROFILE
The city projects an unaudited operating surplus of approximately $6.3 million (12.9% of spending) in fiscal 2014, marking the fourth consecutive year of positive financial performance, after adjustments. The improved performance is the cumulative result of aggressive expenditure reductions since fiscal 2011 and increased revenue from renewed economic activity, a voter approved increase (effective fiscal 2011) in the utility user tax rate, and increased revenues related to events held in the city.
The city's unrestricted general fund reserve is projected to increase at year end fiscal 2014 to approximately $12 million, or 24.6% of spending, from just $804,000 (1.7% of spending) in fiscal 2012. Management expects to spend approximately $6.4 million of the accumulated unrestricted reserve in fiscal 2015 to spur economic development and address capital needs, leaving the fund balance at still adequate levels for the rating level (approximately 11.5% of fiscal 2014 spending).
PRUDENT FINANCIAL PRACTICES
The city's financial position is better positioned following the adoption and implementation of more prudent financial practices and policies. These changes have resulted in more conservative budgeting, regular budgetary updates and revisions, long-term financial planning, and the rebuilding of financial reserves. Financial projections reflect generally balanced performance over the near term under reasonable assumptions.
RISING PENSION AND OTHER LONG-TERM LIABILITY COSTS
The city participates in CalPERS, a statewide pension program to which it makes the full annual actuarial required contribution. In fiscal 2013, the city reported that its total pension contribution was $3.7 million or 5.1% of governmental fund spending. Pension contributions are expected to increase significantly over the next several years due to actuarial changes at the pension plan. Management's regularly updated five year financial forecast remains balanced despite the increased costs from pensions and other retirement benefits.
The city offers other post-employment benefits (OPEB) and funds them on a pay-as-you-go (paygo) basis. In fiscal 2013, the city contributed $1.6 million or 2.3% of governmental spending. In fiscal 2014, the city began prefunding a portion of the liability, contributing approximately $539,000 more than the paygo amount. While the total contribution remains well below the full actuarially based annual required contribution, Fitch views the prepayment of OPEB liabilities positively.
HIGH DEBT BURDEN
The city's overall debt burden is high at 5.9% of taxable assessed value (AV) although this is somewhat offset by the city's overall low carrying costs of 11.2% of governmental spending. The high debt burden is largely due to overlapping debt issued by other taxing entities. Indio has no additional debt issuance plans and expects to fund capital projects and maintenance with operational cash flow and designated general fund reserves.
LIMITED ECONOMY
The city hosts several large music festivals annually including Coachella and Stagecoach during which the city's population is estimated to nearly double. The events generate additional revenues for the city from hotel and sales taxes along with providing additional employment opportunities. Prudently, the city budgets approximately one-third of the direct revenues received from the festivals (ticket surcharge and hotel taxes) for one-time expenses such as capital needs. Music festival promoters and the city completed a 17-year agreement in 2013 that will keep and expand the city's music festivals.
The city's wealth indicators point to below-average wealth levels with per capita and median household income at 72% and 85%, respectively, of the state average. In addition, the individual poverty rate was 21%, which is significantly higher than that of the state (14.4%) and region (15.1%).
Indio benefits from a rapidly growing labor force and a regional labor market that includes most of Coachella Valley. However, the unemployment rate remains elevated at 9% (April 2014) despite above average employment gains over the past couple years.
The city's AV increased by a notable 8.2% in fiscal 2015, marking the second year of growth since fiscal 2010. Additional residential and commercial development in the city is expected to support AV performance over the near term.
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
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=856294
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