SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed the following ratings on Fresno County, CA (the county) obligations:
--$381 million taxable pension obligation refunding bonds (POBs), series 2004 at 'A+';
--Implied general obligation rating at 'AA-'.
The Rating Outlook is Stable.
SECURITY
The POBs are payable from any legally available source of funds.
KEY RATING DRIVERS
SOUND FINANCIAL PROFILE: The county maintains a sound financial position benefiting from conservative management practices and commitment to budget balance evidenced by significant spending cuts during the recession.
LIMITED ECONOMY; STABLE TAX BASE: The economy is centered on agriculture with below average wealth levels and above average unemployment. The diverse tax base remained relatively flat throughout the economic downturn.
MODERATE DEBT: The county benefits from moderate debt levels and minimal future debt. While escalating debt service could pressure future debt capacity, future capital needs appear to be affordable.
AFFORDABLE TOTAL RETIREE COSTS: Pension obligations as a percent of payroll are high and increasing. The county has no immediate plans to change benefits; however, retiree costs are moderate as a portion of governmental spending. Furthermore, the county has never offered retiree healthcare.
GENERAL FUND OBLIGATIONS: The POBs are rated one notch below the implied GO rating as they are payable solely from any legally available funds.
RATING SENSITIVITIES
The rating is sensitive to shifts in fundamental credit characteristics including the county's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely.
CREDIT PROFILE
Fresno County is located in the southern portion of California's San Joaquin Valley, halfway between Los Angeles and Sacramento. With a population of approximately 952,000, the county serves as the regional hub for services, commerce and trade for the agriculturally-centered southern San Joaquin valley.
SOUND FINANCIAL PROFILE
The county has maintained a sound financial position - achieving net operating surpluses after transfers each of the last five years - despite economic pressures to operations. Total revenues exhibited marked stability during the economic downturn. State and federal funds each account for about one-third of total revenues and tax revenues (almost entirely property taxes) total about 25%. After a steep decline in fiscal 2010, tax revenues have increased each of the last three fiscal years, nearly to the previous high. The county's total general fund balance stood at $307.5 million, or 27.9% of expenditures net of transfers, at fiscal year-end 2013. The unrestricted fund balanced stood at an adequate 9.5% in fiscal 2013 down from 14.3% two years prior due to the reclassification of certain agency funds to restricted.
Due to its commitment to balanced budgets, Fitch expects the county to maintain at least this level of unrestricted fund balance going forward. The county's solid performance during the recession was aided by its policy of reducing costs consistent with revenue reductions. After cutting positions, implementing layoffs, and imposing salary reductions, the county has begun increasing service levels at a gradual pace. Labor contracts are in place through fiscal year 2016 with all bargaining groups except the District Attorney Investigators Association and the Service Employees International Union (SEIU). Terms of the contracts appear affordable, including 2% salary increases each year. The county has experienced a contentious relationship in recent years with SEIU, which went on a three day strike in 2012 and has a pending Public Employment Relations Board complaint. SEIU represents about 63% of employees.
LIMITED ECONOMY
As noted, the economy is heavily dependent on agriculture as Fresno is a leading agricultural center. After government, which accounts for about 19% of county employment, agriculture is the largest employment sector at about 15%. As is common in agricultural communicates, unemployment rates are consistently higher than state and national levels. The county unemployment rate was 9.5% as of September 2014, down year over year from 11.1%, compared to 6.9% for the state and 5.7% nationally. Median household income levels are low at 74% of state and 86% of national averages.
STABLE TAX BASE, LOW CONCENTRATION
The county's tax base remained relatively flat despite a hard hit housing market due in part to the large portion of assessed valuation (AV) attributable to farmland. In connection with state incentives to retain farmland, AV for 'Williamson Act' parcels is determined based on generated income as opposed to market value. As a result, its value remained fairly stable while residential and commercial properties experienced volatility.
Countywide, taxable AV declined only a combined 3.7% through fiscal 2011 and has increased a combined 5.7% over the last four years. Fresno County experienced one of the worst housing market collapses in the country with a total peak to trough reduction of 54%. However, prices have increased slowly since 2012; they are up 9.8% year over year and are projected to increase another 5.1% over the next year. Concentration is low with the top 10 taxpayers comprised mostly of petroleum and utility businesses equaling 7.6% of total AV.
PENSION COSTS MODERATE DESPITE HIGH CONTRIBUTION RATES
The Fresno County Employees' Retirement Association (FCERA) includes the County, the Superior Court of California-County of Fresno, Clovis Memorial District, Fresno Mosquito and Vector Control District, and Fresno/Madera Area Agency on Aging. Its funded ratio as of June 30, 2013 was 75% (estimated at 73% under Fitch's assumption of 7% investment returns), and unfunded liability was $1.175 billion.
Despite high contribution rates, the county's annual required pension contribution for fiscal 2013 was equivalent to a moderate 17.7% of governmental fund spending. Contribution rates rose significantly from a combined 28.52% of payroll in fiscal 2007 to 53.5% in fiscal 2013 due to changes in actuarial assumptions and investment losses. In addition, the county pays 50% of the employee portion of the contribution for Tier 1 employees. New employees are picking up a larger portion of the annual pension cost in advance of the 2017 requirement contained in a recently adopted state pension reform bill; this should help moderate the cost.
MODERATE DEBT; NO OPEB LIABILITY
The county's overall debt levels are moderate, with total overall net debt (including accreted value related to CABs) equal to 4% of assessed valuation (AV) and about $2,706 per capita. Amortization of direct debt is slow with 36% of principal (including accreted value) retired within 10 years. Debt service payments on all POBs escalate through maturity in 2033. Concern about rising debt service costs is somewhat mitigated by its relative affordability at about 3.7% of governmental fund spending. The county may issue a small new money debt issuance in 2015 but does not have any major capital needs. Carrying costs, including debt service and pension ARC, total a low 13% of governmental fund spending. The county has never offered other post-employment benefits (OPEB) and thus has no OPEB liability.
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=957335
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