Fitch Affirms Yountville Finance Authority, CA's LRBs at 'A+'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has affirmed Yountville Finance Authority, California's (the authority) bonds as follows:

--$3.9 million lease revenue bonds (LRBs) series 2013 at 'A+'.

In addition, Fitch affirms the following rating on the town of Yountville (the town):

--Implied general obligation (GO) at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a covenant to budget and appropriate lease payments from the town to the authority for use of the town hall and town center, subject to abatement. There is no debt service reserve fund (DSRF).

KEY RATING DRIVERS

SOUND FINANCIAL MANAGEMENT AND OPERATIONS: The rating reflects the town's sound financial operations, supported by recurring general fund surpluses, solid fund balance levels as a percentage of spending, and prudent management practices.

HIGH REVENUE AND ECONOMIC CONCENTRATION: The rating is constrained by the town's heavy reliance on economically sensitive transient occupancy taxes (TOT), which provide a majority of general fund revenues and derive from just 11 taxpayers. In addition, lodging and restaurant properties account for a high proportion of taxable assessed value (TAV).

SOLID ECONOMIC PERFORMANCE: The town remains a luxury tourist destination with a high concentration of world-class restaurants and upscale hotels in the center of Napa Valley. Property values proved resilient during the last recession and have performed well in subsequent years, while TOT revenues increased in all but one year over the last decade.

ADEQUATE DEBT PROFILE: Debt levels are moderate to high although somewhat offset by the large visitor base relative to permanent population. No further debt issuances are planned, and capital needs are manageable, although debt amortization is somewhat slow.

SOUND LEGAL STRUCTURE: The 'A+' LRB rating reflects a sound legal structure, including a covenant to budget and appropriate lease payments, rental interruption insurance, and essential leased assets. However, there is no DSRF requirement.

RATING SENSITIVITIES

ECONOMIC DOWNTURN: The rating is sensitive to the performance of the town's tourism sector, which generates a large proportion of governmental revenues. A material decline in tourism spending would increase downward pressure on the rating. Upward rating movement is constrained by the town's ongoing vulnerability to economic downturn.

CREDIT PROFILE

Yountville serves a small population of 3,000 residents in Napa County, about 60 miles north of San Francisco. The town is centrally located in Napa Valley's internationally recognized wine country, and attracts an outsized share of wealthy visitors drawn to its upscale hotels and restaurants. Management estimates the town receives about 120,000 visitors annually. Yountville is predominantly built out with a stable population and limited new construction.

ECONOMY IS STRONG AND RESILIENT, YET HIGHLY CONCENTRATED

The town's economic indicators are strong. Per capita income levels are well above state and national averages and per capita TAV is high at approximately $205,000. Unemployment data are not available for the town but county unemployment rates are below state and national averages. Approximately one-third of the town's population, and a large share of its employment, is associated with a veteran's home supported by state and federal funding.

Yountville's property tax base is highly concentrated in the tourism sector but proved to be quite resilient during the economic downturn. TAV levels rose at a compound annual rate of 5.4% between 2008 and 2015, with no annual declines. Home values reported by Zillow.com increased by 12.4% year-over-year as of November 2014, pointing to further likely TAV gains in fiscal 2015. The top 10 taxpayers account for a high 29% of TAV and include seven hotels.

SOUND FINANCIAL OPERATIONS, CONCENTRATED REVENUES

The town's financial operations have continued to perform strongly. The general fund has produced consistent operating surpluses, allowing the town to fund both capital needs and healthy reserves. Unrestricted fund balance of $4.1 million at the end of 2014 was equal to 36% of general fund spending. In addition, the town's capital project fund retained a fund balance of $3.5 million. The fiscal 2015 budget is balanced and management expects to further add to reserves, which Fitch considers reasonable based on strong revenue performance to date.

General fund revenues are highly concentrated in TOT, which provided approximately 60% of ongoing revenues in fiscal 2014. Such revenues derive from just 11 lodging properties, with 3 hotels accounting for approximately 60% of all rooms. Sales taxes provided an additional 12% of 2014 general fund revenues.

TOT and sales taxes have performed strongly in recent years, with recurring double-digit annual gains. Nonetheless, both revenues are generated from an exceptionally small base of taxpayers, creating the potential for swift and substantial declines. Management has prudently secured business interruption insurance on local tourism properties and dedicated reserves to address potential shortfalls, but the town's financial prospects remain closely aligned with the performance of its tourism sector.

ADEQUATE DEBT PROFILE

The town's debt profile remains adequate. Overall debt levels are high at $8,833 per capita, but more moderate relative to TAV at 4.8%. Potential concerns about high debt levels are mitigated by the substantial visitor base which contributes, through TOT and sales tax, to debt repayment. Capital needs are manageable, and the town makes significant use of pay-as-you-go capital financing. Principal amortization is below average with 43% of outstanding principal retired over 10 years.

Yountville participates in the CalPERS' retirement system and has implemented new benefit tiers and shifted pension contributions to employees in recent years. Fitch estimates that the town's pension plans are funded at an adequate 69%, assuming 7% investment returns. The town has fully funded its OPEB ARC for the past several years and has instituted policies to continue such funding. Carrying costs for debt service and retiree benefits accounted for a manageable 22% of governmental fund expenditures in 2014.

SOUND LEASE PROVISIONS

The 2013 LRBs supported several capital projects, including the timely completion of seismic improvements to the town hall, which escaped the August 2014 Napa earthquake without damage. Assets securing the bonds include town hall and the adjacent town center, with a combined estimated value of $5.5 million.

Legal provisions includes a covenant to budget and appropriate lease payments, 24 months of rental interruption insurance, and a covenant to maintain standard comprehensive insurance. The structure does not include a DSRF, which is a concern but does not lead Fitch to make a notching distinction. Budget delay risks are mitigated by the timing of semiannual lease payments well past the beginning of the fiscal year.

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 and Zillow.com.

Applicable Criteria and Related Research:

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

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=959135

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Contacts

Fitch Ratings
Primary Analyst
Stephen Walsh
Director
+1-415-732-7573
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
or
Secondary Analyst
Andrew Ward
Director
+1-415-732-5617
or
Committee Chairperson
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Stephen Walsh
Director
+1-415-732-7573
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
or
Secondary Analyst
Andrew Ward
Director
+1-415-732-5617
or
Committee Chairperson
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
New York
elizabeth.fogerty@fitchratings.com