Fitch Rates Riverside, CA's Pension Obligation BANs 'F1+'; Affirms GOs at 'AA'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has assigned an 'F1+' rating to the following Riverside, CA (the city) bond anticipation notes (BANs):

--$30 million taxable pension obligation refunding BANs, 2015 series A.

The BANs are expected to sell via negotiation the week of May 4. Proceeds will be used to refund the city's outstanding $30 million taxable pension obligation BANs, 2014 series A, which Fitch is affirming at 'F1+'.

In addition, Fitch affirms the following ratings:

--$14.3 million general obligation (GO) bonds, series 2004 at 'AA';

--$18.5 million taxable pension obligation bonds (POBs), series 2005A at 'AA-';

--$20.7 million certificates of participation (COPs), series 2010 (Recovery Zone Facility Hotel Project) at 'AA-';

--$18.6 million lease revenue COPs, series 2006 (Galleria at Tyler Public Improvements) at 'A+'.

Riverside Public Financing Authority (the authority):

--$39.9 million lease revenue refunding bonds, series 2012A at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The pension obligation BANs and POBs are secured by the city's absolute and unconditional obligation, payable from any legally available funds.

The GO bonds are secured by the city's full faith and credit and unlimited ad valorem property tax pledge.

The lease revenue refunding bonds and COPS are secured by lease payments made by the city to the authority from any legally available resources of the city for use and occupancy of city facilities. The lease revenue COPs are secured by lease payments made the by city to the City of Riverside Municipal Improvements Corporation from any legally available resources of the city for use and occupancy of city facilities. Lease payments are subject to abatement, the risk of which is mitigated by two years of rental interruption as well as provisional property loss insurance. The leased premises consist of the city hall complex and policy patrol facility for series 2012A; two libraries and two fire stations for series 2010; and a parking structure addition to a privately owned retail center (the Galleria at Tyler), a second parking structure at the Tyler Mall, and two arterial streets that bound the mall for series 2006.

KEY RATING DRIVERS

CONSISTENTLY GOOD FINANCIAL PERFORMANCE: The city maintains healthy reserves, aided by expenditure flexibility and diverse revenue sources. Fitch expects the city to manage cost pressures within its limited growth revenue framework.

WEAK ECONOMY STABILIZING: The economy continues to improve after being severely affected by the housing-led downturn. Home prices and the employment base are both recovering steadily.

REVENUE DIVERSITY: The city benefits from charter-approved transfers from its utilities which account for about 18% of gross operating revenue. This insulates the city somewhat from the volatility in its property and sales taxes.

COMPLEX DEBT PROFILE: The city's debt load is moderate, and its pension plans are well-funded; however, variable- rate and short-term obligations represent a combined 46% of total governmental debt, exposing the city to liquidity and market risk.

SHORT-TERM RATING: The 'F1+' rating on the BANs reflects anticipated market access based on the city's long-term 'AA' rating.

GENERAL FUND OBLIGATIONS: The COPs, lease revenue bonds, and POBs are rated one notch below the GO bonds as they are payable solely from any legally available funds. The 'A+' lease revenue COP rating (series 2006) further reflects the non-essential nature of the leased assets.

RATING SENSITIVITIES

RESERVE MAINTENANCE: As the modest recovery continues, the city will be challenged to maintain fiscal balance amidst salary and pension cost pressures.

CREDIT PROFILE

The city is the county seat of Riverside County (implied GO rating of 'AA-' by Fitch) and the 12th largest city in California. Located in the western portion of the county about 60 miles east of downtown Los Angeles, the city encompasses 81.5 square miles and has a population of 314,034.

WEAK ECONOMY STABILIZING

The city's economy is continuing its recovery after the severe economic downturn. Employment growth, which has been steady at about 1%-3% per year, has brought the unemployment rate down to 7.1%, slightly below the state average of 7.3% as of January 2015. The city benefits from sizeable government and education sectors, including county operations and four colleges and universities; however, the region's unemployment rate remains elevated in part due to the previously high level of construction employment.

Per capita income is well below state and national levels, possibly due to larger household sizes and the large student population, estimated at about 52,000 (one-sixth of the total city population). Median household income is more on par with both state and U.S. averages.

The city's assessed value (AV) increased a cumulative 9.3% from fiscal 2012 to fiscal 2015 and management estimates an additional 5%-6% increase for fiscal 2016. This recovery comes after a cumulative 10.6% decline from fiscal 2010 through 2012, reflecting a more than 50% decline in home prices. Home prices continue to rise but remain about 28% below peak levels according to Zillow.com.

CONSISTENTLY GOOD FINANCIAL PERFORMANCE

Riverside has maintained a sound financial position over the last five years despite revenue declines. The city entered the recession with a good financial cushion and more recently has posted two years of modest surpluses. Operating revenues continued to rebound in fiscal 2014 at 5.3% year-over-year, which was somewhat offset by increasing expenditures, primarily from increased public safety pension contribution rates and liability insurance trust fund charges. Fiscal 2014 ended with a $1.8 million surplus increasing the unrestricted fund balance to $52.2 million, or 18.7% of spending, compared to a projected $3.6 million drawdown. The fiscal 2015 budget projects a small deficit (0.35% of spending).

REVENUE DIVERSITY

Revenues are diverse, with sales and property taxes comprising 23% and 21% of general fund revenues, respectively. Utility user tax receipts make up 11.6%, and a utility transfer (equal to 11.5% of gross utility revenues) generates about 19% of general fund revenues. Water revenue bonds are rated 'AA+'/Stable Outlook and electric revenue bonds are rated 'AA-'/Stable Outlook. Sales taxes increased 12% in fiscal 2011, 8% in fiscal 2012, 5.2% in fiscal 2013, and another 9.7% in fiscal 2014, largely due to the recovery of auto dealerships and lumber yards hard-hit during the recession. Property tax receipts declined slightly (3%) in fiscal 2014 after a 14% increase in fiscal 2013 stemming from primarily one-time revenues. These included $4.4 million related to the dissolution of the redevelopment agency and $2 million in catch-up payments for all outstanding delinquent property taxes related to the city's enrollment in the Teeter plan. Under the Teeter plan, Riverside County is responsible for the collection of delinquent taxes and the city receives 100% of the levy.

SOUND RESERVE POLICY

The city has exceeded its unreserved general fund balance policy (i.e. maintenance of at least 15% of the following year's spending) for the past decade. Budget adjustments to date have not been severe and include non-public safety hiring freezes, expenditure increase rollbacks, and pension and benefit reforms.

COMPLEX DEBT PROFILE

The city's overall debt burden is moderate. About 39% of the total governmental debt is synthetically fixed variable-rate borrowing, which exposes the city to counterparty and termination risk (the swap had a negative $19.5 million mark-to-market value as of June 30, 2014). Amortization of debt is about average with 46% of principal retired within 10 years, not including the pension obligation BANs.

The city's pensions are well funded at 83.3% of liabilities under Fitch's 7% investment return assumption in large part due to the issuance of POBs in 2004 and 2005. The city routinely contributes the full annual required contribution (ARC). Carrying costs, including debt, pension ARC, and OPEB contributions, are high at about 28.9% of fiscal 2014 governmental spending; however, a sizeable portion of debt service is repaid from non-general fund sources.

The current offering will refund all of the city's outstanding taxable pension obligations BANs. Management continues to utilize this financing vehicle to realize interest savings; the 2005 POBs that the BANs refunded did not begin amortizing until 2020.

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 ¬ Effective Aug. 15, 2011 to Aug. 14, 2012

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898

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=983322

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Contacts

Fitch Ratings
Primary Analyst
Shannon Groff
Director
+1 415-732-5826
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Karen Ribble
Senior Director
+1 212-908-5611
or
Committee Chairperson
Arlene Bohner
Senior Director
+1 212-908-0554
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Shannon Groff
Director
+1 415-732-5826
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Karen Ribble
Senior Director
+1 212-908-5611
or
Committee Chairperson
Arlene Bohner
Senior Director
+1 212-908-0554
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com