Fitch Affirms Pittsburg RDA, CA's Housing TABs at 'BBB'; Outlook Revised to Positive

SAN FRANCISCO--()--Fitch Ratings has affirmed the following Pittsburg Redevelopment Agency, CA's tax allocation bonds (TABs):

--$24.9 million housing set-aside TABs series 2006A (taxable) and housing set-aside tax allocation revenue bonds series 2004A at 'BBB'.

The Rating Outlook is revised to Positive from Stable.

SECURITY

The housing TABs are payable from the 20% housing set-aside revenues derived from a senior lien on all incremental property tax revenues in Los Medanos sub-areas II and III.

KEY RATING DRIVERS

IMPROVING AV; ADEQUATE COVERAGE: The Positive Outlook is prompted by recent assessed value (AV) gains and the prospect of further AV improvements which, if realized, will further boost debt service coverage from adequate to sound.

MIXED PROJECT AREA CHARACTERISTICS: The project area benefits from a rebounding housing market, significant new construction, and a high incremental value (IV)-to-base year ratio. However, the tax base exhibits inherent volatility and high concentration in top taxpayers.

WEAK SOCIO-ECONOMIC INDICATORS: Despite being part of the diverse and strong San Francisco metro area, local income levels are below average and the unemployment rate has been high.

RATING SENSITIVITIES

TAX BASE PERFORMANCE: An upgrade is likely if material AV gain is realized and sustained.

CREDIT PROFILE

Pittsburg is located in Contra Costa County and benefits from its location within the large and diverse San Francisco Bay Area employment market.

The relevant project area (Los Medanos sub-areas II and III) covers 1,995 acres (16% of the city) and makes up 23% of the city's AV.

ADEQUATE COVERAGE, MATURE PROJECT AREA

Fitch-estimated fiscal 2015 former housing revenues of $2.7 million cover housing TABs' maximum annual debt service (MADS) of $2 million by 1.4x. Fitch views the housing TABs' AV cushion as adequate, and estimates AV would have to decline by 26% for MADS coverage to reach 1.0x.

The project area benefits from a high 25.6x IV-to-base year value, due to the early establishment of the former redevelopment agency and significant developments thereafter. For every 1% of AV change, housing set-aside revenues available for debt service would change by roughly the same percentage.

POSITIVE AV TREND

AV grew by 8.8% in fiscal 2015, but was still 13% lower than its pre-recession peak. Prior to 2015, AV had dropped for six consecutive years and experienced a cumulative decline of 20%. The relatively late start of recovery and significant peak-to-trough decline suggest inherent volatility and weakness of the tax base.

The positive AV trend is likely to continue. The housing market recovery is strong, albeit at a slower pace compared with previous years. Home price increased by 16% year-over-year (compared with a growth rate of 36% a year ago) according to Zillow. AV increases are not subject to the Prop 13 AV cap (typically 2% annually) if they result from a resale or were subject to temporary Prop 8 reductions during the downturn.

Furthermore, new housing construction is proceeding at a pace of over 200 single-family-house starts annually in the project area, and could be adding 2% of AV per year at completion. A substantial number of multi-family units have been approved and are under construction or just completed in the project area.

Commercial and industrial developments are also underway. Management indicates Columbia Solar Energy which is wrapping up a large solar farm project could potentially add another 2% AV to the fiscal 2017 tax roll. At the same time, the successor agency is actively and gradually selling properties owned by the former redevelopment agency. These sales could have positive impacts on the tax base as well.

The Positive Outlook reflects Fitch's expectation that this home price appreciation and significant construction activity will boost debt service coverage. Due to uncertainties around timing and value at completion, Fitch will give full credit to these developments once tax-base gains materialize.

TAX BASE CONCENTRATION, PENDING APPEALS

The top 10 taxpayers comprise a high 35% of total AV and 37% of IV. In particular, the largest, Delta Energy, accounts for 17%, and the next three largest taxpayers each make up around 5%. The top-10 concentration level has come down from 45% a year ago, due to Delta Energy's successful appeal reducing its AV from $327 million to $241 million (a 26% reduction).

In the recent past, significant pending appeals were a countervailing force to positive AV momentum. As the appeals gradually work their way through and as the underlying real estate markets improve, outstanding appeal values have come down. As of fiscal 2015, value at risk for the entire project area (which includes the relevant sub-areas II & III, as well as sub-area I) totaled $52 million, or 1% of total AV.

BELOW-AVERAGE SOCIO-ECONOMIC INDICATORS

The city of Pittsburg is well-connected to the large, diverse and strong San Francisco Bay Area employment centers by light rail and freeway, and anchored by several large industrial enterprises such as Los Medanos Energy Center, Delta Energy Center (both power plants), United Spiral Pipe, and USS Posco.

However, the city's per capita income is at only 58%, 81% and 85% of the metro, state, and national levels respectively, although its median household income is more comparable to state and national levels. Educational attainment levels are less favorable; 17% of residents have bachelor's degree or higher, compared with 29% nationally.

The city's unemployment rates have historically been high, reaching 17.4% during the height of the recession. More recently, job creation in the city outpaced labor force growth, resulting in a more favorable unemployment rate at 6% in March 2015, compared with 6.5% in California and 5.6% nationally.

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, Underwriter and Zillow.

Applicable Criteria

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

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

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985709

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings, New York
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com
or
Primary Analyst
Associate Director
Yueping Liu, +1-415-732-5629
or
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Director
Scott Monroe, +1-415-732-5618
or
Committee Chairperson
Managing Director
Amy Laskey, +1-212-908-0568

Contacts

Fitch Ratings, New York
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com
or
Primary Analyst
Associate Director
Yueping Liu, +1-415-732-5629
or
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Director
Scott Monroe, +1-415-732-5618
or
Committee Chairperson
Managing Director
Amy Laskey, +1-212-908-0568