Fitch Affirms Turlock PFA, CA's TABs at 'BBB+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the following tax allocation bonds (TABs) for the Turlock Public Financing Authority (PFA), California:

--$2.7 million outstanding TABs series 1999 at 'BBB+'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a senior lien on all tax increment revenues from the former Turlock Redevelopment Agency's (the RDA) sole project area net of any required housing set-asides and administrative charges.

KEY RATING DRIVERS

ADEQUATE AV CUSHION: Maximum annual debt service (MADS) coverage is satisfactory at 2.30x, but is highly vulnerable to assessed value (AV) volatility, with an adequate AV cushion of 28.1%. The impact of AV declines on pledged revenue would be magnified given the low ratio of incremental-to base-year value.

CONCENTRATED TAX BASE: The local economy and tax base are concentrated in the agriculture and food processing sectors. The tax base is beginning to rebound following several years of significant recessionary contraction.

SATISFACTORY AB 1X 26 IMPLEMENTATION: The rating assumes continued satisfactory implementation of AB 1X 26 (dissolution legislation) procedures and prioritization of debt service payments.

RATING SENSITIVITIES

FUTURE AV CHANGES: A reversal in Turlock PFA's AV growth resulting in materially lower debt service coverage and AV cushion could result in a negative rating action. Likewise, continued AV gains resulting in a materially larger AV cushion could result in positive rating action.

CREDIT PROFILE

The city of Turlock, with a 2013 population of 70,365, is 15 miles south of Modesto in Stanislaus County (the county), within California's Central Valley.

MODESTLY IMPROVED DEBT SERVICE COVERAGE AND AV CUSHION

Two additional series of TABs (series 2006 and 2011) are ranked pari passau with the Fitch-rated 1999 series. There are no housing bonds. Fiscal 2014 coverage of all parity maximum annual debt service (MADS) improved to 2.2x with the inclusion of surplus housing revenues, compared to the 1.6x achieved with only non-housing revenues. Fiscal 2015 coverage inclusive of housing revenues is projected at 2.3x MADS. The fiscal 2015 AV cushion (defined by the percentage of one-time AV decline that the tax base is able to withstand while maintaining 1x MADS coverage) rose to an adequate 28% from 24% in fiscal 2014.

Tax increment revenues are sufficient to sustain other moderate stresses. MADS coverage would remain above 1.0x should the project area experience a repeat of the AV declines seen during the past recession. Historical appeals are moderate and a sustained increase would not materially diminish coverage.

RECOVERY SEEN IN INHERENTLY VOLATILE TAX BASE

The project area's fiscal 2015 AV of $1.47 billion rose 6.2%, after a sizeable 19% cumulative decline in the five years following the onset of the recession. Despite recent gains, AV remains 12.6% below its pre-recession peak. The fiscal 2015 incremental value (IV) is only 103% of the base year value ($727 million). Due to this low ratio, tax increment revenues are significantly more volatile than AV changes. The IV remains 22% below its peak value even after a 12% increase in fiscal 2015. .

The project area, formed in 1993 and amended in 1996, consists of a significant 4,318 acres. It represents 40% of the city's land area and includes some unincorporated portions of the county. About half the tax base consists of industrial and commercial properties. Taxpayer concentration is moderate at 14% of AV but higher as a percentage of IV, at 29.4%. Several of the largest taxpayers are members of the food production industry.

The city's economic base reflects its location within the Central Valley, one of the most productive agricultural areas in the nation. Agricultural products include fruits, nuts, livestock, and animal products.

SATISFACTORY AB1X26 IMPLEMENTATION

Fitch believes that the successor agency (SA) will continue to reconcile the timing difference in pledged revenue receipts (in January and June) and debt service payments (mostly in September). The state has indicated that the SA should incorporate prorated debt service in both of the semi-annual ROPS submissions, requesting property tax allocations as needed to compensate for semi-annual periods when such allocations would be insufficient to pay obligations due. Fitch believes that prorating allocations in this way will not pressure the SA's ability to pay debt service, given that the state has expressed its intention to approve requested reserves in the period when property tax allocations would be insufficient.

Additional information is available at 'www.fitchratings.com'.

In addition to the source(s) of information identified in the Master Criteria, this action was additionally informed by information from Creditscope, University Financial Associates.

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

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

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Contacts

Fitch Ratings
Primary Analyst
George M. Stimola
Analyst
+1-212-908-0770
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Karen Ribble
Senior Director
+1-415-732-5611
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
George M. Stimola
Analyst
+1-212-908-0770
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Karen Ribble
Senior Director
+1-415-732-5611
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com