Fitch Rates Vista, CA's $98MM Lease Revs 'AA'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has assigned an 'AA' rating to the following Vista, California (the city) bonds:

--Approximately $98.3 million Vista Joint Powers Financing Authority 2015 refunding lease revenue bonds (LRBs).

The bonds will advance refund outstanding debt for interest savings and are expected to price the week of Aug. 24.

In addition, Fitch affirms the following ratings:

--$109.4 million Vista certificates of participation (COPs) series 2007 at 'AA';

--Implied unlimited tax general obligation (ULTGO) rating at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The refunding LRBs and COPs are payable from lease payments made by the city for use and occupancy of several city facilities. Lease payments are subject to annual appropriation and full or partial abatement. A debt service reserve for the LRBs is expected to be funded with a surety.

KEY RATING DRIVERS

STRONG FINANCIAL PERFORMANCE AND RESERVES: The 'AA+' ULTGO rating reflects the city's strong financial flexibility resulting from balanced operations, demonstrated expenditure flexibility and very high reserves.

MANAGEABLE LONG-TERM LIABILITIES: Overall debt levels are moderate with an increasing debt service schedule expected to remain manageable given an identified repayment source, limited future capital needs and no new-money debt issuance plans. The city has no liability for other post-employment benefits (OPEB) and carrying costs for debt service and pensions are affordable.

STABLE TAX BASE: The city's tax base has experienced steady moderate growth after limited declines during the last recession. Assessed values (AV) reached record highs in fiscal 2015 and recent construction permit activity points to further likely gains in subsequent years.

MIXED ECONOMIC INDICATORS: Median household incomes remain below average but employment levels have expanded steadily over the last several years. Local unemployment rates are below state and national averages.

LEASE APPROPRIATION RISK; ESSENTIAL ASSETS: The LRB and COPs ratings are notched below the implied ULTGO rating on the city to reflect annual appropriation risk of lease payments balanced by the essential nature of the leased assets, and a covenant to budget and appropriate lease payments.

RATING SENSITIVITIES

STABLE OPERATIONS: The rating could be impacted by a material decline in the city's operating performance. The Stable Outlook reflects Fitch's expectation that such deterioration is unlikely.

CREDIT PROFILE

The city of Vista, with a population of over 97,000, is located in northern San Diego County (rated 'AAA' implied ULTGO by Fitch), 40 miles north of the city of San Diego and 90 miles south of Los Angeles.

STRONG FINANCIAL PERFORMANCE AND RESERVES

The city continues to record strong operating results and has made regular additions to general fund reserves. Unrestricted general fund balance rose to an exceptionally high 78.8% ($50.5 million) of spending in fiscal 2014, and management expects to add $5 million-$6 million to this balance in fiscal 2015.

The city's strong financial position has enabled it to pursue a range of prudent actions including the prepayment of outstanding debt, regular pay-go funding of capital needs, and the recent elimination of a $4.6 million liability owed to CalPERS following the integration of the city's safety plan with a statewide pool. Management also demonstrated its ability to control expenditures during the last recession through the use of furloughs and attrition, and has maintained total city employment at levels well below pre-recession peaks.

Approximately one-third of fiscal 2014 general fund revenue is derived from sales taxes. Fitch's concerns regarding the volatility of such revenues, as well as the city's limited revenue flexibility under California's Proposition 13, are offset by strong fund balances and a history of proactive management to address revenue shortfalls.

MODERATE OVERALL DEBT

Overall debt levels following the proposed refunding remain moderate at $3,423 per capita and 3.4% of AV. Amortization of direct debt is slow, with 27% of principal due for repayment within the next 10 years. Capital needs are limited, offsetting concerns about slow amortization, and the city funds most ongoing capital requirements from its operating budget.

The refunding bonds will account for the bulk of the city's outstanding debt following this transaction and are supported on a budgetary basis by a 30-year, voter-approved half-cent sales tax (Measure L). Measure L revenues have been sufficient to fund all debt service payments to date, and would need to increase at a modest compound annual growth rate of 1.6% from fiscal 2014 levels to fully fund debt service on the refunding bonds through maturity. A shortfall in sales tax growth could require future general fund support for debt service, but the city appears well-positioned to address this challenge.

The city accumulated a substantial internal reserve from sales tax collections in the years immediately following the authorization of Measure L, and has been spending down this balance recently to fund public safety operations in addition to debt service. Management estimates a $5 million balance at the end of fiscal 2015 (about 77% of 2016 debt service), and has accounted for this as a committed reserve in the city's general fund.

The LRBs and COPs are payable from lease payments made by the city in a typical lease transaction that includes a city covenant to annually budget and appropriate payments. Leased assets include three fire stations, city offices, a park, and an amphitheatre. The LRBs and COPs are rated one notch below the city's implied ULTGO rating to account for appropriation risk.

MANAGEABLE CARRYING COSTS

The city participates in CalPERS and contributes 100% of the required annual payment. Pension contribution rates have increased in the past few years and are expected to continue to rise due to recent changes in actuarial assumptions and efforts to reduce unfunded liabilities. The city has no OPEB liability. Total carrying costs for debt and retiree benefits are manageable at 17% of governmental expenditures.

STABLE TAX BASE

The city's tax base has proven resilient, with a modest 5% decline during the recession followed by four years of accelerating growth. 2016 AV levels were nearly 14% above their 2012 low. Home values reported by Zillow.com remain depressed relative to pre-recession levels but have risen sharply since 2012 and recorded 3.8% year-over-year gains as of July 2015. Recent building permit activity has also been robust, particularly for residential units, which should support ongoing AV growth.

MIXED ECONOMIC INDICATORS

Median household incomes remain below average at 77% and 89%, respectively, of state and national levels. Employment has expanded steadily since 2010. The local unemployment rate of 4.4% as of June 2015 was well below state and national averages.

The tax base is diverse with the top 10 taxpayers representing just 4.6% of AV and comprised of a mix of real estate holdings and small local manufacturers. The city is adjacent to the U.S. Marine Corps' Camp Pendleton, and its economy remains somewhat weaker than the broader San Diego region, as indicated by below-average income levels.

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

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

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=989730

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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
Stephen Walsh
Director
+1-415-732-7573
Fitch Ratings, Inc.
650 California Street, 4th floor
San Francisco, CA 94108
or
Secondary Analyst
Alan Gibson
Director
+1-415-732-7577
or
Committee Chairperson
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Stephen Walsh
Director
+1-415-732-7573
Fitch Ratings, Inc.
650 California Street, 4th floor
San Francisco, CA 94108
or
Secondary Analyst
Alan Gibson
Director
+1-415-732-7577
or
Committee Chairperson
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com