SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA' rating to the following city of Hayward, California (the city) certificates of participation (COPs):
--$72.5 million 2015 COPs (Capital Projects).
The COPs will be sold competitively on Sept. 23, 2015. Proceeds will contribute towards upgrading the city's fire stations and constructing the new main library and community learning center.
In addition, Fitch affirms the following ratings:
--Implied general obligation bond rating at 'AA+';
--$23.9 million 2007 refunding COPs (Civic Center and Capital Projects) at 'AA'.
The Rating Outlook is Stable.
SECURITY
The COPs are repaid by lease rental payments made by the city for use of two existing fire stations, and a new main library and community learning center. The lease rental payments are subject to annual appropriation and abatement.
KEY RATING DRIVERS
SOUND RESERVES: The city continues to conservatively manage operations to maintain solid general fund reserves and liquidity. Ongoing labor concessions and other expenditure cuts coupled with improved revenues and voter-approved revenue enhancements have been largely effective in closing budgetary imbalances.
LOCATED WITHIN STRONG REGIONAL ECONOMY: The city benefits from its location within the San Francisco Bay Area and the resulting diverse employment opportunities. While the city's socioeconomic characteristics are mixed, city residents are benefitting from lower unemployment and the strengthened local tax base.
MANAGEABLE DEBT PRESSURES: Overall debt levels are moderately high with manageable carrying costs. No further debt issuances are currently planned. Rising pension costs have the potential to pressure the credit, though this is somewhat mitigated by management's successful negotiation of pension cost sharing among all employees.
COPS' RATING DISTINCTION: The COPs' one-notch rating distinction reflects the city's general credit quality as well as the covenant to budget and appropriate sufficiently for lease rental payments, mandatory rental interruption insurance, and other standard bondholder protections.
RATING SENSITIVITIES
FAILURE TO MAINTAIN STRUCTURAL BALANCE: Failure to maintain general fund structural balance would indicate pressured financial flexibility inconsistent with the current rating. The Stable Outlook reflects Fitch's expectation that the city will maintain breakeven to positive operations going forward, thereby protecting its reserves and liquidity.
CREDIT PROFILE
The 63 square mile city is located in Alameda County on Interstate 880 approximately 14 miles south of Oakland and 26 miles north of San Jose. The city's population of 151,574 in 2013 has experienced modest growth over the last decade.
SOUND RESERVES
The city's financial operations have stabilized in recent years, with prudent management offsetting budgetary imbalances. Voter-approved revenue increases have supplemented conservative revenue forecasting and expenditure controls during the recession (in particular, no salary or wage increases) allowing the city to maintain sound reserves. The city's liquidity position is consistently healthy, with general fund cash exceeding liabilities 3.5x in fiscal 2014.
The city's fiscal 2014 unrestricted general fund balance of $25.5 million equaled a solid 19.4% of spending, slightly lower than the previous year's result due to a small $0.5 million drawdown. The city expects fiscal 2015 year-end results to show a return to breakeven operations and has budgeted a balanced fiscal 2016 budget without any assumed use of general fund reserves.
In June 2014, a strong 67% of voters approved a twenty year half-cent sales tax measure which began in October 2014. It is projected to augment general fund revenues by approximately $10 million annually and has already outperformed its partial fiscal year 2015 projections. The revenues will be designated for necessary capital improvements and police and maintenance services. These revenues also will be available for repayment of the 2015 COPs.
CITY TYPICALLY OUTPERFORMS MULTIYEAR FORECASTS
The fiscal 2016 budget provides general fund operating forecasts through fiscal 2024 which project significant structural imbalance in the out-years. These projections are principally driven by the city's conservative budgeting assumptions which do not include the benefit of the voter-approved half-cent sales tax measure.
The city historically outperforms its multi-year projections, particularly by focusing on cost containment measures and remains committed to maintaining balanced operations. However, the city's options with regard to service cuts are somewhat limited given its high level of public safety spending. Also, while these projections include negotiated increases to sworn labor costs, they do not yet include $1.1 million in annual civilian labor cost increases (net of labor concessions,) which have only just been settled.
LOCATED WITHIN STRONG REGIONAL ECONOMY
The city benefits from its participation in the San Francisco Bay Area's diverse employment opportunities. The city's own employment base is somewhat narrow. Large city employers include government, California State University-East Bay, and midsize manufacturing firms, with new bio-science and information technology firms somewhat offsetting the presence of traditional manufacturers.
The city has largely recovered from the economic downturn, with both housing prices and assessed valuation (AV) showing strong growth in recent years. The city's tax base has grown by almost 26% since its recessionary low in fiscal 2011. Development prospects are good. Socioeconomic characteristics remain mixed, particularly in relation to the wealthy region. However, the June 2015 unemployment rate of 6.5% represented a significant decline from 8.1% a year prior, bringing it closer to the state (6.2%) while remaining above the nation (5.5%).
MANAGEABLE DEBT PRESSURES
Overall debt ratios, including former redevelopment agency successor agency debt, are moderately high at $4,206 per capita and 3.2% of market value. Amortization of direct city and successor agency debt is moderate with 56% of principal retired within 10 years. Currently, the city has no further plans to issue new debt but wants eventually to replace its main police station, jail, and 911 dispatch center (a $75 million - $90 million project that is not included in the city's 10-year capital improvement program).
Combined, the city's debt repayment, actuarially required pension, and pay-as-you-go other post-employment benefits (OPEB) carrying costs represented a manageable 16% of total governmental spending in fiscal 2014. This is expected to grow as the city's contributions towards the California Public Employees' Retirement System (CalPERS) rise significantly. However, negotiated labor concessions include employees sharing a greater portion of the burden.
OPEB contributions are not a significant cost to the city and the unfunded liability remains small relative to AV ($75 million in fiscal 2013 which was 0.5% of that year's AV). However, with an unfunded ratio of almost 99%, the city is taking action to bring funding up to the actuarially required contribution (ARC) by fiscal 2022. As a result, the city's pay-as-you-go contributions increased to $4 million (57% of ARC) in fiscal 2014 from $2.5 million (40% of ARC) in fiscal 2012.
TYPICAL COPS STRUCTURE; STANDARD BONDHOLDER PROTECTIONS
The city has covenanted to budget and appropriate lease rental payments for the use of two existing fire stations and the proposed new main library and community learning center. Proceeds from the 2015 COPs will contribute to improvements to the fire stations and construction of the new main library and community learning center. Upon completion, the total value of these leased assets will be $75.9 million, which exceeds the 2015 COPs' par amount. There will be $5.6 million of capitalized interest through June 1, 2018, seven months after the projects' estimated completion date. Leased property substitution, sublease, and release are permitted so long as sufficient value and useful life is retained.
The lease requires the city to provide 24-month rental interruption insurance. Lease payments would be abated proportionately during any period where there is substantial interference with the city's use and occupancy of the property, although not if insurance proceeds or reserve fund amounts are available to pay the lease. The site lease cannot be terminated without the authority's agreement, and no acceleration of lease rental payments is permitted. The authority has the right to re-enter and re-let the leased properties. There will be a fully cash-funded debt service reserve.
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, and National Association of Realtors.
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
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=990563
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990563
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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