Fitch Upgrades Pleasant Hill Recreation & Park District, CA GOs to 'AA-'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has upgraded the following ratings on the Pleasant Hill Recreation & Park District, California (the district) based on review of the credit under Fitch's revised criteria for U.S. state and local governments, as well as improved financial flexibility:

--Issuer Default Rating to 'AA-' from 'A';

--$18.8 million general obligation (GO) bonds, election of 2009, series A (2010) to 'AA-' from 'A'.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the district, supported by the levy of ad valorem taxes on all taxable property within the district, without limitation as to rate or amount.

KEY RATING DRIVERS

The upgrade to 'AA-' is based on Fitch's evaluation of the district's solid revenue and expenditure frameworks, as well as low long-term liability burden, as described in Fitch's revised criteria for U.S. state and local governments. In addition, the upgrade reflects recent improvements in the district's financial position and Fitch's expectation of solid future operating performance.

Economic Resource Base

The district is primarily residential and benefits from its participation in the broad and diverse San Francisco Bay Area regional economy, which has performed strongly in recent years. Population growth prospects are limited as the district is largely built out, but home values and income levels are well above state and national averages.

Revenue Framework: 'aa' factor assessment

The district's historical revenue performance has exceeded U.S. economic performance and prospects for further growth are strong based on continued assessed value gains and rising demand for use of the district's recreational facilities and programs. The district has no independent legal ability to raise property taxes but has a strong record of revenue gains from user fees.

Expenditure Framework: 'aa' factor assessment

Based on current spending patterns, Fitch expects the natural pace of spending growth to be in line with anticipated revenue growth. The district has a solid ability to adjust expenditures and notable flexibility over labor expenses.

Long-Term Liability Burden: 'aaa' factor assessment

Long-term liabilities are low relative to the district's resource base. Employees participate in a state-sponsored pension plan that is adequately funded but the district offers no other post-employment benefits (OPEBs).

Operating Performance: 'a' factor assessment

Fitch expects the district to maintain balanced operations through a moderate recession and to manage potential revenue shortfalls through expenditure reductions. Operating budgets are typically balanced and the district's financial flexibility is enhanced by a substantial balance of capital funds accumulated from recurring general fund surpluses.

RATING SENSITIVITIES

MAINTAINED FINANCIAL FLEXIBILITY: The district's small size leaves it somewhat vulnerable to financial shocks that can quickly deplete reserves and challenge financial flexibility, as occurred several years ago in the midst of a major capital improvement campaign. Sustained reductions in reserves could pressure the rating downwards, while substantial improvement in reserves over the long term could result in upwards rating movement.

CREDIT PROFILE

Pleasant Hill Recreation and Park District is located 45 miles east of San Francisco in suburban Contra Costa County and was formed in 1951. District boundaries include the city of Pleasant Hill as well as portions of two adjacent cities and unincorporated areas. The district benefits from a resilient economy and substantial tax base that outperformed the state and nation during the last recession and in subsequent years. Wealth and income levels are above average and employment growth continues to be robust.

Revenue Framework

District revenues are split roughly evenly between a share of the 1% countywide property tax and user fees for its recreational facilities and programs.

Historical revenue growth has exceeded overall U.S. economic performance and inflation. Fitch expects revenue growth to remain due to ongoing assessed value increases and rising demand for the district's recreational facilities and programs. The district recently completed a major capital program supported by bond proceeds and has experienced steady increases in demand and user fees for its new and improved facilities.

Like other California local governments, the district's independent legal ability to raise revenues is limited by state constitutional provisions which require voter approval for tax increases. The district has unlimited discretion, however, to raise user fees for recreational facilities and programs.

Expenditure Framework

Personnel costs account for a majority of district expenditures and most district employees are part-time or seasonal recreational staff.

Based on current spending patterns Fitch expects expenditure growth to be in line with expected revenue growth. The district sets most user fees to recover costs and operations are typically balanced.

Carrying costs for the district are elevated at 25% of governmental expenditures despite very slow amortization and are paid almost entirely for debt service. Pension costs represent just 3% of governmental expenditures and the district does not provide OPEBs to its employees. Additional expenditure flexibility is afforded by the district's extensive use of part-time and seasonal recreational staff and the absence of labor agreements.

Long-Term Liability Burden

Overall debt, in combination with the district's unfunded pension liabilities, is low relative to the district's resource base at about 7% of personal income. The district participates in a state-sponsored pension plan that is adequately funded, but part-time and seasonal employees are not eligible to participate in it.

Operating Performance

Fitch expects the district to maintain satisfactory financial flexibility during a moderate recession, primarily through expenditure reductions and some use of reserves. Financial flexibility was challenged during the last recession when unanticipated cost increases for major capital projects resulted in depletion of its general fund balance. These projects have since been completed and have contributed to improving revenues and financial flexibility. The district has no further major capital needs, and Fitch does not anticipate a recurrence of the large drawdowns experienced in the past.

Budgets are conservative and typically result in surpluses, which the district has used to support pay-go capital spending. The district's reserves have rebounded strongly following the recession and include funds assigned to capital projects that could be returned to the general fund at its board's discretion.

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

In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/site/re/879478

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012752

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012752

Endorsement Policy

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
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@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
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com