Fitch Rates Alameda County Joint Powers Auth Lease Revs at 'AA+'; Upgrades Outstanding

SAN FRANCISCO--()--Fitch Ratings has assigned the following Alameda County Joint Powers Authority, California (the authority) rating:

--$96.3 million lease revenue bonds (juvenile justice refunding), series 2016 at 'AA+'.

Fitch has also upgraded the following ratings:

--$752 million authority lease revenue bond series 2008A (juvenile justice facility), 2010A (multiple capital projects), and 2013 (multiple capital projects), and lease revenue refunding bonds series 2012 to 'AA+' from 'AA';

--$41 million California Infrastructure and Economic Development Bank (I-Bank) revenue bonds series 2004 (North County Center for Self-Sufficiency Corporation Project) to 'AA+' from 'AA';

--Alameda County (the county) Issuer Default Rating (IDR) to 'AAA' from 'AA+'.

The series 2016 bonds will sell via negotiation on Oct. 27, 2016. They will refund all outstanding series 2008A bonds for interest savings.

The Rating Outlook is revised to Stable from Positive.

SECURITY

The authority's lease revenue bonds and the I-Bank revenue bonds are each repayable under the county's covenant to budget and appropriate lease rental payments equal to debt service for the right to use and occupy various public safety, social service, health, and educational facilities, among other assets. The lease rental payments are subject to abatement. The leased property for the series 2016 bonds is the 475,000 square foot Alameda County Juvenile Justice Center, located in an unincorporated section of the county near San Leandro, and completed in 2007.

KEY RATING DRIVERS

The rating upgrade of the county's IDR to 'AAA' reflects its ongoing strong financial management performance and recently capped exposure to Alameda Health System's (AHS) performance. A March 2016 agreement between the county and AHS caps future county support for the system's liquidity needs, creates an AHS capital improvements reserve, and enhances management oversight. Despite legal restrictions on tax increases, the county's revenue growth has been strong reflecting the growing residential, commercial, and industrial tax bases.

Economic Resource Base

Alameda County is located on the eastern shore of San Francisco Bay, covers 813 square miles, includes 14 incorporated cities, and is home to more than 1.6 million residents. The county benefits from a diverse employment base with good access to the broad San Francisco Bay Area economy. Post-recession economic and tax base recovery has been strong. County residents' income and wealth characteristics are lower than the wealthy region's average but above state and national averages.

Revenue Framework: 'a' factor assessment

Revenue growth has exceeded national economic performance and inflation, and Fitch expects this trend to continue. The county's legal ability to raise revenues is constrained by state constitutional provisions that require voter approval for tax increases.

Expenditure Framework: 'aaa' factor assessment

The county has solid expenditure flexibility, particularly since its fixed cost burden is moderate. It has demonstrated a robust ability to manage spending in times of economic stress.

Long-Term Liability Burden: 'aa' factor assessment

Overlapping debt levels are moderate relative to the county's resource base. It benefits from pre-funding of its other post-retirement benefits (OPEBs) and has been building up reserves for pension liabilities.

Operating Performance: 'aaa' factor assessment

The county maintains consistently positive general fund operating margins, high cash balances, and substantial reserves. Considerable additional financial cushion is provided by the property development fund (Emerald Fund) whose corpus is protected by county policy. Low revenue volatility and solid expenditure flexibility provide the county with exceptionally strong gap-closing ability. Fitch does not expect the county's tenured elected officials and administrators to materially change their financial management policies or approach.

RATING SENSITIVITIES

FUNDAMENTAL CREDIT QUALITY: The IDR is sensitive to material change in the county's historically prudent financial management practices and significant weakness in the economy that deviates from national economic trends.

CREDIT PROFILE

The county benefits from a diverse employment base with no single industry concentration. It anticipates ongoing growth in management and professional services, biomedical manufacturing, leisure and hospitality, and renewable energy research and development. Key employers such as the University of California, Livermore and Sandia Laboratories, and Kaiser Permanente have made considerable infrastructure investments over long periods of time. Following relatively small recessionary declines in fiscals 2010 and 2011, taxable AV increased by almost 23% through fiscal 2016. The tax base is diverse and the county estimates that the average taxable AV for single family houses is only 60% of market value, representing considerable potential future AV growth as properties change ownership. While housing prices have risen sharply and housing foreclosures have returned to pre-recession levels, the county's housing market remains relatively more affordable than the San Francisco or Silicon Valley housing markets.

Revenue Framework

Local taxes provided 19% of the county's fiscal 2015 revenues while 59% were from intergovernmental sources, largely for federal and state mandated services.

Fitch expects revenue growth to remain in line with or above U.S. economic performance and inflation, based on historical performance and continued economic and tax base growth.

State law requires voter approval for tax increases, limiting the county's ability to control its revenues. In particular, property tax growth is constrained by an annual limit on taxable AV increases absent a change in ownership. Fees, charges for services, and fines can be raised only to recover the costs of providing related services. The county undertakes an annual fee inventory to ensure full cost recovery and expansion where possible. Given all these constraints, Fitch judges the county's revenue raising ability as limited.

Expenditure Framework

Of its $2.6 billion total general fund budget in fiscal 2017, approximately 32% goes to public assistance, 27% to health care, and 26% to public protection. The county estimates that only a quarter of its general fund revenues (approximately $653 million in the fiscal 2017 budget) are discretionary. However, most of this "discretionary" revenue is in fact used to fund the county's mandated share of costs for programs that receive federal and state funding. Approximately 46% are budgeted for public protection, 19% for health care, and 11% for public assistance, with the remaining 24% are budgeted for general governmental functions, including debt service, reserves, and capital projects.

The pace of expenditure growth is likely to be slower than or equal to revenue growth, particularly given that the county's personnel costs are largely predictable in the near term. Eight of the nine labor contracts to be negotiated in fiscals 2017 and 2018 are for small bargaining units. The one exception is Alameda County Management Employees' Association, General Government and Confidential Units, which have 1,180 members. More significant numbers of employees are covered by the labor contracts which do not expire until fiscals 2019-2021. The county's productive labor relations history suggests that the outcome of these future labor negotiations will continue to be affordable.

Expenditure flexibility is solid. Carrying costs, including debt service, pension, and OPEB payments and prefunding, are moderate at around 16% of governmental spending. Despite not including reopeners (apart from the fire contract), the county's labor contracts are reasonably flexible. None impose restrictions on the county's ability to control headcount, only the fire contract requires binding arbitration when all other negotiating options fail (this requirement has never been invoked), and a limited number of contracts use "me too" formulas requiring salary and benefit increases equivalent to those given to other bargaining units.

The county's prime expenditure control mechanism during the recession was restraining employee salary and benefit costs, particularly by not providing cost of living adjustments for four and a half years and freezing hiring. Additional savings were generated from departmental efficiencies. There were no layoffs and only sparing use of furloughs. In a future recession, the county would likely focus on personnel cost control again, along with not granting cost of living adjustments for contracted service providers, and reducing discretionary capital expenditures (around $5 million annually). Through the labor negotiations process, the county is working towards increasing employee contributions to health benefit costs. Currently, all employees pay at least 10%, with some now paying 15%.

Long-Term Liability Burden

Annual debt and pension costs are moderate relative to county residents' personal income (slightly more than 10%) and the tax base's market value (approximately 4%). Assuming a 7% discount rate, more conservative than the discount rates used by the pension plans in which the county participates, the county's pension liabilities are approximately 73% funded. However, in fiscal 2015 the board established a pension liability reduction account within its committed general fund balance. By the end of fiscal 2017, this account will reserve $400 million towards the county's pension liabilities. The county plans to add a further $300 million to the pension liability reduction account by fiscal 2020. It currently has no plans to deposit these monies into ACERA. The county calculates that its OPEB liability is 91% funded leaving an unfunded liability which is miniscule relative to the county's resource base.

The county expects to issue up to $100 million in new lease revenue bonds or commercial paper in fiscal 2017 to complete its Highland Hospital acute care tower project. The annual lease rental payments would be paid from the general fund. This new debt will not have a significant impact on the county's debt profile since the county's existing pension obligation bond debt will roll off in December 2018 freeing up considerable debt repayment capacity. On Nov. 8, 2016, county voters will be asked to approve a $580 million general obligation bond authority to fund affordable housing development. The anticipated three tranches of this debt would not significantly alter the county's overall liability burden.

Operating Performance

The county continues to maintain very strong general fund balances and liquidity, supplemented by the Emerald Fund created in 1998. Proceeds from the sale of surplus county properties are deposited into the Emerald Fund, which had a balance of approximately $339 million at June 30, 2016. By county policy, the corpus of the Emerald Fund is preserved while interest earned on the funds is available to fund capital projects, including related debt service. However, these funds would be legally available for any purpose subject to a four-fifths vote of the board. The county ended fiscal 2015 with a combined unrestricted general fund and Emerald Fund balance of $1.4 billion, or 61% of general fund spending. This includes the $300 million committed reserved to date for pension liabilities. The county expects to end fiscal 2016 in a similarly strong position, by which time the committed reserve for pension liabilities will have grown to $400 million.

Alameda County has limited exposure to its county hospital system. The AHS is a legally separate entity funded in part through a dedicated sales tax which voters in 2014 extended to 2034 (71% support). Following its 1998 establishment, AHS generated significant operating losses and negative cash flows, requiring substantial working capital support from the county. A March 2016 agreement between the county and AHS established new repayment schedules for AHS's accumulated negative balance (reduced to $95 million in fiscal 2015), pension obligation bond contributions, and capital contributions. The new agreement also limits future county exposure to AHS's liquidity needs, creates an AHS capital replacement reserve, and establishes stronger accountability and oversight mechanisms between AHS and the county. The agreement remains in effect until June 30, 2034 by which time AHS must reduce its accumulated negative balance to $50 million. AHS appears to be benefitting from ongoing federal health care reform, demonstrating revenue growth and reduced accounts payable in fiscal 2016. Fitch expects that the county's ongoing financial support for AHS will remain a manageable component of its annual financial obligations as health care reform beds down.

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=1012757

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012757

Endorsement Policy

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

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Contacts

Fitch Ratings
Primary Analyst
Alan Gibson
Director
+1-415-732-7577
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
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
New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Alan Gibson
Director
+1-415-732-7577
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
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
New York
elizabeth.fogerty@fitchratings.com