Fitch Affirms Indio Public Fin Auth, CA Lease Revs at 'BBB+'; Outlook Revised to Positive

SAN FRANCISCO--()--Fitch Ratings affirms the following Indio Public Financing Authority, CA (the authority) lease revenue bonds:

--$24.5 million lease revenue refunding bonds, series 2012 (public capital improvements) at 'BBB+'.

In addition, Fitch affirms the city of Indio's implied general obligation (GO) bond rating at 'A'.

The Rating Outlook is revised to Positive from Stable.

SECURITY

The lease revenue bonds are limited obligations, secured by the city's covenant to budget and appropriate annual lease rental payments for use and occupancy of the essential and non-essential assets, subject to abatement. Additional security is provided by a standard cash-funded debt service reserve fund, property insurance, and two years of rental interruption insurance. Leased assets include the city's public works yard, a senior center, and three parks.

KEY RATING DRIVERS

CONTINUED FINANCIAL IMPROVEMENT: The Outlook revision to Positive reflects the city's consistently positive financial performance since fiscal 2012, which Fitch expects to continue over the near term, and the restoration of the city's unrestricted fund balance to levels consistent with an 'A+' ULTGO rating.

PRUDENT BUDGETARY PRACTICES: The notable improvement in the city's financial position over the past few years reflects the adoption and implementation of prudent financial policies and practices. The city has proposed an increase in the unrestricted reserve policy to 20% from the current 15% level, which would be an important offset to the reliance on economically sensitive revenues.

ELEVATED DEBT RATIOS: Overall debt levels are elevated due to overlapping debt. The city has no additional planned issuances, although direct debt levels are expected to remain relatively stable given the below-average amortization rate of outstanding principal.

LIMITED ECONOMY: The city's economic profile is characterized by an elevated unemployment rate and below-average income levels. Positively, fiscal 2016 marked the third year of solid gains in assessed values, driven by valuation reassessments, an improving housing market, and continued development in the quickly growing city.

SECURITY FEATURES: The lease revenue bonds are rated two notches below the city's GO rating, reflecting the non-essential nature of the majority of the leased assets and abatement risk.

RATING SENSITIVITIES

BALANCED FINANCIAL OPERATIONS: Maintenance of balanced financial operations and satisfactory reserves could result in an upgrade to Indio Public Financing Authority, CA's rating.

CREDIT PROFILE

Indio is a general-law city that covers approximately 33 square miles of the Coachella Valley in Riverside County. The city experienced rapid population growth over the past decade with a 4.5% compound annual growth rate and an estimated population of 83,539.

STABILIZED FINANCIAL PROFILE

The city's much improved financial profile appears to have stabilized with projected financial results for fiscal 2015 showing the fifth consecutive year of operating surplus, after adjustments, and the restoration of a sound unrestricted fund balance. Fitch expects the city's financial performance to remain balanced over the near- to medium-term based on management's financial projections, which have generally outperformed expectations in recent years, and the city's ability and demonstrated willingness to constrain expenditure growth and make reductions when necessary.

Preliminary figures for fiscal 2015 reflect a projected operating surplus of approximately $7 million (11.6% of spending) and an unrestricted fund balance of $15.6 million or 25.9% of spending. The city's fiscal 2016 budget is balanced and projected to leave the city's unrestricted balance at healthy levels.

PRUDENT FINANCIAL PRACTICES

The city's financial profile has improved significantly since fiscal 2011 due largely to the adoption and implementation of more prudent financial practices and policies. These changes have resulted in more conservative budgeting, regular budgetary updates and revisions, long-term financial planning, and the rebuilding of financial reserves. Financial projections reflect generally balanced performance over the medium term under reasonable assumptions.

The proposed strengthening of the city's unrestricted fund balance policy has the potential to further augment the city's financial profile. The city council is expected to vote in November 2015 to increase the unrestricted fund balance policy to 20% of spending from the current 15% level.

RISING PENSION AND OTHER LONG-TERM LIABILITY COSTS

The city participates in CalPERS, a statewide pension program to which it makes the full annual actuarial required contribution. In fiscal 2014, the city reported that its total pension contribution was $4.3 million or 6.4% of governmental fund spending. Pension contributions are expected to increase significantly over the next several years due to actuarial changes in the pension plan. Management's regularly updated five-year financial forecast remains largely balanced despite the increased costs from pensions and other retirement benefits due to assumed revenue growth and constrained spending.

The city offers other post-employment benefits (OPEB) and has historically funded them on a pay-as-you-go (paygo) basis. In fiscal 2014, the city's OPEB cost was $1.6 million or 2.4% of governmental spending. The fiscal 2014 contribution reflects the city's first contribution to pay down a small portion of the OPEB plan's future liability. Management expects additional contributions will continue, although at a level well below the full actuarially based annual required contribution.

ELEVATED DEBT BURDEN

The city's overall debt burden is elevated at 5.1% of taxable assessed value (AV), largely due to overlapping debt. Indio has no additional debt issuance plans and expects to fund capital projects and maintenance with operational cash flow and restricted and unrestricted general fund reserves. Overall carrying costs for debt service, pension ARC and OPEB paygo were moderate in 2014 at 15.6% of governmental spending.

LIMITED ECONOMY

The city hosts several large music festivals annually including Coachella and Stagecoach during which the city's population is estimated to nearly double. The events generate additional revenues for the city from hotel and sales taxes along with providing additional employment opportunities. Prudently, the city budgets approximately one-third of the direct revenues received from the festivals (ticket surcharge and hotel taxes) for one-time expenses such as capital needs. Music festival promoters and the city completed a 17-year agreement in 2013 that will keep and expand the city's music festivals.

The city's socioeconomic indicators point to below-average income levels with per capita and median household income at 70% and 82%, respectively, of the state average. In addition, the individual poverty rate was 21.9%, which is higher than that of the state (15.9%) and region (17.4%).

Indio benefits from a rapidly growing labor force and a regional labor market that includes most of Coachella Valley. However, the unemployment rate remains elevated at 7.1% (June 2015) despite above-average employment gains over the past several years.

The city's AV increased by a notable 8.4% in fiscal 2016, marking the third year of growth since fiscal 2010. Additional residential and commercial development in the city is expected to support stable to modestly increasing AV performance over the near term.

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, 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

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=989067

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Contacts

Fitch Ratings
Primary Analyst
Matthew Reilly, CFA
Director
+1-415-732-7572
Fitch Ratings, Inc.
650 California St, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Karen Ribble
Senior Director
+1-415-732-5611
or
Committee Chairperson
Arlene Bohner
Senior Director
+1-212-908-0554
or
Media Relations
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Matthew Reilly, CFA
Director
+1-415-732-7572
Fitch Ratings, Inc.
650 California St, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Karen Ribble
Senior Director
+1-415-732-5611
or
Committee Chairperson
Arlene Bohner
Senior Director
+1-212-908-0554
or
Media Relations
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com