Fitch Upgrades Chico Redevelopment Agency, CA Tax Allocation Bonds to 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings has upgraded the following Chico Redevelopment Agency, CA (RDA) tax allocation bonds (TABs):

--$ 62.3 million Chico Amended and Merged Redevelopment Project TABs, series 2005, to 'AA-' from 'A+';

--$ 15.8 million Chico Amended and Merged Redevelopment Project refunding TABs, series 2007, to 'AA-' from 'A+'.

The Rating Outlook is Stable.

SECURITY

The bonds are backed by tax increment revenues generated within the sole project area, Chico Amended and Merged Redevelopment Project Area, net of the 20% housing set-aside and senior pass-through payments. The bonds are additionally payable from housing increment revenues.

KEY RATING DRIVERS

MATERIALLY IMPROVED DEBT SERVICE COVERAGE, AV CUSHION: The upgrade reflects Fitch's refined analysis of surplus housing revenues, which the agency now considers to be available to pay non-housing TAB debt service. The availability of these revenues, aided by assessed value (AV) gains, has materially improved the bonds' debt service coverage and resilience to shifts in AV.

CLOSED LIEN AFTER DISSOLUTION: Fitch considers all TAB liens to be closed, as successor agencies (SAs) are not permitted to issue new money TABs.

DIVERSE TAX BASE; WEAK ECONOMIC INDICATORS: City income and wealth levels are below average and unemployment exceeds the national average, but is just below the state average. After prior year declines, project area AV returned to growth in fiscal 2014, and continued to grow in subsequent years. Tax base concentration is low, with the top 10 taxpayers making up about 11.5% of incremental value (IV).

RATING SENSITIVITIES

CHANGES IN REVENUE AVAILABLE FOR DEBT SERVICE: The rating is sensitive to changes in the trend of pledged revenues due to tax base changes outside the historical range. Tax base declines that materially decrease pledged revenues could have a negative effect on the rating. Given recent AV stability and growth trends, Fitch believes such shifts are not likely in the near term. Tax base growth that materially increases pledged revenues could have a positive effect on the rating.

CREDIT SUMMARY

Chico is located 90 miles north of Sacramento and 174 miles northeast of San Francisco and is the retail, recreational, educational, financial, and commerce center for Butte County and the surrounding area. The project area is large, encompassing 16 square miles and about 40% of the city and portions of unincorporated Butte County.

REDEVELOPMENT DISSOLUTION - NEUTRAL-TO-POSITIVE IMPACT

In May 2014 Fitch refined its California RDA analysis pertaining to the beneficial impact of dissolution legislation (AB 1X 26). Fitch now considers TAB liens to be closed and surplus housing revenues to be available for non-housing TAB debt service. Although uncertainties remain, Fitch views the continued presence of closed TAB liens and surplus housing revenue availability as more likely than not to remain a feature of California TABs.

CONTINUED ASSESSED VALUE IMPROVEMENT

The project area's tax base represents a mix of properties, chiefly residential (about 57%) and commercial (21%), and AV growth has historically been very sound. Tax base concentration is low, with the project area's top taxpayer, Sierra Nevada Brewery, at 2.9% of AV and 4.1% IV, and the top 10 taxpayers at 8.1% of AV and 11.5% of IV.

The project area experienced annual AV declines in fiscal years 2011 through 2013 that reduced AV by about 6% before returning to growth in fiscal 2014 (2.2%). Additional growth followed in fiscal 2015 (2.6%) and fiscal 2016 (5.1%). Continued modest AV growth is expected in the near term due to ongoing residential and commercial development. Management reports no pending property tax appeals in the project area.

The city is home to the California State University at Chico, which employs 1,800. Other major employers include the Enloe Medical Center (2,581 employees) and the Chico Unified School District (1,300 employees). City unemployment as of July 2015 (6.2%) declined from 7.7% a year prior as employment grew. Unemployment remains higher than the comparable national rate (5.6%), though it is just below the comparable state rate (6.5%). City per capita money income is below average at 82% and 86% of the state and national levels, respectively. Poverty levels are above average.

COVERAGE ENHANCED BY HOUSING REVENUES AND AV GAINS

Coverage of maximum annual debt service (MADS) by fiscal 2016 revenues (including the 20% housing set-aside and excluding estimated senior pass-through payments) is strong at about 3.5x (vs. about 2.7x excluding housing revenues). MADS coverage including debt service related to subordinate lien Chico Urban Area Joint Powers Financing Authority debt, is 2.9x. Coverage stands up well to various Fitch-designed stress scenarios, including the loss of the top 10 taxpayers. An AV decline of about 52% would be required to reduce senior debt MADS coverage to 1.0x.

COMPLIANCE WITH DISSOLUTION PROCEDURES

The city of Chico has been recognized as the SA to the RDA. Recognized obligation payment schedules (ROPS) that include 2015 debt service have been approved by the oversight board and state. The SA has received approval for sufficient funds to cover 2015 debt service payments. Funding for the next debt service payment, due April 1, 2016, is expected to be approved under the Jan. 1, 2016 to June 30, 2016 ROPS, which has been approved by the oversight board and is currently under review by the Dept. of Finance.

Dissolution-related (AB 1X 26) risks are lessening as management is continuing to adhere to indenture requirements, and necessary revenue tracking is in place. Since dissolution, the SA's procedures to manage dissolution have become well-established, lessening operational risks.

Additional information is available on www.fitchratings.com

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

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

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

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=991962

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=991962

Endorsement Policy

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

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Contacts

Fitch Ratings
Primary Analyst
Maria Coritsidis, +1-212-908-0514
Analytical Consultant
Fitch Ratings, Inc.
33 Whitehall St
New York, NY 10004
or
Secondary Analyst
Stephen Walsh, +1-415-732-7573
Director
or
Committee Chairperson
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations
Sandro Scenga, New York, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Maria Coritsidis, +1-212-908-0514
Analytical Consultant
Fitch Ratings, Inc.
33 Whitehall St
New York, NY 10004
or
Secondary Analyst
Stephen Walsh, +1-415-732-7573
Director
or
Committee Chairperson
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations
Sandro Scenga, New York, +1-212-908-0278
sandro.scenga@fitchratings.com