SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings upgrades the following Indio Public Financing Authority, CA (the authority) lease revenue bonds:
--$22.5 million lease revenue refunding bonds, series 2012 (public capital improvements) to 'A+' from 'BBB+'.
In addition, Fitch upgrades the city of Indio's Issuer Default Rating (IDR) to 'AA-' from 'A'.
The Rating Outlook is revised to Stable from Positive.
The lease revenue bonds are limited obligations, supported by the city's covenant to budget and appropriate annual lease rental payments for use and occupancy of certain leased 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
The upgrade of the city's Long-Term IDR to 'AA-' from 'A' results from both sustained improvements in operating performance and application of Fitch's revised criteria for U.S. state and local governments, released on April 18, 2016, particularly with respect to the city's ability to withstand cyclical revenue declines. The upgrade of the city's lease rating to 'A+' from 'BBB+' additionally reflects Fitch's general approach under the revised criteria to rate appropriation-backed debt one notch below an issuer's IDR.
Economic Resource Base
Indio has a population of just under 90,000 residents and is located in central Riverside County, about 20 miles east of Palm Springs and 75 miles from Los Angeles. The town is located in the Coachella Valley and hosts several large festivals annually that can double its resident population. Historically an agricultural community, Indio's economy has diversified with population growth, but income and employment indicators remain well below state and national averages.
Revenue Framework: 'a' factor assessment
Historical revenue growth has outpaced overall U.S. economic performance and inflation, and Fitch expects that trend to continue based on continued economic development and population growth. The city's independent legal ability to raise revenues is limited by state constitutional provisions requiring voter approval for tax increases.
Expenditure Framework: 'aa' factor assessment
Based on the city's current spending practices, Fitch expects the natural pace of expenditure growth to be in line with to marginally above revenue growth. Expenditure cutting flexibility is solid and fixed costs for debt service and pensions are moderate.
Long-Term Liability Burden: 'aa' factor assessment
Long-term liabilities for overall debt and the city's pensions are moderate relative to its resource base.
Operating Performance: 'aa' factor assessment
The city retains strong gap closing ability relative to revenue declines anticipated in a moderate recession. Budget management is conservative and the city has made notable additions to reserves during the current economic recovery.
Financial Flexibility: The IDR is sensitive to shifts in fundamental credit characteristics, most notably Fitch's expectations for the city's ongoing financial flexibility throughout economic cycles.
Indio is a relatively affordable community adjacent to several wealthy desert enclaves in the Palm Springs area. Major regional employers include Indian casinos and resorts, as well as hospitals and governmental entities. Long-term population growth has been above average and appears likely to continue based on the region's affordability relative to coastal population centers.
Taxes accounted for nearly half of the city's 2015 general fund revenues and rely on a diverse array of tax sources, including sales tax, utility user's tax, property tax, transient occupancy tax, and franchise fees. Voters' approval of a local sales tax measure in November 2016 is expected to raise $8.5 million in new revenue annually over a 20-year term, equal to about 13% of fiscal 2015 general fund revenue. Planning is currently underway for use of these revenues, which will likely include portions for capital and operations.
The city's revenue performance has been strong over the past 10 years, exceeding both inflation and overall U.S. economic performance. This performance has been supported by ongoing economic development and population growth as well as policy actions, including a surcharge on festival tickets which is expected to generate approximately $2.6 million(about 4% of fiscal 2015 general fund revenues) in fiscal 2017. Based on the city's track record of steady growth, Fitch expects revenues to continue to out-perform the U.S. economy.
Like other California local governments, the district has limited independent legal ability to raise revenues due to state constitutional provisions requiring voter approval for tax increases.
Indio provides a broad range of municipal services to its residents with public safety representing the majority of expenditures. Total public safety spending in fiscal 2015 accounted for nearly two-thirds of general fund expenditures.
Based on the city's healthy revenue growth historically and current spending practices, Fitch expects the natural pace of spending growth to be in line with to marginally above revenue growth.
The city's ability to reduce expenditures is solid, and is supported by moderate fixed costs for debt service and pension benefits, which accounted for approximately 15% of governmental expenditures in fiscal 2015. The city has utilized layoffs, concessions, furloughs, and maintenance deferrals to address revenue shortfalls in past downturns and would likely return to such strategies if needed to offset revenue declines.
Long-Term Liability Burden
Long-term liabilities, including net pension liabilities and overlapping debt, are moderate relative to the city's resource base at about 15% of personal income. Management is considering additional debt issuance to support capital needs and address a recent legal judgement but overall debt levels are not expected to increase materially. The city participates in two state-sponsored pension plans with typical actuarial assumptions and a somewhat weak Fitch-estimated funding ratio of 64%, assuming 7% investment returns.
General fund reserves provide the city with strong gap-closing ability relative to above-average revenue declines anticipated in a moderate recession. Financial flexibility is supported by a reserve for economic uncertainty sized at 15% of general fund revenues, which the city currently exceeds. Fitch expects the city would prioritize expenditure reductions to address an unanticipated revenue decline with some limited use of reserves.
Revenue declines led to a sharp drop in fund balance during the last recession but reserve levels and overall operating performance have strengthened notably over the last several years under a new management team. Recent operating gains are supported by improved management practices, including the establishment of a reserve for economic uncertainty and multi-year financial planning, and Fitch expects the city to maintain its strengthened financial position going forward. Preliminary results for fiscal 2016 point to a fifth consecutive year with an operating surplus and the fiscal 2017 budget is balanced.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
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