Fitch Affirms San Bernardino County, CA's 1995 COPs at 'AA-'; Outlook Stable

SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings has taken the following rating actions on San Bernardino County, CA's (the county) certificates of participation (COPs).

--$21.2 million COPs, series 1995, affirmed at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by lease payments, subject to abatement, from the County of San Bernardino for use and occupancy of the Arrowhead Regional Medical Center. The bonds share a debt service reserve fund with the series 1996 and series 2009A COPs that is funded with a combination of surety bonds, a collateralized investment agreement, and cash.

KEY RATING DRIVERS

SOLID FINANCIAL PERFORMANCE: The county maintained its history of solid financial performance with a small deficit in fiscal 2011, due to the prepayment of debt and cash-funded capital projects, and a modest projected surplus in fiscal 2012 (unaudited). The county benefits from conservative financial policies that generally limit the use of reserves to finance one-time expenses

ONGOING BUDGETARY CHALLENGES: Prudent budgeting practices have identified ongoing challenges to budgetary balance over the next several years due to rising labor and benefit costs, including pensions, and revenues that remain below pre-recession levels. Fitch's rating assumes management will continue to balance recurring spending with recurring revenues, per the county's policy and practice, and maintain satisfactory reserve levels.

MODERATE DEBT BURDEN: Overall debt ratios are moderate due to overlapping debt issuances. The county cash-funds most capital projects and does not plan on issuing additional debt. Outstanding principal amortizes at a rapid rate.

STABILIZING ECONOMY: Economic challenges remain with the county still experiencing high unemployment and a pressured housing market, but the overall situation appears to be stabilizing with very modest increases in the median home price, fewer foreclosures, a return to employment growth, and a rebound in taxable transactions. The county benefits from good long-term prospects given its available and affordable land, strategic location on transportation networks connecting Pacific ports with domestic markets, and proximity to large labor markets.

WHAT COULD TRIGGER A RATING ACTION

INABILITY TO MAINTAIN STRUCTURAL BALANCE: Fitch's rating assumes that the county will continue to make the necessary spending reductions to maintain balanced operations despite increasing cost pressures.

CREDIT PROFILE

STRUCTURALLY BALANCED FINANCIAL OPERATIONS

The county maintained its solid financial performance by aggressively reducing expenditures to match reduced revenue levels. In fiscals 2011 and 2012, the county closed budgetary gaps of $88.4 million and $47.2 million, respectively, by reducing its workforce, containing and reducing salary and benefit costs, eliminating general fund subsidies for underfunded programs, and other cost-saving measures.

Fiscal 2011 saw a modest operating deficit (after transfers) of $5.6 million (0.3% of spending), which was largely due to the use of reserves to prepay outstanding debt and cash-fund capital projects. Management projects a net operating surplus in fiscal 2012 of $74.6 million (unaudited) due to a modest increase in revenues, particularly sales tax revenue, and spending reductions. The county anticipates reserving approximately $14.2 million of the surplus to offset an estimated liability from potential litigation regarding property tax administration fees.

In fiscal 2012, the county established a five-year financial plan that identified and recommended solutions to the general fund budgetary structural deficit. The county adopted a structurally balanced budget for fiscal 2013 that does not rely on existing reserves, closing a budgetary gap of $33.2 million by obtaining concessions from some labor groups, reducing departmental budgets, and deferring some capital investments.

The county's unrestricted general fund reserves remain at satisfactory levels. At the end of fiscal 2011, the total unrestricted general fund balance (the sum of the assigned, unassigned, and committed fund balance under GASB 54) was $227 million or 10.6% of general fund spending. Unrestricted reserves were drawn lower by $53 million from fiscal 2010 reflecting the use of fund balance to prepay outstanding debt and fund capital projects.

Fitch does not expect the recent bankruptcy of the City of San Bernardino to materially impact the county's financial profile.

MANAGEABLE LONG TERM LIABILITIES

Overall debt ratios are moderate at $2,695 per capita and 3.3% of taxable assessed value (AV). Direct debt makes up a relatively small portion of overall debt, reflecting the county's practice of cash-funding capital projects. Direct debt amortizes at a rapid rate with approximately 71.5% of outstanding principal retired within 10 years.

The county does not have any additional issuance plans and will continue to cash-fund capital projects despite reducing capital fund contributions by approximately $7 million in fiscal 2013.

The county will continue to face budgetary pressure from rising pension costs due both to investment losses and increasing labor costs. In fiscal 2011, the county's pension contribution was $213.3 million or the equivalent of 10% of general fund spending. Significant cost increases are included in the county's five-year financial plan with the annual contribution rising by $15 million and $20 million, respectively, in fiscals 2013 and 2014.

The county does not offer other post-employment benefits (OPEB) and has no unfunded OPEB liability which somewhat tempers risk to the annual pension burden as does the county's moderate debt carrying charges (at 7.4% of spending).

STABILIZING ECONOMY

San Bernardino County experienced very high unemployment rates and a depressed housing market during and following the recession, although recent data reflects potential stabilization with both job growth and a very modest increase in home prices. The county's 2.3% year-over-year employment growth (June 2012) was modestly above the state average of 1.9%, reducing the county's unemployment rate to a still high 12.6%. Home prices, which had declined significantly, have stabilized and recorded a modest increase in median value over the past few months albeit at prices well below pre-recession highs. The county's AV, which declined by 10.5% from fiscals 2009 - 2012, recorded very modest growth of 0.7% for fiscal 2013.

The county, which is the largest in the continental U.S., covers approximately 20,105 square miles in southeastern California, sharing a border with Nevada. Home to a growing population of approximately 2 million residents, the county is well positioned to serve as a distribution and logistics center for products arriving through the ports of Los Angeles and Long Beach. In addition, county residents in the southwestern portion of the county are in close proximity to the large and diverse labor markets in the nearby counties of Orange and Los Angeles.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

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 and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

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Fitch Ratings
Primary Analyst
Matthew Reilly, [phone]
Associate Director
650 California Street
San Francisco, CA 94108
or
Secondary Analyst
Stephen Walsh, [phone]
Director
or
Committee Chairperson
Mike Rinaldi, [phone]
Senior Director
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Media Relations:
Elizabeth Fogerty, [phone]
Email: [e-mail]

Source: Fitch Ratings