SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings has affirmed and removed from Rating Watch Negative the following tax allocation bonds for Pittsburg Redevelopment Agency, California (the agency):
--$26.6 million housing TABs at 'BBB'.
The Rating Outlook is Stable.
The housing TABs are secured by a first lien on the 20% housing set-aside revenues.
KEY RATING DRIVERS
--RISK OF DEBT SERVICE DRAW REDUCED: Removal of the Rating Watch Negative reflects the diminished likelihood of a debt service reserve fund (DSRF) draw as the successor agency to the RDA (the SA) has expressed its intent to pay debt service prior to any payment to the county under the state's AB 1484. Further, the California Department of Finance (DOF) is working on a judicial solution to correct miscalculated AB 1484 liabilities, which potentially could eliminate the SA's liability.
--AMPLE RESERVE LEVELS: In the event that the SA were forced to make the full AB1484 payment and the payment were allocated to the housing and non-housing bonds on a pro-rata basis, Fitch would expect a modest drawdown of the bonds' DSRF, followed by full replenishment in the following 12-month period based on the bonds' adequate debt service coverage. Fitch does not anticipate that this scenario will occur.
--ADEQUATE DEBT SERVICE COVERAGE: The 'BBB' rating reflects the housing TABs' adequate debt service coverage. Fitch estimates fiscal 2013 housing revenues will cover maximum annual debt service (MADS) 1.32 times (x), and assessed valuation (AV) would have to decline by a substantial 23% for coverage to fall to 1.0x.
--HOUSING MARKET WEAK, BUT STABILIZING: The local housing market was severely hit by the housing-led recession and prices are much lower than peak levels, but the market has been showing recent signs of stabilization that may bode well for future tax increment.
Progress Towards Successful AB1484 Dispute Resolution
On June 27, 2012 the governor signed AB 1484 which, in addition to other items, required repayment by many SAs of property tax distributions from December 2011 and January 2012 that the state believes should have been directed to other taxing entities. The SA, like a handful of other agencies, believes DOF improperly calculated its $3.5 million AB 1484 payment and has been in discussions with DOF to resolve the dispute. The city is suing the state to discharge its AB 1484 obligation.
On Aug. 27, 2012 DOF issued to the SA a letter that neither confirmed nor rejected the SA's payment amount but indicated DOF would not exercise non-payment remedies, such as withholding sales tax revenues from the city and imposing harsh penalties. DOF has since contended that no entity has the statutory authority to amend the payment amount, even if calculated in error. However, DOF is seeking to correct miscalculated payments via judicial intervention in the near term. Because DOF was not able to confirm which SAs' AB1484 payments were calculated in error, Fitch is uncertain whether the SA would benefit from an ultimately successful judicial intervention.
Fitch formerly was concerned that the penalties were sufficiently harsh that the SA might have chosen to make its AB 1484 payment from tax increment revenues to protect city funds despite the bonds' senior lien on property tax increment. This may have resulted in a draw from the bonds' DSRF because tax increment revenues may not have been sufficient to pay debt service plus the AB 1484 payment. Management has stated, however, that the city intends to adhere to the bonds' senior lien on tax increment in the event of an adverse dispute outcome.
Some auditor-controllers have raised concerns that non-payment of the AB 1484 liability would require counties to withhold increment from successor agencies, thus removing the agency's ability to pay debt service on a senior basis. If this occurred and the agency allocated a portion of the withholding to the housing bonds, then a limited drawdown (estimated at about $200,000) of the housing bond's $2.5 million reserve might occur. However, based on fiscal 2013 Fitch-estimated coverage levels, Fitch would anticipate such a draw would be replenished in the following fiscal year. This scenario seems unlikely based on the agency's many potential avenues for successful dispute resolution.
Pittsburg Filing Suit Against State
Pittsburg is suing the state to discharge its AB 1484 liability, in spite of DOF's decision not to pursue payment as stated above. This stems from DOF's contention that it lacks statutory authorization to reduce the SA's payment amount and that DOF may be prohibited from issuing a finding of completion to the SA until full payment is made. The finding would be required for the SA to sell its idle assets, as it is obligated to do per AB 1X 26.
Coverage Falls, But Increment May Benefit from Housing Market
The project area's tax base has contracted in each of the past five years, reflective of a long period of severe home price depreciation. According to Zillow, the city's median home price peaked at $475,000 in January 2006 and fell an extreme 67% to a trough of $159,100 in September 2011. The lion's share of related AV losses occurred in fiscal years 2009 and 2010, with losses of 3.1% and 14.3%, respectively. Since then, home price declines moderated substantially, and AV declines have remained modest in a range from 0.9% to 1.5% through fiscal 2013. Zillow data shows year-over-year home prices rose 3.6% in August, which may bode well for future tax increment levels.
Based on fiscal 2013 AV, Fitch estimates that housing revenues of $2.6 million will cover MADS an adequate 1.32x. This coverage is down slightly from 1.34x in fiscal 2012 due to a modest 1.3% AV loss. Fitch estimates that AV could fall a substantial 23% from current levels before MADS coverage would fall to 1.0x. By comparison, the cumulative AV decline from fiscal 2008-2013 was 20%. If house price gains hold, coverage could improve somewhat in fiscal 2014. However, coverage would be unlikely to rise to levels that would result in a positive rating action.
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 and Zillow.com.
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
U.S. Local Government Tax-Supported Rating Criteria
650 California Street
San Francisco, CA 94108
Source: Fitch Ratings