NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the following Baldwin Park Public Financing Authority, CA's sales tax and tax allocation bonds (TABs):
--$4.1 million sales tax and tax allocation refunding bonds, series 2003 at 'BB'.
The TABs are removed from Rating Watch Negative.
The Rating Outlook is Negative.
The series 2003 bonds are limited obligations of the authority, payable from a first lien on sales tax and incremental property tax revenues derived from the Puente Merced project area and surplus tax increment revenues of the San Gabriel River, Delta and Sierra Vista project areas. These three project areas were merged with the Puente Merced project area in April 2000 by ordinance of the City of Baldwin Park (the city).
The bonds are additionally secured by a cash-funded debt service reserve fund (DSRF) equal to maximum annual debt service (MADS).
KEY RATING DRIVERS
REVENUE DISRUPTION AND DSRF DRAW: Although payment of series 2003 debt service in August 2012 did not require a DSRF draw, in August 2012 the Successor Agency to the Baldwin Park RDA (SA) withdrew funds from DSRFs to pay a portion of debt service requirements on two of its other three outstanding series of TABs. The draw was required due to a combination of much lower than expected tax increment distributions in June 2012 from Los Angeles County (county) under AB 1X 26 and delayed distribution of $600,000 in housing set-aside funds that was subsequently reversed.
CONTINUING REVENUE UNCERTAINTY: One reserve draw of $401,998 has been fully replenished (San Gabriel) and one reserve draw partially replenished ($157,000 of $451,861) (Central Business District or CBD) but revenue vulnerability remains for 2013 debt service requirements. Payment discrepancies in 2012 coupled with approval requirements for certain requested payments in 2013 create uncertainties as to revenues available for 2013 debt service requirements and if total payments received are not sufficient, could again result in DSRF draws.
INCREASED RELIANCE ON SALES TAX: Credit quality is further compromised by the increased dependence upon volatile sales taxes to pay series 2003 debt service as a result of the shortfall in tax increment distributions. Sales taxes generated within a small commercial development have fluctuated, falling 40% between fiscals 2007 and 2008. Sales tax revenues for 2013 are conservatively forecasted at $420,000. Collections have failed to fully cover maximum annual debt service (MADS) in recent years and are not expected to cover debt service of approximately $532,000 in 2013.
ADEQUATE HISTORICAL DEBT SERVICE COVERAGE: Coverage of series 2003 annual debt service from pledged Puente Merced tax project area increment and sales taxes and surplus revenues from the merged project areas has averaged an adequate 1.6x over the past two years (2010 and 2011).
DECLINING TAXABLE VALUES: Taxable values within the merged project area (Puente Merced, San Gabriel River, Delta and Sierra Vista) have fallen by 5.6% over the past two years. A recent increase in appeals activity may signal further assessed value (AV) reductions, although expected AV losses would total a moderate $3.7 million or 1% of incremental assessed value (IV) based on projections.
TAXPAYER CONCENTRATION RISK: Moderately high concentration exists within the merged project area, with the top 10 taxpayers representing 26% of IV. Top taxpayers include Wal-Mart ('AA' with a Stable Outlook by Fitch), Home Depot ('A-', Stable Outlook), and several multi-tenant offices and retail buildings.
INCREMENTAL REVENUE STABLITY: The merged project area is mature with a high IV ($614.2 million) relative to the base year ($88 million). As a result, tax increment revenues respond less dramatically to changes in total AV.
BELOW AVERAGE SOCIOECONOMIC PROFILE: Baldwin Park is a lower income community, exhibiting a high incidence of individual poverty, and high levels of unemployment.
WHAT COULD TRIGGER A RATING ACTION
ADDITIONAL REVENUE SHORTFALLS: The SA projects having sufficient funds from sales tax revenues both on hand and expected over the course of the year to fully cover the series 2003 debt service payments in February and August 2013. Continuing overall revenue uncertainties coupled with approval requirements which result in shortfalls from projections and further draws on the DSRF to pay debt service on any SA required debt service will put downward pressure on the rating.
SUCCESSOR AGENCY REQUIRES DSRF DRAWDOWN; REVENUE UNCERTAINTIES CONTINUE
The Baldwin Park Successor Agency (SA), the designated successor agency to the RDA, withdrew a total of $853,859 from the DSRF to cover debt service due on August 1 for two of its four outstanding TABs. The Fitch-rated series 2003 TABs, however, were paid from pledged sales taxes already received from the Puente Merced project area.
The RDA historically borrowed internally from either RDA reserves or the city to cover timing mismatches between tax revenue receipts and debt service payments. The internal loans were repaid from subsequent tax increment revenues. However, lack of available RDA cash reserves and lower than expected tax distributions have significantly increased the SA's borrowing needs.
Cash in the combined DSRFs totalled $2.9 million prior to the draws and was more than sufficient to fund approximately $1.4 million of August and September debt service requirements ($1.8 million total less $430,000 attributable to the series 2003 bonds). The CBD reserve funds are not available for the merged project area debt service. City officials drew on the DSRF rather than lend funds to the SA for upcoming debt service due to required approvals for such a loan and uncertainty that future tax distributions from the county would be sufficient to repay the loan. The SA has included a request for reserve draw reimbursement in its January 1 to June 30, 2013 Recognized Payment Schedule (ROPS) request. $558,998 of the total DSRF draws has been replenished thus far following approval of the use of set-aside funds and a deferral amount.
County officials are projecting that the SA will receive $1.9 million of net tax increment allocations for the January 2013 distribution and approximately $800,000 for the June 2013 distribution. The SA projects annual sales tax revenues at a conservative $420,000. The SA has also requested approval for reimbursement of approximately $779,000 housing funds for use in paying 2013 debt service requirements. The total amount of projected funds for 2013 would be sufficient to replenish the DSRF draw and, with expected sales tax collections, meet all requirements for 2013 debt service. Fitch believes the projections may be overoptimistic given recent payment trends and further approval requirements.
LOWER THAN EXPECTED TAX PAYMENTS FROM THE COUNTY
The July 2012 downgrade to 'BB' reflected the SA's extensive use of DSRFs to fund debt service costs as a result of much lower than expected June 1st tax-increment distribution received by the SA from the county and a housing set-aside amount for $600,000 which subsequently reversed. Fitch notes as a key credit concern the fact that officials from the county and the SA have not mutually established the reasons for the discrepancy which calls into question the adequate and continuous flow of sufficient revenue to cover obligations.
The state department of finance approved the SA's ROPS for both the January through June and July through December 2012 periods. The amount approved for the latter period was approximately $2.6 million. The SA's $1.7 million June 1st distribution from the Redevelopment Property Tax Trust Fund (RPTTF) represented tax increment collected within four project areas from February to May 2012. The distribution was approximately 27% below the $2.3 million available to the RDA for the same period in 2011 and below the $2.6 million approved on the ROPS. Based on 2012 taxable values among the four merged project areas, fiscal 2013 tax increment revenues should be about 5% lower than the prior year level.
After payment of senior lien pass-through payments, administration fees and housing set-aside allocations, about $790,000 was actually distributed to the SA. This resulted in the required DSRF draw.
PLEDGED SALES TAX PROVIDES ADDITIONAL BUT VOLATILE SECURITY
The shortfall in tax-increment distributions has increased reliance upon sales taxes to meet series 2003 debt service requirements; the only outstanding RDA TABs additionally secured by a sales tax derived the pledged project area. The use of pledged sales taxes to pay RDA debt service is not subject to semi-annual state approval.
Sales tax collections are derived from the Puente Merced project area; a small commercial district. Collections have proven volatile, declining by 40% between fiscals 2007 and 2008 although collections have since been more stable, increasing by about 8% in fiscal 2011. The below investment-grade rating reflects the resulting increased dependence upon volatile sales taxes to pay series 2003 bond debt service.
PROJECT AREA PROFILE
The Puente Merced project area consists of 16 acres adjacent to the San Bernardino I-10 Freeway. Development includes the Baldwin Park Towne Shopping Center with Home Depot as its main anchor, and a Marriott Courtyard Hotel. Fiscal 2012 project area AV totalled $39 million, down 0.4% from the prior year. The tax base is highly concentrated with the top 10 taxpayers accounting for 98% of AV.
Five of the city's six project areas were merged in 2000 including the Puente Merced project area. The merged project area totals 788 non-contiguous acres in the city's downtown area, largely comprising commercial and industrial properties with a small residential component.
The merged project area IV for fiscal 2012 totals $614.2 million or 7.0x the base year AV of $88 million. The ratio of incremental AV over the base year AV reduces volatility in incremental tax revenue to changes in the AV of the project area. The merged project area AV has declined by a total of 5.6% over fiscals 2011 and 2012, preceded by two years of robust growth. The merged project area tax base is somewhat concentrated although much more diverse than Puente Merced. The top 10 taxpayers in the merged area account for 23% of AV and 26% of IV. Wal-Mart and Home Depot are the two largest taxpayers at 4.3% and 2.7% of AV, respectively.
Pending appeals within the merged project area increased significantly in both number and value in fiscal 2011, particularly in the San Gabriel River and Sierra Vista project areas. The AV of pending appeals more than doubled from $54 million (8.6% of IV) in fiscal 2010 to $116 million in fiscal 2011 (16% of AV) while the average success rate jumped from 14% to 22%. The heightened level of appeals signals further reductions in AV although based on average success rates, projections indicate the tax base would lose about $3.7 million or a manageable 1% of IV.
BELOW-AVERAGE SOCIOECONOMIC PROFILE
Fitch considers the city's economic and demographic profile weak. A very young population contributes to per capita income levels that equal 52%-56% of the state and U.S. average. Median household income approaches the national average but is only 84% of the state. The city's individual poverty rate is also high. The educational achievement of the local labor force is well below the state and nation, contributing to high levels of unemployment. Unemployment remains high at 14.8% in July 2012 compared to 10.9% in California and 8.3% nationally, although lower than the prior year's July unemployment rate of 16.4%.
Baldwin Park is located in western Los Angeles County, approximately 20 miles east of downtown Los Angeles. The city encompasses 6.7 square miles and is near fully built-out. The city had previously experienced strong growth due to infill development, but the city's population trends were static between 2000 and 2010. The city is served by I-10 (the San Bernardino Freeway), I-605 (the San Gabriel River Freeway), and I-210 (the Foothill Freeway) making the greater Los Angeles metro area easily accessible for local residents.
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 the 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, Zillow.com, National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 14, 2012;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 14, 2012.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
Bernhard Fischer, +1 212-908-9167
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Elizabeth Fogerty, +1 212-908-0526
Source: Fitch Ratings