Fitch Ratings has affirmed the ratings on the city of Pittsburg, California, bond obligations with a stable outlook. Apx $91.5M pension funding bonds, series 2006 are rated A-; while the general obligation (GO) bond rating is A. (See chart below)
Fitch said it will recalibrate the ratings on the above referenced bonds on April 30, 2010. At that time, with a continued Stable Outlook, the ratings will be revised as A+ for the pension bonds, and AA- fot the GO bonds.
The Rating Rational is based on what every taxpayer knows, unfortunately, the bill wil be paid no matter what! “Pension funding bonds are secured by an absolute and unconditional obligation of the city to make debt service payments. The city’s GO debt (none outstanding), related to the implied GO rating, is secured by the city’s full faith and credit and unlimited taxing power.”
The rosy picture Fitch paints is based on several factors. Despite contractions in property and sales taxes the city’s financial position remains sound, supported by effective cost cutting, a sizeable budget stabilization fund and a plan to eliminate its modest reliance on one-time revenue sources.
Noting overlapping debt levels are substantially elevated and the payout rate on the pension funding bonds is very slow and that the industrial base can prove volatile in terms of taxes, Pittsburg’s economy is weaker than other Bay Area cities, with typically higher unemployment and residential housing stress.
Key Ratings Drivers will be Pittsburg’s “ability to maintain balanced operations and retention of high reserve levels given the city’s economic vulnerabilities,” and hope for “some return to economic growth as evidenced by stability in sales taxes and property values and improvement in the unemployment rate.”
Read the fine print below:
Pittsburg, with a population of about 64,000, is located in the eastern portion of the San Francisco Bay in Contra Costa County. The city benefits from its location along a state highway near an interstate as well as its stop on the region’s major rapid transit rail which provides access to the San Francisco and Oakland job markets. In recent years, the city’s population growth has outpaced the region based on its relative proximity to employment centers and more affordable housing stock.
The city’s tax base is dominated by companies in the large heavy industrial area located near the waterfront. The top 10 taxpayers make up a very high 40% of the total tax base (including redevelopment increment). The concentration risk is somewhat mitigated by the long tradition of power and chemical plants in the city, the level of recent investments made at many of the large plants and the city’s proactive management of its heavy industrial area. Until fiscal 2009, the city experienced healthy tax base growth, with residential, commercial and industrial development, coupled with price appreciation, resulting in assessed valuation (AV) growth which peaked in fiscal 2007 at 14.5%. Growth slowed in fiscal 2008, declined 2% in fiscal 2009 and fell by a very high 15% in fiscal 2010. The large decline in fiscal 2010 was led by residential property values being reassessed at market values. With a high amount of subprime and negative amortization loans and high foreclosure rates, the city’s residential tax base is likely to be suppressed for some time.
City wealth indicators are mostly below average, with per capita income about 73% of the state level and median household income better but still at just 92% of the state level. The unemployment rate has historically trended higher than the county and region, averaging 10% in 2008 compared to 6.2% for the county. Owing to the prolonged downturn, the city’s unemployment rate was a high 18.7% in January 2010, compared to 12.1% for the county and 13.2% for the state.
In spite of these economic challenges, Pittsburg’s financial position remains sound. The general fund benefits from its below average reliance on property taxes and diverse revenue sources. Sales taxes make up about 29% of general fund revenues, followed by property taxes (14%) and other taxes (mostly franchise fees at just under 14%). The general fund is less exposed to property tax revenues because about 73% of city AV is tax increment, with tax revenues flowing directly to the redevelopment agency. In addition to pressure from declining property tax revenues, the city’s sales taxes are down about $2.3 million, or 27% from their peak, but are close to the fiscal 2010 budget of $6.2 million. To offset these declining revenues, the city cut spending in fiscal 2010 by about $4 million through a hiring freeze, some layoffs and eliminating other expenses. The mid-year budget report projects the city ending the year close to budgeted figures, which was balanced using about $1 million from the budget stabilization fund but keeping general fund balances the same. The city ended fiscal 2009 with a general fund balance of $6.6 million, or 17.1% of spending, most of it unreserved. Including the $7.4 million budget stabilization fund, the city’s available fund balance was a healthy $13.8 million, or 35.7% of spending. The city’s prudent use of its reserves and its return to balanced operations is a key rating driver. The city expects break even operations in fiscal 2011 with minimal if any use of the budget stabilization fund.
The city’s direct debt burden is moderate. The pension funding bonds are the only general fund debt outstanding and at about $91 million, result in $1,400 in debt per capita. However, including overlapping entities (primarily the city’s redevelopment agency), debt levels are very high at over $11,700 per capita and 12.5% of AV. Amortization of the pension funding bonds is slow, with just 18% repaid in 10 years and a final maturity in 2035. The city’s pension was well funded at the end of fiscal 2007, but will undoubtedly have a lower funding ratio once investment losses from fiscal 2009 are included. The other post employment benefit liability appears manageable.