Fitch Ratings has affirmed the following ratings for Fresno County, CA (the county):
–$371 million taxable pension obligation refunding bonds (POBs), series 2004 at ‘A+’;
–Implied general obligation rating at ‘AA-‘.
The Rating Outlook is Stable.
The POBs are secured by an absolute and unconditional obligation of the county and are payable from any legally available source of funds.
KEY RATING DRIVERS
SOUND FINANCIAL PROFILE: The county maintains a sound financial position benefiting from conservative management practices and prudent spending cuts.
LIMITED ECONOMY: The economy is centered on agriculture with below average wealth levels and above average unemployment.
STABLE TAX BASE, LOW CONCENTRATION: The tax base has remained relatively flat throughout the economic downturn and exhibits low taxpayer concentration.
MODERATE DEBT: The county benefits from moderate debt levels and no plans to issue additional debt in the near term. However, escalating debt service could pressure future debt capacity.
AFFORDABLE TOTAL RETIREE COSTS: Pension obligations as a percent of payroll are high and increasing and the county has no immediate plans to change benefits. However, the costs are moderate as a portion of general fund spending. Furthermore, the county has never offered retiree healthcare.
GENERAL FUND OBLIGATIONS: The POBs are rated one notch below the implied GO rating as they are payable solely from any legally available funds.
Fresno County is located in the southern portion of California’s San Joaquin Valley, halfway between Los Angeles and Sacramento. With a population of approximately 931,000, the county serves as the regional hub for services, commerce and trade for the agriculturally-centered area economy.
SOUND FINANCIAL PROFILE
The county has maintained a sound financial position – achieving net operating surpluses after transfers each of the last four years – despite economic pressures to operations. Total revenues have shown marked stability during the economic downturn. State and federal funds each account for about one-third of total revenues and tax revenues (almost entirely property taxes) total about 22%. After a steep decline in fiscal 2010, tax revenues have increased each of the last two fiscal years, nearly to the previous high. The county’s total general fund balance stood at nearly $300 million, or 25.6% of expenditures net of transfers, at unaudited fiscal year end 2012. The unrestricted fund balanced declined to an adequate 8.6% in fiscal 2012 from 14.3% in fiscal 2011 due to the reclassification of certain agency funds to restricted. Fitch expects the county to maintain at least this level of unrestricted fund balance going forward.
The maintenance of solid financial operations throughout the economic downturn was aided by the county’s policy of reducing costs consistent with revenue reductions. As such, the county has lowered service levels and cut staffing levels over the last several years. In fiscal 2012, it cut 500 positions, of which 200 were filled, and negotiated and imposed salary reductions totaling about $29.7 million in savings. For fiscal 2013, the county reached agreement with all bargaining units except SEIU, with which it reached impasse and imposed salary reductions. The county is currently in arbitration with SEIU. If the county does not prevail, management expects to make budget adjustments to account for the loss.
As noted, the economy is heavily dependent on agriculture. After government, which accounts for about 18% of county employment, agriculture is the largest sector at about 13%. Further reflecting the strong agricultural component of the area economy, unemployment rates consistently have been much higher than state and national levels. County unemployment rates currently stand at 13% (September 2012) compared to 9.7% for the state and 7.6% nationally. Median household income levels are low at 76% of state and 89% of national averages.
STABLE TAX BASE, LOW CONCENTRATION
The county’s tax base has remained relatively flat despite a hard hit housing market due in part to the large portion of assessed valuation (AV) attributable to farmland. Taxable AV declined only a combined 3.7% through fiscal 2011 before increasing slightly in fiscal 2012 (0.5%) and remaining flat in 2013. Fresno County ranks 24th in housing price declines nationally (Case-Shiller) with a total peak to trough reduction of 55%. However, year over year housing prices are up 6.3% and, after several years of double digit declines, housing starts began to increase in fiscal 2012 (2.6%) and are projected to continue to do so (Global Insights). Concentration is low with the top 10 taxpayers comprised mostly of petroleum and utility businesses equaling 6.2% of total AV.
PENSION COSTS MODERATE DESPITE HIGH CONTRIBUTION RATES
Despite high contribution rates, the county’s annual required pension contribution for fiscal 2011 was equivalent to a moderate 9% of governmental fund spending. Contribution rates rose significantly from a combined 28.52% of payroll in fiscal 2007 to 46.1% in fiscal 2011 due to changes in actuarial assumptions and investment losses. In addition, the county pays 50% of the employee portion of the contribution for Tier 1 employees. The recently adopted state pension reform bill will require employees to pick up a larger portion of the annual pension costs by 2017, which should help moderate the cost.
The Fresno County Employees’ Retirement Association (FCERA) includes the County, the Superior Court of California-County of Fresno, Clovis Memorial District, Fresno Mosquito and Vector Control District, and Fresno/Madera Area Agency on Aging. Its funded ratio as of June 30, 2011 was 73.5% (declining to 67.9% under Fitch’s assumption of 7% investment returns), and unfunded liability was $1.1 billion.
MODERATE DEBT; NO OPEB LIABILITY
The county’s debt levels remain moderate, with total overall net debt equal to 4.1% of assessed valuation (AV) and about $2,640 per capita. Amortization is slow with 38% of principal retired within 10 years. Debt service payments on all POBs escalate through maturity in 2033. Concern about rising debt service costs is somewhat mitigated by its relative affordability at about 3.7% of governmental fund spending. The county is not contemplating any additional debt issuances in the near term and does not have pressing capital needs. Carrying costs, including debt service and pension ARC, total a moderate 13% of governmental fund spending. The county does not offer other post-employment benefits (OPEB) and thus has no OPEB liability.
In addition to the sources of information identified in Fitch’s Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, S&P/Case-Shiller Home Price Index, IHS Global Insight, and 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
U.S. Local Government Tax-Supported Rating Criteria