Fitch Ratings has taken the following action on Monterey County Financing Authority, CA’s (the authority) revenue bonds:
–$32.3 million 2008 revenue bonds, series A (Salinas Valley Water Project) downgraded to ‘A+’ from ‘AA-‘.
The Rating Outlook is Stable.
The bonds are secured by a closed and senior lien on the following revenues of the Monterey County Water Resources Agency (the agency): assessments on property-owners in agency Zone 2C, ad valorem property taxes, net hydroelectric facility revenues, and annexation fees.
KEY RATING DRIVERS
REDUCED DEBT SERVICE COVERAGE: The downgrade to ‘A+’ is based on reductions in pledged revenues and debt service coverage since issuance. Coverage levels remain adequate under Fitch stress scenarios that consider further declines in taxable assessed values and property assessments.
MANAGEMENT WEAKNESSES: The rating also reflects recent turmoil in agency operations arising from its involvement in a now halted desalinization project, as well as the agency’s failure to meet continuing disclosure requirements since issuance.
MIXED ECONOMIC RESULTS: Monterey County’s (the county) economy shows mixed results with both continued housing weakness and moderate employment growth over the past 12 months. The county’s agricultural and tourism base continues to perform strongly but housing prices remain depressed following declines of more than 60% from peak levels.
MODERATE DEBT LEVELS: Overlapping debt levels are low to mid-range and both debt service and employee pension costs are affordable.
Monterey County is located on California’s central coast, about 100 miles south of San Francisco. The economy is dominated by agriculture and tourism.
DEBT SERVICE COVERAGE REDUCED BUT ADEQUATE
The downgrade to ‘A+’ reflects reduced debt service coverage following issuance of the bonds in 2008. Pledged revenues for fiscal 2012 were 29% below pre-issuance peaks and appear unlikely to recover to those levels. Debt service coverage declined as a result, from a projected 1.9 times (x) maximum annual debt service (MADS) at issuance to 1.4x MADS under Fitch’s most recent projections.
A sharp decline in net hydroelectric revenues accounts for most of the decline in coverage. Net hydroelectric revenues fell from a high of $1.4 million in fiscal 2006 to $192,000 in fiscal 2012 due primarily to lower electricity prices under the agency’s long-term power purchase agreement. The agency is currently seeking to renegotiate this agreement to stabilize revenues, but the impacts of such changes are unlikely to improve coverage levels before fiscal 2014. Fitch’s calculations of debt service coverage assume no net hydroelectric revenues through maturity. Coverage remains adequate under stress scenarios that consider a 20% drop in assessed values and a 10% decline in property assessments from current levels, which Fitch considers unlikely.
PROPERTY-BASED REVENUES PROVIDE GOOD SECURITY
Property-based revenues supporting the bonds include assessments and ad valorem taxes, and have remained relatively stable since issuance. Assessments are levied upon property owners in agency Zone 2C, which includes approximately 66,000 parcels and 436,000 acres. Assessment amounts per acre are fixed and can only be reduced upon a change in property usage, for example, from irrigated agriculture to dry farming. Concentration levels are low, with the top 10 assesses contributing 6% of total assessments at issuance. Assessments for fiscal 2012 were approximately 2% higher than at issuance.
Ad valorem property tax revenues derive from the agency’s share of the 1% countywide tax levied in multiple zones within the county. The agency’s share of such revenues varies by zone and is based upon the pre-Proposition 13 allocation of property taxes among local taxing jurisdictions. Revenues are limited by a 2% cap on annual increases in assessed values (AV) for existing properties, and have declined approximately 11% since issuance due to AV reductions.
The bonds were issued to support construction of the Salinas Valley Water Project, which seeks to halt saltwater intrusion into groundwater supplies and increase flood protection. Project benefits and revenues are concentrated in the Salinas Valley, a major agricultural center responsible for approximately $3.6 billion in direct economic output in 2011.
The downgrade also reflects recent turmoil in agency operations arising from its participation in a failed desalinization project. The agency incurred up to $4 million of expenses as part of this project, which also resulted in the resignation of its general manager and the prosecution of one of its directors on conflict of interest charges. Management weaknesses are also reflected in the agency’s failure to meet continuing disclosure requirements since issuance. Monterey County (GOs rated ‘AA’, Stable Outlook by Fitch) has taken steps to address these weaknesses with the recent appointment of a new interim general manager and increased oversight of agency finances, which Fitch expects to help stabilize operations.
MIXED ECONOMIC RESULTS
The county’s economy fared better than much of the state of California during the recent recession. The county’s robust agricultural sector has outperformed the overall economy, and its large government sector has been a source of relative stability.
The county’s jobless rate has traditionally exceeded national averages due to the dominance of the seasonal agricultural and tourism industries. This gap decreased during the recent recession as the local job market outperformed the state and nation, and the county has recorded job gains for 13 consecutive months. Unemployment rates remained elevated despite such improvements at 8.6% as of September 2012, as compared to state and national rates of 9.7% and 7.6%, respectively.
The local real estate market has continued to suffer following the housing-led recession, but Monterey’s wealthy coastal communities have provided some stability, which differentiates the county from the state’s hardest hit housing markets. Assessed values (AV) fell a relatively mild 3.5% in fiscal 2010 and 4.1% in fiscal 2011, with modest growth for fiscals 2012 and 2013. Home prices remain below 60% of peak levels, but have shown increasing signs of stability in the first half of 2012.
MODERATE DEBT LEVELS
Overlapping debt levels are low to mid-range at 2.2% of AV and $2,631 per capita. The agency’s unfunded pension obligations are manageable but are likely to rise over the next several years to offset recent investment losses.
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, and IHS Global Insight.
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