Fitch Ratings has affirmed and removed from Rating Watch Negative the following tax allocation bonds (TABs) for the Rialto Redevelopment Agency, CA (the RDA):
--$24.9 million TABs (Merged Project Area) series 2003A, at 'BBB+';
--$18.3 million TABs (Merged Project Area) series 2005C, at 'BBB+';
--$21.2 million TABs (Merged Project Area) series 2008C, at 'BBB+';
--$24.6 million TABs (Merged Project Area) series 2005A, at 'BBB+';
--$39.1 million TABs (Merged Project Area) series 2008A, at 'BBB+';
--$10.2 million housing set-aside TABs (Merged Project Area), series 2005B, at 'BBB+';
--$27.6 million housing set-aside TABs (Merged Project Area), series 2008B, at 'BBB+'.
The Rating Outlook is Stable.
The non-housing tax allocation bonds are special obligations payable from the Rialto gross tax increment revenues from Rialto's sole project area. This is less the 20% housing set aside, senior pass-throughs and county administrative fees.
The tax allocation housing bonds are special obligations payable from the Rialto merged project area 20% of gross revenues housing set-aside revenues less only county administrative fees.
KEY RATING DRIVERS
PROGRESS ON AB1X26 IMPLEMENTATION: The City of Rialto (the city) has been recognized as a successor agency (SA) to the RDA. Recognized obligation payment schedules (ROPS), which include calendar 2012 debt service, have been approved by the oversight board, county and state. The SA received sufficient payments, along with cash reserves, to cover debt service included in the ROPS.
IMPLICATIONS OF AB 1484: The governor signed this trailer bill to the state's fiscal 2013 budget on June 27, 2012. The bill includes what Fitch believes are improvements to the ROPS approval process and other procedures going forward. However, it 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 reports that it made the required repayment and reports that sufficient funds remain for debt service payments.
HOUSING REVENUE AVAILABILITY: The lack of distinction between former housing set-aside revenue and total tax increment under AB1X26 did not affect Fitch's assessment of credit quality. This is because debt service coverage does not materially change assuming this comingling.
DECLINING BUT ADEQUATE DEBT SERVICE COVERAGE: Annual debt service coverage for both the non-housing has declined to 1.83x in fiscal 2011 from 2.02x in fiscal 2010. The same is true for the housing tax allocation bonds, declining to 1.62x in fiscal 2011 from 1.79x in fiscal 2010. Based on expected project area assessed valuation declines in 2012, coverage levels are projected to decline but remain sound at 1.74x and 1.53, respectively.
PENDING AV APPEALS: Pending tax appeals increased significantly over the past three years and likely will result in AV declines for 2013. Low historical appeal loss rates coupled with modest new development activity are expected to stabilize AV over the next few years.
SIGNIFICANT PROJECT AREA AV: AV has declined 10% in total over the past three years. However, the heavily developed commercial and industrial tax base remains generally stable with total AV of $2.7 billion and a solid incremental value (IV) to base year AV ratio in 2012 at over 3.0x. Management expects that current modest development activity will stabilize the merged project area AV. This in turn will largely offset appeals in fiscal 2013 and beyond.
HIGH TAXPAYER CONCENTRATION: Located in San Bernadino County proximate to the Ontario International Airport, the project area is large in size and concentrated among the top ten taxpayers at 33% of IV of $2.2 billion in fiscal 2012. A large component consists of industrial properties and distribution centers. The top two taxpayers comprise over 16% of IV in 2012.
CONCENTRATED PROJECT AREA
The Rialto merged project area, formed in 1977 and amended in 2002, encompasses over 7,500 acres and over 50% of the city with a significant industrial presence. The area is located about 15 miles from the Ontario International Airport and 60 miles east of Los Angeles. The project area has excellent access to the Interstate-10 freeway and the Alameda Corridor rail line that links to the Ports of Los Angeles and Long Beach.
The project area includes several large distribution centers within including Target Corp., FedEx Corp., Staples Inc. and Toys R Us Inc. The local economy remains weak with very high unemployment rates, below average wealth indicators and a depressed residential sector. City unemployment peaked at 18.8% in July 2010 and remains very high at 15.2% in May 2012. Median household income reported in 2009 was 16% less than the state average.
Steady annual tax base growth over the past decade slowed over the past three years to a total decline of 10% from 2008 to 2012. The project area tax base was $2.7 billion in 2012, compared to a base year value of $633 million. The top ten taxpayers comprise a high 33% of the project area's total IV in 2012 led by Target Corp. at 8.3% and Prologis, Inc. at 9.6%.
Pending valuation appeals were modest at approximately $18 million at-risk in 2011. However, given recently positive leasing activity, they are not expected to result in material annual increment revenue losses or significantly impact coverage levels. Higher than expected tax appeal loses will place downward pressure on the rating.
Following a significant slowdown in development over the past three years, activity improved in 2011. Industrial and commercial occupancy rates are up and falling rents seem to have stabilized. Additionally, several leading taxpayers completed facility additions. The residential market remains soft. While very little new construction is currently in the pipeline, apparent stabilization is a credit positive. The city's projections for future growth from the Rialto airport redevelopment project in 2013 or later seem reasonable.
STABILIZING COVERAGE LEVELS
Following steady increases between fiscal years 2005 and 2009, annual gross pledged revenues have stabilized around $20 million in fiscal 2011. Net tax increment revenues are providing solid coverage of annual debt service at 1.83x for the non-housing TABs and at 1.64x for the housing TABs. Projected coverage is expected to drop again in fiscal 2012. However, it will remain satisfactory at 1.74x for the non-housing TABs and 1.53x for the housing TABs. These coverage levels coupled with the risk of further declines from AV appeals are balanced by the very large size of the project area and in-line with the 'BBB+' rating category.
Coverage stands up well to various Fitch-designed stress scenarios. This includes the loss of the top ten taxpayers and several additional years of consecutive moderate AV declines. While the historical success rate of tax appeals has been low, coverage levels have declined over the past three years.
Non-housing TABs debt service is level around $9.4 million with a final maturity in 2037. Housing annual debt service is level around $3.1 million with a final maturity in 2037.
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, University Financial Associates, 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. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
Bernhard Fischer, +1-212-908-9167
Fitch Inc., One State Street Plaza, New York, NY 10004
Scott Monroe, +1-415-732-5618
Jessalynn Moro, +1-212-908-0608
Elizabeth Fogerty, +1-212-908-0526
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