Fitch Rates Gilroy, CA's General Obligation Bonds 'AA-'; Outlook Stable
Source: Business Wire
--$26.5 million series 2010.
The bonds are expected to sell via negotiation on July 21.
In addition, Fitch affirms the following:
--$10.5 million in outstanding general obligation bonds at 'AA-'.
The Rating Outlook is Stable.
RATING RATIONALE:
--The 'AA-' rating reflects solid general fund financial operations, exhibited by high fund balances, conservative fund balance policies, and large expenditure reductions that are expected to better align expenses with shrinking revenues.
--Gilroy benefits from its location within the large San Jose employment market.
--Economic characteristics are below average, including high unemployment, below-average income levels, large tax base reductions, and a strained housing market.
--Various internal funds have borrowed heavily from the water fund. If impact fees do not rebound sufficiently to close these deficits, the general fund could be affected significantly.
--The city's debt profile is weak, with high net debt levels, very slow amortization, and upcoming note refinancings that could further strain already weak debt characteristics and potentially impact the general fund.
KEY RATING DRIVERS:
--Management's continued ability and willingness to cut expenditures if a weak economy further pressures tax revenues.
--The timing and structure of future debt issuances required to retire the city's outstanding bond anticipation note (BAN), and the ability of developer fees to pay related debt service without affecting the general fund.
--The city's post-recession economic landscape and its effects on population growth, the return of developer fees, tax base growth, and retail activity.
SECURITY:
The bonds are secured by an unlimited ad valorem tax pledge.
CREDIT SUMMARY:
The city serves approximately 52,000 residents and is located about 30 miles south of San Jose. The economy has been diversifying in recent years, but is still largely agricultural, bearing the high unemployment and low per capita income levels typical of agriculturally dependent communities. Until recently, high population growth has been the result of relatively affordable housing and the city's close proximity to the large San Jose employment market. However, Gilroy's residential real estate market has been hit quite badly, with high concentration in negative amortizing mortgages likely pointing to continued stress. Nonetheless, modest price increases and recently reduced foreclosure rates suggest the market may be approaching its trough.
Gilroy's financial position is adequate overall, but vulnerable to a weak economy and large contingent liabilities. Fiscal 2009 ended with a manageable $3 million deficit that reduced the total and unreserved general fund balances to still high levels of $18.9 million (53% of expenditures and transfers out) and $18.8 million (52.8%), respectively. However, the general fund has approximately $11 million of contingent liabilities due to loans of $1.8 million, $5.3 million, $3.9 million to the traffic impact, public facilities impact, and other governmental funds, respectively, owed primarily to the water and sewer funds. The loans were accrued due to various internal service fund deficits and as the result of a land purchase. Also, the city intends to issue $48 million in certificates of participation (COPs), half of which will be structured as variable-rate certificates, and developer fees would first pay debt service on the COPs (estimated at $2 million), with remaining amounts then reducing internal loans. If developer fees do not increase sufficiently, the general fund could be tapped for debt service payments, and contingent liabilities may become direct liabilities of the general fund under Prop 218 if it is determined the borrowing funds will be unable to repay their loans. This could put downward pressure on the rating.
Management estimates that fiscal 2010 will produce a modest surplus, and projections for fiscal 2011 point to balanced to slightly deficit operations. Balanced operations in fiscal 2010 are due to substantial expenditure cuts implemented in fiscal years 2009 and 2010 that have significantly offset large sales- and property-tax revenue declines. Management prudently saved a cumulative $11.4 million annually by cutting 71 positions and other expenditures. Additionally, the city's fire labor union agreed to concessions that are estimated to save $400,000 annually beginning in fiscal 2011. Negotiations with police are ongoing.
The city's debt profile is weak. Principal amortizes very slowly, with 5.9% and 16.7% of outstanding principal retired in five and 10 years, respectively. While direct debt levels are low at $1,602 per capita (1.35% of AV), the debt of overlapping municipalities raises net debt levels to a high $6,293 (5.31%). Intermediate-term capital needs are limited.
Gilroy refinanced $42.7 million of outstanding variable-rate COPs in August 2009 with a BAN that matures in September 2010. Management intends for the note to be refinanced 50% with fixed-rate COPs, and 50% with a three-year BAN. In three years, the city intends to refinance the BAN with a variable-rate COP. Fitch believes this financing plan exposes the city to some market access risk.
The $26.5 million of series 2010 GO bonds are being issued to fund the construction of a new library.
Applicable criteria available on Fitch's website at 'www.fitchratings.com':
--'Tax-Supported Rating Criteria,' dated Dec. 21, 2009;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Dec. 21, 2009.
Additional information is available at 'www.fitchratings.com'.
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Contact:
Fitch Ratings, San Francisco
Scott Monroe, 415-732-5618
Amy Doppelt, 415-732-5612
Andrew Ward, 415-732-5617
or
Media Relations:
Cindy Stoller, 212-908-0526, New York
Email:
cindy.stoller@fitchratings.com
