|[February 24, 2014]
Fitch Affirms Pittsburg CA's POBs at 'A+'; Outlook Stable
SAN FRANCISCO --(Business Wire)--
Fitch Ratings has affirmed Pittsburg, California's (the city) bonds as
--$37.9 million pension obligation bonds (POBs), series 2006 at 'A+';
--Implied general obligation (GO) bonds at 'AA-'.
The Rating Outlook is Stable.
The POBs are an absolute and unconditional obligation of the city
imposed by law.
KEY RATING DRIVERS
SOLID FINANCIAL POSITION: The city's financial position is solid, as
exhibited by high fund balances, recent voter approval of a new sales
tax, years of prudent cost-cutting, and a manageable path to structural
balance. Nonetheless, further cost cutting will be required to maintain
balanced general fund operations.
BELOW-AVERAGE ECONOMY IN RECOVERY: The city's economy is benefitting
from an employment and housing market recovery. Nonetheless, the city
was very hard-hit by the housing-led recession, and overall economic
indicators significantly lag the state and region.
BELOW-AVERAGE DEBT PROFILE: Overall debt levels are high, largely
reflective of substantial redevelopment borrowing. Elevated carrying
costs are likely to head higher due to rising pension costs, escalating
debt service, and stepped-up efforts to pre-fund other post employment
benefits (OPEB). Offsetting these weaknesses, the city's pensions are
adequately funded and capital needs are manageable.
STRONG FINANCIAL MANAGEMENT: Seasoned financial management and
policymakers have a record of prudent fiscal actions. Institutionalized
financial practices are impressive, including a high minimum fund
balance policy, new OPEB pre-funding requirements, multi-year
forecasting, and a budget stabilization reserve requirement.
FINANCIAL DECLINES WOULD BE NEGATIVE: An unexpected and material
deterioration of the city's fiscal position or strong management
practices could lead to a downgrade.
UPWARD MOVEMENT LIMITED: Fitch views the implied GO rating as currently
capped at 'AA-' due to the city's debt and economic profile weaknesses.
Pittsburg, with a population of about 65,000, is located in the eastern
portion of the San Francisco Bay Area in Contra Costa County. The city
benefits from a deepwater port and major rail lines that have supported
the longstanding presence of heavy industry, which continues to dominate
the local economy.
A WEAK EMPLOYMENT MARKET IN RECOVERY
The city's economy was very hard-hit during the housing-led recession,
with unemployment peaking above 17% and severe peak-to-trough home value
declines of 66.1%, according to Zillow. The local economy has recovered
somewhat, with three years of employment expansion lowering the
unemployment rate to a still high 10.9% in November 2013. The city's
year-over-year unemployment fell by a significant 2.1%, but most of the
improvement was the result of residents leaving the labor force.
HOUSING MARKET, ASSESSED VALUES STABILIZING
Home prices have begun to recover, with December values up a substantial
34% year-over-year to $244,100. The recovering housing market resulted
in the city's first assessed value (AV) gain in several years, with a
3.6% increase for fiscal 2014.
The city's economy is dominated by heavy industrial enterprises,
resulting in high tax base concentration. The top 10 taxpayers equal 35%
of AV and the top taxpayer (a natural gas power plant) makes up about
Per capita income levels are low at 57% and 79% of regional and state
levels, respectively. Household incomes are higher, reflecting large
household sizes, but still lag the region and state.
STRONG FINANCIAL POSITION
The city's financial operations are strong, in spite of deep
recessionary pressures on city revenues. Fiscal 2013 general fund
operations produced a manageable $900,000 deficit, lowering the total
and unrestricted balances to still high levels of $18.2 million (53.9%
of expenditures and transfers out) and $15.1 million (44.8%),
respectively. The deficit is net of $2.3 million of transfers out to
pre-fund OPEB and for capital projects.
The ciy is in year three of a seven-year plan to structurally balance
its operations. The city has well-outperformed projections since
initiation of the seven-year plan, and may approach balance sooner than
originally anticipated. Out-performance has stemmed from several
factors, including forecasting conservatism, voter approval of a new
sales tax, and revenue out-performance.
The city's fiscal 2014 general fund budget includes a $1.8 million
deficit. However, the city has a solid record of outperforming its
budget, so the actual deficit may be much smaller. Property and sales
tax revenues have been well outperforming to date.
NEW SALES TAX TO TEMPORARILY BOLSTER REVENUES
The Measure P sales tax was approved by a high 74% of voters in November
2012, authorizing a one-half-cent sales tax for five years, dropping to
one-quarter-cent through year 10 and then expiring. The tax raised $2.4
million in fiscal 2013, reflecting three quarters of collections.
Management estimates $3.3 million of revenues in fiscal 2014 (10% of
projected fiscal 2014 expenditures), conservatively reflecting no
growth, despite an uptick in economic indicators. Measure P revenues are
being spent on police services, a senior center, and economic
FURTHER CUTS LIKELY REQUIRED TO ACHIEVE LONG-TERM BALANCE
Despite the city's recently strong revenue performance, management
projects future cost-cutting will be required to achieve fiscal balance
as the city faces increased costs related to pensions, OPEB pre-funding,
recent wage hikes, and escalating POB debt service.
The city's seven year plan includes required cuts to reach structural
balance, which seems achievable given the council's history of prudently
reducing costs as recommended by financial management. Also, the scope
of required future cost-cutting has fallen significantly over the past
two years due to rising revenues and cost-cutting to date. The projected
required cuts range from zero to $400,000 annually, less than half of
their size two years ago.
The seven-year plan also includes a cumulative $2.7 million draw from
the city's budget stabilization reserve. The reserve is currently sized
to $7.5 million and the city has not yet drawn from the reserve despite
prior projections to the contrary. Management's history of conservative
projections suggests future draws may be smaller than the already
manageable sum currently projected.
LARGE DEBT BURDEN, RISING CARRYING COSTS
The city's overall debt burden is very high at 13.2% of AV ($10,853 per
capita), due in large part to substantial debt issuances by the city's
former redevelopment agency. Carrying costs (pension, OPEB, and debt
service over total governmental spending) also are elevated at 26.2% and
are likely to head higher over the next several years due to rising
pension costs, OPEB pre-funding, and an ascending debt service profile.
Debt amortization is moderate without inclusion of CAB accretions
treated as principal. Including accretions, amortization slows
The city offers two CalPERS pension plans, which are adequately funded
at 87.4% and 83.4% for the miscellaneous and public safety plans,
respectively. The funded ratios were boosted due to the issuance of
POBs. Capital needs are moderate, consisting mostly of road maintenance,
and the city has no plans for additional debt issuances.
STRONG FINANCIAL MANAGEMENT, NEW INSTITUTIONALIZED POLICIES
The city employs a seasoned team of financial administrators and
policymakers who acted conservatively during the recession to maintain
the city's strong financial position by cutting costs, raising revenues,
and instituting conservative policies.
In 2013 city council prudently approved a fiscal sustainability
ordinance that created or enhanced a number of conservative financial
management policies. These include the doubling of the city's former
minimum unappropriated reserve to 30% of operating expenses,
establishment of a budget stabilization reserve with a balance ranging
between 5%-25% of operating expenses, minimum OPEB pre-funding levels,
and a supermajority vote of the council to appropriate reserves. The
policy also directs certain excess revenues to additional OPEB
pre-funding, and capital repairs.
Management estimates the unappropriated general fund balance will
increase to 23% by fiscal year end 2014 and will be fully funded by
fiscal 2018 using one-time revenues and transfers.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's
Tax-Supported Rating Criteria, this action was additionally informed by
information from Creditscope and Zillow.
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
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