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TMCNet:  Fitch Affirms Pittsburg CA's POBs at 'A+'; Outlook Stable

[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 listed below.

--$37.9 million pension obligation bonds (POBs), series 2006 at 'A+';

--Implied general obligation (GO) bonds at 'AA-'.

The Rating Outlook is Stable.

SECURITY

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.

RATING SENSITIVITIES

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.

CREDIT PROFILE

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 14%.

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 development.

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 significantly.

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=821510

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.


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