Fitch Affirms Yuba City Financing Authority, CA COPs at 'A+; Outlook Stable

Fitch Ratings has affirmed Yuba City Financing Authority (the authority), California's obligations as follows:

-- $10.9 million certificates of participation (COPS) (Gauche Park/Aquatic Complex) series 2006 at 'A+'.

In addition, Fitch affirms the following Yuba City (the city), CA rating:

-- Implied general obligation rating at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The certificates are secured by the city's covenant to budget and appropriate lease payments for beneficial use and occupancy of the leased facilities. Additional security is provided through a debt service reserve surety.

KEY RATING DRIVERS

LIMITED ECONOMY RECOVERING SLOWLY: The city exhibits above-average unemployment and below-average incomes consistent with an agricultural community, although it benefits from proximity to the Sacramento employment base.

SOUND FINANCES; MODEST STRUCTURAL IMBALANCE: The city has maintained a high level of reserves, which are expected to decline somewhat over the next several years to address an ongoing small structural deficit.

GOOD MANAGEMENT PRACTICES: Management has taken a number of steps in the past several years to offset recessionary pressures, including retiree pension and healthcare reforms and expenditure reductions. The city recently increased its fund balance policy.

SOUND DEBT PROFILE: Debt levels are low to moderate, capital needs are limited, and pension and healthcare liabilities appear manageable.

RATING SENSITIVITIES

FINANCIAL CUSHION: A drawdown of reserves below projected minimums and failure to close the small structural imbalance over the near- to intermediate-term could put downward pressure on the rating.

CREDIT PROFILE

The city, which serves a population of 65,000, is located approximately 45 miles north of Sacramento along the Feather River in Sutter County. The economy is agriculturally based, with access to the regional Sacramento employment market.

LIMITED ECONOMY RECOVERING SLOWLY

Unemployment remains elevated given the city's agricultural roots, though employment has registered solid gains since the recession. Largest employers include government, medical, retail and Sunsweet Growers. Median household incomes are 79% of state and 93% of national averages. Taxable assessed value (TAV) declined each year from fiscal 2010 to 2013 - a combined 11.3% reduction - before increasing 0.8% in fiscal 2014. Fitch believes further TAV gains are likely over the near term given recent healthy home price increases.

FINANCES STEADY THOUGH PRESSURES CONTINUE

Management has taken a number of actions over the past several years to offset general fund revenue declines. These steps include holding vacant positions open and a 10% furlough for the past three years, early retirement incentives, and pension and OPEB reforms. The furloughs (included in the city's three-year labor contracts through the end of fiscal 2014) equal $2.2 million in savings per year, in exchange for the guarantee of no layoffs unless revenues decline by a certain amount.

After a cumulative decline of 17% since fiscal 2008, operating revenues started to recover modestly in fiscal 2012. As a result of the mentioned cuts, the city's unrestricted general fund balance at fiscal 2012 year-end stood at $8.2 million or a healthy 24.3% of spending. With an estimated deficit of $500,000, the fiscal 2013 results are expected to generate only modest erosion in reserves. The city also benefits from reserves in a capital fund and vehicle replacement fund which could be used if necessary.

The city's forecast through fiscal 2016 shows continued similar deficits. Fitch believes the city is adequately positioned to address these gaps, given historically conservative budgeting, remaining expenditure flexibility, and the healthy reserves. However, any additional pressure from increased salary and debt service outlays could impair management's ability to align ongoing revenues and spending. The city recently increased its unreserved general fund balance policy to 15%.

SOUND DEBT PROFILE

Debt levels are low on a per capita basis and moderate as a percentage of the tax base. The pace of amortization is average. Carrying costs, including debt, pensions, and retiree healthcare, are moderate but expected to increase with rising pension contributions. Capital needs, including public safety radio system improvements and road projects, are modest and will be funded with paygo and grants.

The COPs are secured by rental payments for use of Gauche Park, which includes the aquatic center financed by the COP proceeds. Fitch considers the leased asset to be non-essential; however, its one-notch distinction from the implied GO rating reflects the large $7.5 million initial equity contribution by the city to the aquatic park, equal to roughly 40% of the project cost.

When the COPs were issued, management intended to fund one-half of debt service from the redevelopment agency (RDA) and the remainder from parks and recreation impact fees. However, further payments from the RDA were disallowed as part of the state's 2012 RDA dissolution (ABx1 26 and AB 1484). This portion is now funded by the general fund.

The parks and recreation fund impact fee balance totaled $2.35 million at fiscal 2013 year-end, including a city council approved set aside of $1.6 million to ensure timely payment given the considerable decline in impact fee revenues in recent years. Annual impact fee revenues are currently insufficient to make the required COP debt service contribution, so the impact fee reserve balance is being tapped to make up the shortfall. Continued weakness in impact fee collections would ultimately place additional pressure on the general fund to make the COP debt payments. The fiscal 2014 total COP payment of $768,596 is roughly flat through final maturity in 2036.

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.

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=813273

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