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MOODY'S ASSIGNS A1 RATING TO MONTEREY COUNTY, CA REFUNDING CERTIFICATES OF PARTICIPATION

17 Sep 2010

Approximately $16 Million of Obligations Affected

Monterey (County of) CA
County
CA

Moody's Rating

ISSUE

RATING

Certificates of Participation (2010 Refinancing Project)

A1

  Sale Amount

$16,000,000

  Expected Sale Date

09/28/10

  Rating Description

Certificates of Participation

 

Opinion

NEW YORK, Sep 17, 2010 -- Moody's Investors Service has assigned an A1 rating to the Monterey County (CA) Certificates of Participation (2010 Refinancing Project). Concurrently, we have affirmed the county's Aa2 Issuer Rating and its other outstanding ratings. All the county's ratings carry a negative outlook.

The Certificates of Participation (COPs) are secured by the county's lease payments to the County of Monterey Public Improvement Corporation. Proceeds will be used to refund the county's outstanding Certificates of Participation (1998 Natividad Medical Center Improvement Project, Series E) for debt service savings.

RATINGS RATIONALE

The ratings reflect the county's large, diverse tax base which includes both higher-wealth, coastal communities and inland agricultural areas. The county's assessed value suffered moderate decreases in fiscal 2010 and 2011; however, over the longer term growth is expected to resume albeit at a slower pace than in recent years. The county's conservatively structured and comparatively modest debt portfolio is also incorporated in its strong ratings. The county's finances at fiscal 2009 and estimated for 2010, though weakened, are consistent with the current rating. The negative rating outlook reflects the anticipated continued narrowing of the county's financial position in coming years. Substantial fund balance declines are budgeted for 2011 and projected for 2012. This would make four consecutive years of fund balance drawdowns. The county has chosen to perpetuate structural imbalance in order to maintain service levels for as long as possible. In budgeting to use its reserves, the county is substantially decreasing its flexibility at a time when the state budget and local economy could continue to bring both anticipated and unanticipated challenges.

LARGE TAXBASE FEELING THE EFFECTS OF THE RESIDENTIAL REAL ESTATE DOWNTURN

Monterey County borders the Pacific Ocean and is well known for its tourist attractions including Pebble Beach and other renowned golf courses, the Monterey Bay Aquarium, and the coastal City of Carmel. The economy is fairly diverse: no single sector accounts for more than 25% of employment. However agriculture has been and still remains the largest land use in the county. Unemployment in the county has always been highly seasonal, reflective of its agricultural sector. As of May 2010, the unemployment rate stood at 11.0%, below the state level of 11.9% but above the national 9.3%.

Assessed value (AV) in the county declined slightly in recent years after growing at double-digit rates earlier in the decade. AV fell 3.6% in fiscal 2010 and another 4.2% in fiscal 2011 to reach $48.5 billion, below the median but well within the range for the county's current rating. The residential real estate market in the county experienced a dramatic fall between 2006 and 2009 but now appears to be stabilizing. The county assessor has been pro-active in lowering the AV on homes whose values have declined since their purchase pursuant to Proposition 8, and has now reviewed the value of every residential parcel in the county. Going forward, therefore, residential AV adjustments should reflect incremental changes based on the most recent year's home prices. Going forward, commercial and industrial parcels are potential sources of downward pressure on AV based upon pervasive weakness in the local economy as presented by the county. Moody's is modestly more optimistic, suggesting that the Salinas area economy is on the road to recovery, although we believe that path will be rocky.

COUNTY FINANCES IN FISCAL 2009 AND 2010 REMAIN SATISFACTORY DESPITE FUND BALANCE DRAWS

The county's financial position remained consistent with its rating based on audited fiscal 2009 and estimated fiscal 2010 fiscal year end results. In fiscal 2009 General Fund revenues were short of expenditures by $6.1 million, lowering unreserved fund balance to $80.7 million or 14.9% of general fund revenues. This amount was supplemented by unreserved fund balance in the county's Capital Projects Fund, one of its non-major governmental funds. When added to the General Fund unreserved fund balance, these yielded available fund balance totaling $125.5 million or a sound 21.7% of General Fund revenues. According to county estimates expenditures exceeded revenues by more than twice as much in fiscal 2010 as in 2009, drawing down fund balances in the General Fund by another $12.9 million. Unreserved fund balances are estimated at $67.9 million or about 12.6% of General Fund revenues. The county estimates that amounts in the Capital Projects Fund are essentially unchanged, bolstering available Fund Balance to a still healthy $105.0 million or 19.5%.

The county's adopted fiscal 2011 budget incorporates a further $15.4 million draw on fund balance, lowering unreserved Fund Balance to an estimated $52.4 million or just 9.8% of General Fund revenues. If the Capital Project Fund remains intact, total available fund balances would be $89.6 million or 16.8% of General Fund revenues. Budget assumptions may be realistic but are not particularly conservative. Most significantly State aid, which together with Federal funds represents 55% of General Fund revenues, is budgeted based on current legislation not incorporating any potential cuts. This is currently a common practice among California counties because it is almost impossible to predict what the state will cut as it balances its budget. As a positive factor Moody's notes that the county has made necessary mid-year cuts in the past, and has in fact outperformed its budget; however, the ultimate results have still been drawdowns in reserves. Salaries and benefits are projected to increase 2.2% despite cuts of 209 positions (-4.3%) in fiscal 2010 and another 49 positions (-1.1%) in the current budget year. The county is projecting a further, comparatively smaller, draw on fund balance of $8.9 million in fiscal 2012, absent corrective action.

The county adopted a structural balance policy in 2009 which it is apparently not adhering to in fiscal 2011. For example, the county is using $5.3 million previously set aside for contingencies to support staffing in public safety and criminal justice. The county has a Strategic Reserve policy designation of 10% of revenues, currently funded at $37.3 million or 7% of revenues; the county has suspended contributions intended to bring the fund up to the policy level, but also is not budgeting to draw it down. In fiscal 2010 the county designated $11.5 million as an operating reserve specifically for fiscal years 2011 and 2012, but it is prepared to draw upon the 2012 portion if needed for the current year. The county has also suspended its policy of transferring unplanned/unbudgeted available fund balance to its capital fund. The county's failure to prioritize structural balance, together with its trend of past and projected negative operations, is the key factors in the negative outlook on the county's ratings.

A notable positive credit factor in recent years is the new-found financial health of the county hospital, Natividad Medical Center (NMC). The county did not provide a subsidy for NMC in fiscal 2009 or 2010, and does not anticipate doing so in the foreseeable future. NMC showed positive operating results of $7.6 million in fiscal 2009, continuing a remarkable trend of improvement. (Just four years earlier, in fiscal 2006, NMC had an operating loss of $25 million.) The county currently estimates NMC's available fund balance at $34.9 million. NMC's strong performance is attributed to operational efficiencies, negotiation of more appropriate payor rates and more aggressive collection of accounts receivable. In the current year, however, the county does anticipate increased staffing costs at NMC due to step increases, new clinical positions, and the creation and staffing of its Information System Department. NMC's fund balances are projected to decrease to as low as $17 million in fiscal 2012 before resuming growth. This is in part due to resumption of capital spending which was halted during the hospital's turnaround. The enterprise has a capital improvement plan totaling about $50 million through 2013 for which financing options are currently under consideration. NMC is the county's largest enterprise; its ability to remain self-supporting is critical to the credit standing of the county's general fund.

DEBT BURDEN LOW; CURRENT FINANCING IS STANDARD CALIFORNIA LEASE

The county's debt burden is low at 0.4% direct and 1.8% overall debt as a percentage of assessed value. The county's lease burden also is low at 2.8% of general fund revenues. NMC receives SB1732 reimbursements from the state which are used to fund about 55% of the county's debt service annually on its 1998 Series E COPs, the issue being refunded with the current financing; taking this funding into account reduces the lease burden to 2.3% of general fund revenues. The county is currently considering whether to lend general fund support to another $15 to $30 million of financing to fund purchase of equipment for NMC. We do not currently believe this financing would raise the county's lease burden to levels inconsistent with the current rating, although the actual impact would depend upon the terms of the financing. The county has no variable rate debt outstanding and is not a party to any derivative agreements.

Due to the timing of the refunding, the county may defer payment of its 2011 lease payments; otherwise, the county is targeting level savings. At this time the bonds being considered for refunding are term bonds, so the county is anticipating modest annual savings from 2012 through 2024 and more sizable savings during the four years prior to maturity. The current financing will not extend the term of the outstanding issue. The leased asset is the NMC hospital complex which has an insured value of approximately $250 million. The legal covenants are standard for a California lease. Title insurance will be required, as will 24-months rental interruption insurance, and fire and extended coverage insurance. The reserve requirement is sized using the standard three-part test, and is expected to be funded with a surety from Assured Guaranty which is also expected to insure the COPs.

Outlook

The negative rating outlook reflects the anticipated continued narrowing of the county's financial position in coming years. The county's finances at fiscal 2009 and estimated for 2010, though weakened, are consistent with the current rating. However substantial fund balance declines are budgeted for 2011 and projected for 2012. This would make four years in a row of fund balance drawdowns. The county has chosen to perpetuate structural imbalance in order to maintain service levels for as long as possible. In budgeting to use its reserves, the county is substantially decreasing its flexibility at a time when the state budget and local economy could continue to bring both anticipated and unanticipated challenges.

KEY STATISTICS

Population, 2005: 389,004

Assessed Value, 2011: $48.5 billion

Assessed Value Growth, 2011: -4.2%

Per Capita Income, 1999: $20,165 (88.8% of State)

Median Family Income, 1999: $51,169 (96.5% of State)

Total General Fund Balance, FY2009: $88.3 million (16.3% of General Fund revenues)

Unreserved General Fund Balance, FY2009: $80.7 million (14.9% of General Fund revenues)

Available Fund Balance, FY2009: $125.5 million (21.7% of General Fund revenues)

Direct Debt Burden: 0.4% of assessed value

Overall Debt Burden: 1.8% of assessed value

Lease Burden: 2.8% of general fund revenues

Pension Funding Level: 92.2% miscellaneous, 75.8% safety as of 6/30/2008

OPEB Liability: $23.1 million as of 6/30/2009

The last rating action with respect to Monterey County, California was on August 30, 2010 when the county's Aa1 Issuer Rating and other outstanding ratings were affirmed, and the rating outlook was changed to negative from stable.

The principal methodology used in rating Monterey County Public Improvement Corporation, CA was The Fundamentals of Credit Analysis for Lease-Backed Municipal Obligations rating methodology published in October 2004. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, confidential and proprietary Moody's Analytics' information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of assigning a credit rating.

MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Dari Barzel
Analyst
Public Finance Group
Moody's Investors Service

Kevork Khrimian
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service
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New York, NY 10007
USA

MOODY'S ASSIGNS A1 RATING TO MONTEREY COUNTY, CA REFUNDING CERTIFICATES OF PARTICIPATION
No Related Data.
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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