Approximately $16 Million of Obligations Affected
Monterey (County of) CA
Certificates of Participation (2010 Refinancing Project)
Expected Sale Date
Certificates of Participation
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.
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
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
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.
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.
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
Unreserved General Fund Balance, FY2009: $80.7 million (14.9% of General Fund
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.
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.
Public Finance Group
Moody's Investors Service
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
MOODY'S ASSIGNS A1 RATING TO MONTEREY COUNTY, CA REFUNDING CERTIFICATES OF PARTICIPATION
Moody's Investors Service
250 Greenwich Street
New York, NY 10007