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MOODY'S ASSIGNS A1 RATING TO SANTA CRUZ COUNTY TAX ALLOCATION BONDS 2011 SERIES A AND TAXABLE HOUSING TABS 2011 SERIES B (LIVE OAK/SOQUEL PROJECT AREA)

23 Feb 2011

A1 Rating Also Affirmed On Agency's Outstanding Rated Obligations

County
CA

Moody's Rating

ISSUE

RATING

Taxable Tax Allocation Bonds, Series 2011 A (Live Oak/Soquel)

A1

  Sale Amount

$12,000,000

  Expected Sale Date

03/03/11

  Rating Description

Tax Allocation

 

Taxable Housing Tax Allocation Bonds, Series 2011 B (Live Oak/Soquel)

A1

  Sale Amount

$6,000,000

  Expected Sale Date

03/03/11

  Rating Description

Tax Allocation

 

Opinion

NEW YORK, Feb 23, 2011 -- Moody's Investors Service has assigned an A1 rating to the County of Santa Cruz Redevelopment Agency's Taxable Tax Allocation Bonds, 2011 Series A and Taxable Housing Tax Allocation Bonds, 2011 Series B (Live Oak/Soquel Community Improvement Project Area). Concurrently, the A1 on rated parity housing debt has been affirmed, as well as the A1 rating on the agency's non-housing tax allocation bonds (TABs).

RATINGS RATIONALE

The agency's various TABs are secured either by non-housing tax increment revenue, housing set-aside revenue, or a combination of both. The rating continues primarily to reflect the Live Oak/Soquel project area's strong tax base, including its large size and exceptional tax payer diversity for a redevelopment project area. Its growth has been measured over the past decade; while continued modest declines may be incurred, no major correction is expected. Debt service coverage is notably low for the rating level. The shared reserve structure mitigates the risk associated with a below investment grade surety which funds the debt service reserve on the Series 2003 TABs.

LARGE, DIVERSE, RESIDENTIAL TAX BASE SUFFERS ONLY MODEST AV DECLINE IN FISCAL 2010, ESSENTIALLY LEVEL IN 2011

The Live Oak/Soquel Project Area is a large, residential area covering 3,760 acres, including three miles of coastline, in unincorporated Santa Cruz County. The project area is located between the cities of Santa Cruz and Capitola, and as a practical matter is indistinguishable from them. The area's tax base benefits significantly from the presence of the University of California Santa Cruz, located in the city of Santa Cruz. Proximity to Silicon Valley also is an important contributor to the local economy, as is tourism. The project area is largely built out, though opportunities for continued growth remain from infill development. In total it is quite sizable at $4.5 billion as of fiscal 2011, a key credit strength.

The recession has affected the local economy, dampening home prices and development, but compared to many others statewide the project area is doing well. The area has grown at a relatively moderate rate averaging 5.2% annually between 2005 and 2011. Thus, it is likely to experience less pressure for correction than many others throughout the state. This is an important credit positive in light of the project area's somewhat low 79% ratio of incremental to total assessed value (AV). The project area is chiefly residential, but also includes a commercial component with retail establishments which primarily serve project area residents. Single family homes account for approximately 84% of secured AV. Despite the residential real estate market collapse, AV grew annually through fiscal 2009, only declined 1.7% in the project area in fiscal 2010, and remained essentially level in fiscal 2011 with 0.3% growth. Following declines during the prior two years, median home prices in the city of Santa Cruz rose sharply year-over-year between December 2009 and December 2010 (14.8%). However Moody's economy.com believes that these gains will not be sustainable, suggesting the likelihood of a dramatic boost in AV is limited. The combined value of appeals in the project area is $195 million, less than 5% of AV. Moody's believes either anemic growth or modest declines are likely in coming years, neither of which is expected to dramatically alter the credit strength provided by the project area's large AV.

A key strength of the project area is its exceptional taxpayer diversity: the top ten taxpayers represent only 4.9% of incremental AV. There is only one vacant property among the top ten, and it does not pose a material credit risk. The property is owned by Palo Alto Medical Foundation, an affiliate of Sutter Hospital. It is adjacent to a hospital, and is intended to be developed as a medical office building in due course. This property represents only 0.6% of incremental AV. Property tax delinquencies are low in the project area at about 4.4%, particularly given that the agency participates in the county's Teeter program under which the agency is guaranteed to receive the total amount of property taxes due to it regardless of actual collections.

NARROW DEBT SERVICE COVERAGE FOR THE RATING LEVEL

Debt service coverage is quite narrow for the rating level as the agency is issuing debt to the maximum permitted by its additional bonds test. Coverage of maximum annual debt service (MADS) by projected fiscal 2011 revenues is 1.20x for obligations secured by housing set-aside revenues and for obligations secured by non-housing increment revenues. This coverage level is well below the approximately 2.0x which is typical for the rating level. The large size and diversification of the project area and the expectation for modest, if any, continued AV declines are key factors mitigating the credit risk posed by the low coverage. Should any declines be more substantial than anticipated, however, the rating could come under downward pressure.

CASH FUNDED DEBT SERVICE RESERVES MAY BE SHARED AMONG VARIOUS SERIES, MITIGATING RISK OF WEAK SURETY

All of the agency's bonds have a standard-sized reserve requirement. The current issue's reserve will be cash-funded, as are the Series 2000, 2000A, 2009 and 2010 bonds'. Cash funded reserves are available to be drawn on a pooled basis for the project area's obligations, although reserves from tax-exempt issues cannot contribute to taxable bonds' debt service. The shared reserve is an important strength, mitigating the risk associated with the agency's Series 2003 bonds whose reserve is funded with an Ambac surety. Because Ambac is rated well-below investment grade (Caa2, developing outlook) this surety provides no meaningful credit support. As the tax increment revenues securing the bonds are a passive revenue stream, one which the agency has no power to increase, the absence of a reserve fund could be a critical credit weakness. However the shared, cash funded reserves provide sufficient support that a rating distinction is not required. Taxable issues' cash reserves will total $3.6 million after the current issue, representing a strong 54.5% of MADS. Tax exempt issues benefit from a total $13.1 million reserve (including the $3.6 million) which represents an even stronger 67.2% of MADS. The Series 2005A, 2005B, 2007 and 2007A reserves are funded with sureties from National Public Finance Guarantee Corporation (formerly MBIA) which is rated Baa1 with a developing outlook. While this is clearly not as strong as a cash funded reserve, the surety provider remains investment grade and thus provides satisfactory support.

The flow of funds provides that if incremental revenues are insufficient to cover debt service, each series of bonds will draw upon its own reserve fund. (A draw upon the reserve is not an event of default.)To the extent that a reserve is fully drawn down, or a surety provider does not meet its obligation, cash funded reserves will be drawn down pro-rata to cover the insufficiency. However, as mentioned above, tax-exempt bonds' reserves cannot supplement the reserves of taxable bonds. Once reserves have been drawn down, the agency is required to replenish them by transferring to the Trustee tax increment revenues sufficient to fulfill the reserve requirement. The agency is required to dedicate all of its increment revenues for the purpose (i.e. the entire debt service coverage amount) until the cash funded reserves are fully funded, but it is not required to contribute any of its cash balances. While they have not explored the matter in depth, the agency's bond counsel believe that housing and non-housing funds could be commingled for the purpose of replenishing the various obligations' reserves, at least over the short term.

GOVERNOR'S PROPOSAL TO ELIMINATE REDEVELOPMENT AGENCIES POSES MINIMAL CREDIT RISK

The Governor's budget recommends phasing out redevelopment agencies beginning in fiscal 2012 while maintaining the security of outstanding debt. Redevelopment agencies will be eliminated, and successor agencies will be required to retire agency debts in accordance with existing payment schedules. Pledged incremental revenue would continue to flow first to the tax allocation bonds and then to the state. The proposal introduces uncertainty but we think the risk is low that any changes would affect the security pledge on tax allocation bonds. Moody's does not believe the credit risk is material as the governor specifically asserted in his proposal that no existing obligations will be impaired.

The proposal also constrains issuance of additional debt secured by incremental revenues, which in itself is a credit positive because it reduces the possibility of future leveraging. However, many agencies are issuing debt now in advance of this possible constraint, a factor incorporated into the rating. Beginning in fiscal 2012 existing agencies would be required to cease creation of new obligations. A constitutional amendment would provide for a 55-percent voter approval of bonding against local revenues for redevelopment projects such as those currently funded with tax allocation bonds. The voter approval requirement effectively reduces the possibility of additional leveraging of incremental net revenues, thus protecting coverage of existing debt service.

What could change the rating-UP

Continued, long-term growth of merged project area AV

Higher debt service coverage structured to be maintained over the long term

What could change the rating-DOWN

Extended, material decline in AV

Lower ratio of incremental to total AV

Increased concentration among the top taxpayers

Decline in debt service coverage

KEY STATISTICS

Project area size: 3,760 acres

Total assessed value, fiscal 2011: $4.48 billion

Change in assessed value, fiscal 2010-2011: 0.3%

Incremental assessed value, fiscal 2011: $3.5 billion

Incremental assessed value as % of total: 78.5%

Ten largest taxpayers as % of incremental AV, FY 2011: 4.9%

Projected coverage of housing obligations' MADS by estimated FY 2011 housing revenues: 1.20x

Projected coverage of non-housing obligations' MADS by estimated FY 2011 non-housing revenues: 1.20x

The last rating action with respect to the County of Santa Cruz Redevelopment Agency was on June 30, 2010 when an A1 rating was assigned to the Agency's 2010 Taxable Housing Tax Allocation Bonds and the outstanding ratings were affirmed.

The principal methodology used in this rating was Moody's Analytic Approach To Rating California Tax Allocation Bonds published in December 2003.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information and 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

Michael Wertz
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

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


Moody's Investors Service
250 Greenwich Street
New York, NY 10007
USA

MOODY'S ASSIGNS A1 RATING TO SANTA CRUZ COUNTY TAX ALLOCATION BONDS 2011 SERIES A AND TAXABLE HOUSING TABS 2011 SERIES B (LIVE OAK/SOQUEL PROJECT AREA)
No Related Data.
© 2019 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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