AFFECTS $9.8 MILLION IN RATED DEBT
Santa Ana (City of) CA
NEW YORK, Nov 17, 2010 -- Moody's Investors Service has downgraded to A2 from A1 the underlying rating on
the City of Santa Ana Certificates of Participation City Hall Expansion Project
The rating action is based upon declining economic indicators, low socioeconomic
levels, narrowing finances and manageable debt levels.
LARGE METRO ECONOMY WITH LOW WEALTH INDICATORS MAKING NEGATIVE ADJUSTMENTS
Santa Ana is located approximately 33 miles southeast of Los Angeles. Population
growth in the 1980s was significant, while recent growth has been more modest.
The city is the ninth largest city in California by population, 355,662 in 2009
(State Department of Finance), and the fourth densest city in the country (2000
US Census density ranking) following San Francisco. The city is the seat of
Orange County (Aa1 Issuer Rating) government and integrated into surrounding
metro economy. The city has experienced Assessed Value (AV) and economic
volatility due in part to the area's exposure to the subprime mortgage
crisis. As a result, fiscal year 2011 AV declined by 4% to $26.2 billion,
following the previous year's decline of 5%. The declining AV has put negative
credit pressure on the rating and contributed to its tax revenue decline and
narrowed financial flexibility.
The city's predominantly working class community reports lower wealth and
socioeconomic levels than the surrounding communities in Orange County. The city
has a per capita income of $12,152, 53.5% of the state, and a median family
income of $ 41,050, 77.4% of the state (2000 census). Orange County
government is the city's largest employer, followed by Ingram Micro a
technology sales firm. August 2010 unemployment was 15.1%, above the state's
12.4%. If compared to other California cities with populations above 250,000
residents, Santa Ana's AV levels, socioeconomic indicators, and its exposure to
the housing market collapse are similar to other California cities with
A2 general obligation lease ratings.
The city is projecting a stabilization of the city's economy in fiscal years
2011 and 2012 and has projected no AV declines in fiscal 2012. It reports that
sales tax revenues are 17.3% higher in the first quarter of fiscal 2011 than the
first quarter of 2010. It also reports that as of the beginning of fiscal 2011
planning permit submissions have increased by 30% since the previous year's
period. DQnews.com, a real-estate data aggregator, reports that September 2010
home sale prices rose by 13.2% compared to September 2009 prices. While these
initial indicators appear promising, it is unclear if they represent a long-term
stabilization or a temporary improvement of the city's economy.
DETERIORATION OF FINANCIAL POSITION FOR SEVERAL YEARS, DESPITE EFFORTS SINCE
2008 TO REDUCE EXPENDITURES
An overall decline of General Fund balance occurred between fiscal years 2007 to
2010. Throughout this period the city's General Fund balance fell from $52.3
million in fiscal 2006, 26.2% of revenues, to $13.6 million in 2010
(unaudited), 6.3% of revenues. The trend is budgeted to stop in fiscal 2011 and
a General Fund surplus of $0.87 million is anticipated. The period of deficit
spending has reduced the city's financial flexibility and lowered its fund
balances to levels below the median of cities with A2 general obligation lease
The period of deficit spending began when General Fund expenditures increased in
fiscal year 2007 by 17.5%. The rising costs were attributed in part to a 4.5%
salary increase for all labor groups. In anticipation of these increases,
General Fund reserves were built up with various one-time transfers that
were then used in fiscal years 2007 and 2008. The following year, in fiscal
2008, tax revenues began to decline. The city reacted with measures to begin
reducing expenditures. However, the reductions were insufficient to match the
decline of revenues. General Fund operating deficits persisted in fiscal 2008
2009, and 2010. The city reports that as of fiscal 2011 they have reduced labor
related expenditures government-wide by approximately $22 million, and the city
is budgeted to achieve a General Fund operational surplus in fiscal year 2011.
The expenditure reductions included long-term measures such as permanent hiring
freezes, salary negotiations, renegotiated PERS contributions, and the
consolidation of positions when vacancies were created. Short-term
measures include negotiated furloughs, Friday closures and postponement of some
capital expenditures such as vehicle replacement. Due in part to these
reductions the city is budgeted to regain fiscal balance, but its narrow
reserves remain a credit weakness.
DIRECT AND OVERALL DEBT BURDEN IS LOW AND MANAGEABLE; NET LEASE BURDEN IS
Santa Ana's direct debt burden remains modest at 0.4% of AV, higher than the
0.3% median for California cities with Aa2 issuer ratings, below 0.5% for those
rated Aa3, but well below the national medians in both categories. The city's
overall debt burden, which includes overlapping taxing entities, is 1.6%, below
the medians of comparable cities in California and Nationally. The city's net
lease burden is high at 8.6% compared to the 2.5% median for California cities
above 250,000 residents. The city reports no significant borrowing plans.
STANDARD LEGAL STRUCTURE
The 1998 Certificates of Participation were issued to Santa Ana
Financing Authority to finance the construction of an expansion of the City of
Santa Ana City Hall building. The city's corporation yard was pledged as the
leased property. Under the lease agreement the city makes lease payments for use
and occupancy of an amount sufficient to pay the annual principal and interest
on the Certificates of Participation. Payments are guaranteed by a municipal
bond insurance policy issued by Financial Security Assurance Inc. (FSA). The
Certificate's reserve fund requirement of $796,705 is met by a reserve fund
surety bond issued by FSA (Aa3/NEG rated). The issuer reports that the city has
maintained Title and Rental Interruption Insurance as required by the
Certificates of Participation.
2000 Population: 337,977
2011 Full valuation: $26.2 billion
2011 Full value per capita: $77,167
1999 Per capita income (as % of CA and US): $ 12,152 (53.5% and 56.3%)
1999 Median family income (as % of CA and US): $ 41,050 (77.4 % and 82.0%)
Direct debt burden: 0.4%
Overall debt burden: 1.6%
FY 2009 Total General Fund balance: $16.3 million (7.7 % of General Fund
FY 2010 Total General Fund balance (unaudited): $13.6 million ( 6.3% of General
WHAT COULD CHANGE THE RATING - UP
Improved financial performance resulting in replenished reserves
Tax base stability and growth
Restoring structural balance to the budget
WHAT COULD CHANGE THE RATING - DOWN
Continued structural imbalance resulting in continued erosion of
Tax base loss further limiting city's finances
Instability of revenue sources
The principal methodology used in this rating was The Fundamentals of Credit
Analysis for Lease-Backed Municipal Obligations published in October 2004.
Information sources used to prepare the credit rating are the following: parties
involved in the ratings, public information, confidential and proprietary
Moody's Investors Service information, and confidential and proprietary Moody's
Moody's Investors Service considers the quality of information available on the
credit satisfactory for the purposes of maintaining a credit rating.
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RATING UPDATE: MOODY'S DOWNGRADES TO A2 FROM A1 THE RATING ON THE CITY OF SANTA ANA (CA) CERTIFICATES OF PARTICIPATION CITY HALL EXPANSION PROJECT 1998
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