Fitch Rates Midpeninsula ROSD, CA's GOs 'AAA'; Upgrades Outstanding

SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AAA' rating to the following Midpeninsula Regional Open Space District, CA's (the district) bonds:

--$40 million general obligation (GO) bonds series 2015A;

--$5 million GO bonds series 2015B (federally taxable).

Proceeds will support various capital projects of the district as the first issuance under a $300 million GO bond authorization approved by district voters in 2014.

In addition, Fitch takes the following rating actions:

--$23.6 million refunding promissory notes 2015 upgraded to 'AAA' from 'AA+';

--$30.3 million refunding promissory notes series 2012 (1999 project lease) upgraded to 'AAA' from 'AA+';

--$20.4 million Midpeninsula Regional Open Space District Financing Authority series 2011 lease revenue bonds (LRBs) upgraded to 'AA+' from 'AA';

--implied GO rating withdrawn.

The Rating Outlook is Stable.

SECURITY

The GO bonds are supported by an unlimited ad valorem tax on all taxable property within the district. The notes are payable from a senior lien on the district's share of countywide property tax. The LRBs are payable from lease payments from the Midpeninsula Regional Open Space District Financing Authority to the district for use of various parcels of open space. The district does not maintain debt service reserve funds (DSRF) on any of these obligations.

KEY RATING DRIVERS

STRONG FINANCIAL OPERATIONS: The district's financial operations are characterized by very high fund balances, significant expenditure flexibility, and sizeable structural operating surpluses. The 'AAA' rating reflects continued strengthening of the district's finances as well as ongoing economic growth.

LARGE, DIVERSE ECONOMY: The district benefits from a very strong economy and resilient tax base, encompassing mostly wealthy areas of Santa Clara and San Mateo counties. The region is well integrated into the large and diverse San Jose and San Francisco economic markets.

SOLID DEBT SERVICE COVERAGE: Coverage levels on the notes are strong and pledged revenues have experienced steady gains. Considerable practical constraints to excessive leveraging mitigate the notes' low additional bonds test (ABT) and lack of a debt service reserve fund.

ADEQUATE DEBT PROFILE: The district's debt burden is low to moderate and its capital plan is flexible and discretionary. Carrying costs are high as is typical of limited purpose entities, and will likely continue to grow with the district's sizeable GO bond program.

SATISFACTORY LEASE FRAMEWORK: The LRBs' rating is one notch below the GO rating as lease payments are not subject to abatement and Fitch considers the leased assets to be essential to the entity's sole purpose of preserving open space.

RATING SENSITIVITIES

STRUCTURAL IMBALANCE: The rating could be pressured by increases in operating expenses that exceed ongoing revenue growth. Fitch believes this is unlikely given the discretionary nature of the district's expenditures.

CREDIT PROFILE

The district serves approximately 705,000 residents in predominantly wealthy portions of northwest Santa Clara County (69% of the tax base) and San Mateo County (31%). Established in 1972, the district's primary objective is to preserve and maintain open space. Its chief method for doing so is to acquire land using district property tax revenues, state and federal grants, gifts of open space land and joint projects with other governmental agencies and private nonprofits.

SOLID FINANCIAL OPERATIONS

District financial operations are strong overall. General fund performance is solid with recurring positive operating margins before consideration of capital spending. The district's fiscal 2016 budget and its long-term projections through fiscal 2030 suggest the district will continue to benefit from sizeable structural surpluses moving forward. Unrestricted general fund balance of $41.7 million at the end of fiscal 2015 represented a high 117% of spending.

The district's 2014 GO authorization will provide significant new resources for funding capital needs, which have accounted for approximately one-third of the district's expenditures over the past three years, and more than half of expenditures over the past seven years. A portion of this savings will be offset by the hiring of new staff to support the district's bond program, but the availability of the new capital funds increases the district's already substantial expenditure flexibility. Non-capital expenses have grown more quickly than tax revenues in recent years, which could eventually challenge the district's operating margins, but Fitch expects that management will constrain future operating costs to ensure maintenance of a solid financial profile.

STRONG, RESILIENT TAX BASE

The district's tax base encompasses mostly wealthy suburban cities with mature and stable housing stocks, as well as headquarters of many of the nation's leading technology companies. Assessed valuation (AV) has increased rapidly in recent years, averaging a solid 6.8% annual growth over the past five years. The tax base declined in only one year of the last recession by a modest 0.6% before returning to growth in subsequent years. Home prices continue to rise throughout the district, which will likely support continued AV growth over the next several years.

Tax base concentration is minimal; the top 10 taxpayers account for 5.6% of AV. Major taxpayers include Google, Apple, Oracle, and Yahoo, reflecting the local economy's concentration in the technology sector.

The regional employment market is large and diverse with a well-educated labor force. March 2015 unemployment rates of 4.1% and 3.4% in the counties of Santa Clara and San Mateo, respectively, are below state and national rates and year-over-year employment growth has been very strong.

SOLID DEBT SERVICE COVERAGE ON NOTES

The district's chief source of operating revenues is a share of the 1% countywide property tax established under California's Proposition 13. Property taxes and miscellaneous revenues are pledged to support the district's notes, providing robust coverage of 4.5x maximum annual debt service (MADS). At current leverage levels, property tax revenues could withstand a decline of more than 75% before senior MADS coverage would fall to 1.0x.

Property tax revenues cover all-in MADS (all of the district's non-GO debt service, including lease-backed debt and private placement notes) by a lower but still strong 3.5x.

The notes' legal provisions are somewhat weak, with no DSRF and an additional bonds test that requires MADS coverage of just 1.25x. The district appears unlikely to leverage pledged revenues beyond current levels due to its reliance on such revenues to fund increasing operating expenses, as well as voters' 2014 approval of $300 million in new GO borrowing authority.

ADEQUATE DEBT PROFILE

The district's overall debt burden is a high $6,646 per capita, but moderate relative to its substantial tax base at 2.1% of AV. The vast majority of the debt burden stems from overlapping debt issuances. Amortization of direct debt is below average, with 32% of outstanding principal and accreted interest due for payment within ten years.

The district participates in the California Public Employees Retirement System (CalPERS), with an estimated funded ratio of 71% under Fitch's assumption of 7% annual investment returns. Liabilities for other post-employment benefits are fully funded through an irrevocable trust. Carrying costs for debt service and retiree benefits were high at 29.2% of governmental expenditures in fiscal 2015, and will likely increase over the next several years due to planned increases in pension contribution rates and debt service related to the district's recent GO authorization.

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

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=988133

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=988133

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20150717005748/en/

Fitch Ratings
Primary Analyst
Stephen Walsh
Director
+1-415-732-7573
Fitch Ratings, Inc.
650 California Street, 4th floor
San Francisco, CA 94108
or
Secondary Analyst
Shannon Groff
Director
+1-415-732-5628
or
Committee Chairperson
Arlene Bohner
Senior Director
+1-212-908-0554
or
Media Relations:
Sandro Scenga, New York, +1 212-908-0278
Email: [email protected]

Source: Fitch Ratings

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