Fitch Affirms $150.1MM Santa Cruz County Redevel Agency, CA TABs at 'A'; Outlook Stable

  Fitch Affirms $150.1MM Santa Cruz County Redevel Agency, CA TABs at 'A';
  Outlook Stable

Business Wire

SAN FRANCISCO -- March 1, 2013

Fitch Ratings has affirmed and subsequently removed from Rating Watch Negative
its 'A' rating on the following Santa Cruz County Redevelopment Agency (RDA),
CA's tax allocation bonds (TABs).

--$150.1 million TABs, series 2000, 2000A, 2003, 2005A, 2005B, 2007, and
2007A.

The Rating is assigned a Stable Outlook.

SECURITY

The TABs are secured by a first pledge and lien on net incremental property
tax revenues generated by the Soquel/Live Oak project area. The revenues are
net of county administration fees, tax-sharing agreements, AB 1290
pass-through obligations, and the statutory 20% housing set-aside, except for
the portion of the TABs that financed low- and moderate-income housing
qualifying projects.

The debt service reserve requirement is satisfied through a combination of
cash-funded reserves and surety bonds from Ambac Assurance Corporation and
National Public Financial Guarantee Corporation.

KEY RATING DRIVERS

AB1484 DISPUTE RESOLVED: The Successor Agency (SA) for Santa Cruz County RDA
and the state's Department of Finance (DOF) resolved their dispute regarding
the SA's AB1484 July 12, 2012 repayment. The legally binding stipulated
agreement between the parties eliminates the requirement that the SA repay $11
million in previously received property tax revenue.

THIN BUT STABLE COVERAGE: Debt service coverage is estimated at 1.21x in
fiscal 2013. The relatively thin coverage levels are mitigated to some extent
by the tax base's stability.

Stable Project Area: The project area is relatively large at 3,760 acres and
almost fully developed. Assessed value (AV) has remained stable with a modest
decline in fiscal 2013. The tax base remains diverse.

Sound Local Economy: The local economy is somewhat exposed to the tourism and
high technology sectors, but remains fundamentally sound with above-average
wealth levels and above-average growth in employment and labor force.

RATING SENSITIVITY:

TAX BASE CONTRACTION: An unexpected contraction in the tax base that reduces
coverage levels below historical norms would likely lead to a downgrade.

CREDIT PROFILE

DISPUTE WITH DOF RESOLVED

The SA and DOF reached a formal agreement resolving their dispute over the
SA's repayment of property tax revenue that the state believed should have
been paid on July 12, 2012 to other taxing entities. Fitch believes this
resolution removes a significant potential risk to bondholder repayment. The
amount in dispute, approximately $11 million net of the SA's partial payment
($599,079), was not paid by the SA on July 12, 2012 in order to retain
sufficient funds to make debt service payments due Sept. 1, 2012. Under the
agreement, the SA is no longer required to make any additional payments and
the state is prohibited from assessing penalties to obtain the unremitted
funds.

The agreement also allows the SA to receive a Finding of Completion following
DOF's ongoing due diligence review of the SA's funds. The Finding of
Completion would allow the SA to expend some stranded bond proceeds and
continue with the process of winding down the RDA.

THIN DEBT SERVICE COVERAGE

The rating reflects the projected reduction in debt service coverage resulting
from a modest 1.5% decline in fiscal 2013 AV. Fitch calculated debt service
coverage for fiscal 2013 is 1.21x compared to 1.23x in fiscal 2012. Maximum
annual debt service coverage (MADS) is projected at 1.18x based on estimated
fiscal 2013 revenues.

The reduced coverage levels increase the risk posed by potential AV volatility
with only a 12% decline necessary to reach 1.0x MADS coverage. While debt
service coverage is below average for the rating level, the project area
benefits from a sound local economy and a diverse and stable tax base,
anchored primarily by residential tax payers in a mature and developed area.

STABLE, DEVELOPED TAX BASE

The Soquel/Live Oak project area consists of 3,760 acres in unincorporated
Santa Cruz County located between the cities of Santa Cruz and Capitola. The
incremental value of the project area is approximately 3.6x its base value and
has grown at a 6% compounded average rate from fiscal 2003 through fiscal
2013. The tax base is diverse and stable. In fiscal 2011, the top ten
taxpayers comprised only 3.8% of total project area AV, or 4.9% of incremental
value. The low concentration is likely due to the residential nature of the
project area.

Project area AV has increased every year since fiscal 2003 with the exception
of a 1.7% decline in fiscal 2010 and a 1.5% decline in fiscal 2013. The most
recent decline was largely due to the periodic revaluation of certain types of
property, the reclassification of some previously taxable property to
tax-exempt, and the successful appeal of AV assessments by some commercial
operations. The rating reflects Fitch's expectation that significant future AV
declines are unlikely, which is supported by a recovering housing market and
limited additional development.

The project area is largely developed and mature with limited area remaining
for new development. Recently completed or currently ongoing development
includes a relatively minor residential subdivision consisting of four homes
(all sold) and a four-building commercial development. Management reported
that Redwood Square, the project area's commercial center, remains stable with
Safeway, Best Buy, and Home Depot acting as the principal anchors to the
retail center.

SOUND ECONOMY

Agriculture, tourism, education, technology and the service sector continue to
play important economic roles in the area. Large employers include the
University of California Santa Cruz, Pajaro Valley Unified School District,
Dominican Hospital, Cabrillo College, the Santa Cruz Boardwalk and Seagate
Technology.

The Santa Cruz-Watsonville MSA unemployment rate of 11% in December 2012 was
higher than the corresponding state average of 9.7%. However, both employment
growth (5.9% year over year) and labor force growth (4.1%) are significantly
above state and national averages. Wealth levels in the MSA are above average
with per capita income at 118% of the national average.

Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Tax-Supported
Rating Criteria, this action was additionally informed by information from
Creditscope, University Financial Associates, S&P/Case-Shiller Home Price
Index, IHS Global Insight, National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

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

Applicable Criteria and Related Research

Tax-Supported Rating Criteria

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

U.S. Local Government Tax-Supported Rating Criteria

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

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Contact:

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