Fitch Affirms San Juan Capistrano, CA's GOs at 'AAA'; Outlook Stable

Fitch Ratings has affirmed the following San Juan Capistrano (the city), California general obligation (GO) bond rating at 'AAA':

--$2.2 million GO refunding bonds, series 1998A (Open Space Program).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by ad valorem property taxes, unlimited as to rate or amount, levied on all taxable real property in the city.

KEY RATING DRIVERS

ABOVE-AVERAGE SOCIOECONOMIC CHARACTERISTICS: The city benefits from significantly above-average wealth levels and a diverse tax base that has fully recovered from slight TAV declines during the recession. The city includes both high-end residential communities and a large commercial component which is currently growing, while maintaining significant protected open space.

STRONG GENERAL FUND POSITION: Following three years of drawdowns during the recession, the city has been successfully restoring its general fund balance, reserves, and liquidity through increased revenues, expenditure cuts, efficiency improvements, and labor concessions.

SOUND FISCAL MANAGEMENT: In order to secure structural balance and increase the contingency reserve, the council directed the city's management team to focus on fiscal soundness, strengthening financial management policies and reporting, efficiency initiatives, and economic/business development.

MANAGEABLE DEBT BURDEN: The city's debt profile is largely conservative with no plans to issue further debt. Retirement and post-employment liabilities are manageable, particularly given labor concessions and the setting aside of funds to pay down the city's relatively small OPEB liability. However, the weakly funded pension system will likely require contribution increases in the future and principal debt amortization is slow.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices, strengthening commercial sector, and rebounding property market. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

ABOVE-AVERAGE SOCIOECONOMIC CHARACTERISTICS

The city is a wealthy municipality located in southern Orange County midway between Los Angeles and San Diego. The city is noted for the historic Mission of San Juan Capistrano as well as gated master planned residential communities with an equestrian focus capitalizing on the city's commitment to open space (44% of the city's land). Wealth levels in the city are well above-average. The local unemployment rate has declined to 5% (November 2013), down from 6.1% a year prior and well below the state's rate of 8.3%. While the impact of the recession significantly slowed the pace of residential development, taxable assessed valuation (TAV) fell by only 2.7% between fiscal years 2010-2012, rebounding by 4.1% in fiscal years 2013-2014.

The city's tax base is diversified with a low 5.5% concentration among the top 10 taxpayers. There is a large economic base which includes auto dealerships, service sector employment, and private schools. After some business contraction due to the recession, there has been renewed expansion. The commercial sector continues to expand, new residential developments are underway, and the city is considering permitting applications for further commercial and residential development projects.

STRONG GENERAL FUND RESULTS

After general fund deficit spending in fiscal years 2008-2010, when the city failed to curb its expenditures during a period of declining revenues, the city returned to positive operations in fiscal years 2011-2013. During that time, a partially new management team focused on strengthening financial management, efficiency initiatives, and economic/business development. As a result, the city has been able to both increase revenues and reduce expenditures, with positive impacts on general fund balances, reserves, and liquidity.

The unrestricted general fund balance has grown from $8 million in fiscal 2011 (35.7% of spending) to $11.1 million in fiscal 2013 (a very strong 51.3% of spending). The city expects its unrestricted general fund balance to remain strong in fiscal 2014 given the current strength of its two main taxation revenues. Property tax revenues (35.5% of general fund revenues in the amended fiscal 2014 budget) are being collected at pre-recession rates and have good future growth prospects due to new development. Sales and use tax revenues (34.4% of general fund revenues in the amended fiscal 2014 budget) are up 9.1% year-over-year for the first two quarters of fiscal 2014. The city's sales and use tax revenues come disproportionately from transportation-related sales. This concentration tends to exacerbate revenue fluctuations during economic cycles, a vulnerability which is significantly offset by the city's strong general fund balance.

During the fiscal 2011-2013 period, the general fund contingency reserve grew from 23.1% of current expenditures excluding capital improvement project transfers (less than the minimum 25% policy goal) to 38.1%. The contingency reserve is on target to reach 47.8% in fiscal 2014 and 50% (the maximum policy goal) in fiscal 2015. In addition to this reserve, the city also has access to borrowable funds in the event of an emergency from the facilities operations fund ($3.3 million) and the sewer enterprise fund ($7.3 million).

The city's general fund liquidity position is much improved. At fiscal 2013 year end, the cash and investments balance was a strong $10.2 million, compared to just $1.4 million at fiscal 2011 year end.

MANAGEABLE DEBT BURDEN

Due to significant pay-as-you-go capital financing, the city's debt burden remains low and consists mostly of general obligation bonds and tax allocation bonds issued by the city's former community redevelopment agency. Including overlapping debt, total obligations were $1,544 per capita or 1.7% of fiscal 2013 taxable assessed valuation. While direct debt amortization is well below average at approximately 39% in 10 years, the city has no upcoming debt issuance plans.

The series 1998A debt service fund has a $1 million balance which the city plans to reduce progressively to one year of average annual debt service (approximately $500,000 per year) to reduce further the annual tax rate.

The city contributes its full annually required pension contribution (ARC) to the Orange County Employers' Retirement System (OCERS) each year ($1.9 million in fiscal 2013). Using Fitch's conservative 7% discount rate, OCERS is currently only 57.8% funded which suggests that higher contributions could well be required in the future. Under the city's 2012 memoranda of understanding with its bargaining units and subsequent California Public Employees' Pension Reform Act (PEPRA) of 2013 reforms, the city now has three pension tiers. All staff began contributing the full employee share on July 1, 2013.

While the city funds OPEB on a pay-as-you-go basis, it has a manageable OPEB unfunded actuarial accrued liability (UAAL) of only $1.3 million for which it has already set aside $0.4 million.

The city's fiscal 2013 debt service, pension ARC, and OPEB pay-go costs represented a manageable 16.7% of its total governmental spending that year.

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, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, and 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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=818110

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings
Primary Analyst
Alan Gibson
Director
[phone]
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Yueping Liu
Analyst
[phone]
or
Committee Chairperson
Karen Ribble
Senior Director
[phone]
or
Media Relations:
Elizabeth Fogerty, [phone]
[e-mail]