Fitch Rates Riverside County PFA, CA's LRBs 'A+'; Outlook Revised to Stable Ratings Endorsement Policy
05 May 2015 5:19 PM (EDT)
Fitch Ratings-San Francisco-05 May 2015: Fitch Ratings has rated Riverside County Public Financing Authority,
California's (the authority) lease revenue bonds (LRBs) as noted below:
--$325 million LRBs series 2015 at 'A+'.
The bonds will sell via negotiated sale the week of May 18. Proceeds will be used to fund a correctional facility in
addition to some smaller capital projects.
Fitch also affirms the 'AA-' implied unlimited tax general obligation (ULTGO) rating in addition to various long-term
county ratings as detailed at the end of this release.
The Rating Outlook is revised to Stable from Negative.
SECURITY
Outstanding LRBs and certificates of obligation (COPs) are payable from Riverside County, California's (the
county) covenant to budget and appropriate payments for the use of various leased assets, subject to abatement.
The pension obligation bonds (POBs) have been legally validated as an absolute and unconditional obligation of
the county.
KEY RATING DRIVERS
CLOSELY BALANCED OPERATIONS: The county's financial operations are structurally balanced, reserve levels
are satisfactory, and Fitch expects revenues to benefit from economic tailwinds. However, policymakers will need
to exercise spending restraint given narrowly balanced operations, limited revenue raising capabilities per state
limitations, and significant expenditure pressures.
RECUPERATING HOSPITAL OPERATIONS: The revision of the Outlook to Stable reflects the hospital
enterprise's (Riverside University Medical Center, or RUMC) rapid operational improvement over the past year
following years of fiscal distress.
DIVERSE, GROWING ECONOMY: The county's economy is large, diverse, and well-situated for growth given its
proximity to large southern California employment markets, competitive home prices, and the availability of
developable land. As a high-growth region with less maturity than its coastal neighbors, the county is likely to
experience higher than average economic volatility over the foreseeable future.
SOUND DEBT PROFILE: The county's other post-employment benefits (OPEBs) obligation is minimal, debt
amortization is moderate, carrying costs are low, and the county's pension plans are adequately funded due to
POB issuances. However, debt levels are moderate to high due largely to overlapping debt.
SOUND LRB STRUCTURE: The 2015 LRB's one-notch rating distinction from the GOs reflects the sound lease
structure, including standard lease-lease back provisions, the overall essentiality of the leased assets, and
standard insurance provisions. The debt service reserve fund is cash-funded to half of the IRS maximum.
RATING SENSITIVITIES
MAINTENANCE OF SOUND FINANCES: Material weakening of the county's financial position, whether caused by
a reversal of RUMC's recent financial improvements or other factors, could result in negative rating action. The
Stable Outlook reflects Fitch's expectations that such an event is not likely.
CREDIT PROFILE
RUMC TURNAROUND PLAN SHOWING IMPRESSIVE EARLY RESULTS
RUMC's financial position improved markedly over the past year. The enterprise has enhanced operating
performance through improved efficiencies and better revenue cycle management with the assistance of Huron
Consulting and a permanent management team in place.
Fitch views positively the longer term strategy to develop a clinically integrated network and partner with other
providers and payors but believes the plan is ambitious and subject to execution risk.
RUMC's fiscal position deteriorated substantially until recently, running cash flow deficits from fiscal years 20102014 ranging from $8 million to $43 million annually. The enterprise's cash position deteriorated in lockstep,
necessitating a $41 million borrowing from the county pool by fiscal year end 2014 in addition to a $26 million loan
from the county's waste management enterprise to pay consultant fees.
In response to these pressures, the county instituted a rapid turnaround plan with the assistance of Huron
Consulting Services. Major elements of the plan included replacing key members of hospital management with
experienced turn-around experts, significantly lowering ongoing expenditures, improving collections, and
implementing a business plan to address challenges from the Affordable Care Act.
As a result of the hospital's turnaround plan, financial performance has improved dramatically and rapidly.
Unaudited fiscal year to date performance to March 31 points to operating income of $23 million with the
expectation that the enterprise's $41 million cash deficit will be lowered to between zero to $10 million by the end
of the fiscal year. The operating income includes $17 million of net non-recurring revenues.
The enterprise will need to absorb significant costs related to the implementation of electronic medical records and
faces execution risks as it looks to transform itself into a competitive regional healthcare provider. The system is
further exposed to the scheduled expiration of the waiver, which could significantly affect reimbursement levels in
the event that it is not extended or replaced as management anticipates. While acknowledging these challenges,
Fitch does not expect RUMC to materially weigh down the county's financial operations.
SOUND FINANCIAL OPERATIONS SUBJECT TO EXPENDITURE PRESSURES
The county's financial position is sound overall, with satisfactory fund balances, growing revenues, and projected
balanced operations over a multi-year period. Maintenance of sound finances will require judicious expenditure
decisions by policymakers.
Audited fiscal 2014 general fund operations produced the general fund's second consecutive year of surplus
following several years of mostly deficits stemming from recessionary revenue losses. A small net surplus of $6.4
million (0.25% of expenditures and transfers out) raised the fiscal year end 2014 total and unrestricted general
fund balances to satisfactory levels of $364 million (14.2% of expenditures and transfers out) and $244 million
(9.6%), respectively. Management anticipates fiscal 2015 operations will also be structurally balanced.
Operations have benefitted from two years of growing property tax revenues, by far the county's largest
discretionary source of revenue, in combination with recent years' significant expenditure reductions. Although the
county projects continued revenue growth, operations are projected to remain narrowly balanced due to various
expenditure pressures. These include rising pension costs, negotiated wage hikes, and the operating costs of the
correctional facility funded with this bond issuance. The 'AA-' GO rating assumes the county's financial position
remains sound, which may require significant expenditure restraint in future years.
ECONOMIC STRENGTHENING CONTINUES
The county's economy is large, diversified, and well-situated for long-term growth. These strengths are offset,
however, by below-average income levels, and a volatile housing market and tax base which, nonetheless, have
shown significant improvement over the past two years.
The county's housing market was one of the worst-affected in the nation, with average home values falling over
50%, although AV contracted by a lower 15.7% in fiscal years 2009-2013 due to Proposition 13. Recently the
housing market has improved significantly, with large price gains and gradually increasing new construction
permits. AV also has begun recovering with solid gains of 3.9% and 7.7% in fiscal years 2014 and 2015,
respectively, though AV remains below its pre-recessionary peak. The county's third-party economist projects 6%
annual AV growth over the next five years, though the county uses a more conservative but still sizable 5%
assumption in its financial forecasts.
Rapid pre-recessionary growth was spurred by the area's housing affordability, ample developable land, proximity
to other employment centers, and location along a major distribution route. As the economy and housing market
continue to recover, Fitch believes these attributes will continue to drive population growth, though not to the
extent of pre-recession years.
SOLID DEBT PROFILE
The county's debt profile is sound overall. Carrying costs (pension, OPEB, debt service costs over total
governmental expenditures) are low at 11%, though the county's debt burden is moderate to high at $4,740 per
capita (5.1% of assessed value), reflective of high overlapping debt levels. This issuance slows debt amortization
to moderate levels from rapid, with 27% and 49% of principal maturing within five and 10 years, respectively.
The 2015 LRBs fund the bulk of the county's capital improvement plan, and no further long-term debt issuances
are planned. Debt service for the LRBs is structured as level with annual debt service estimated at about $21
million, to be largely structured around maturing debt.
The county offers five pension plans through CalPERS. The two largest plans, offered to safety and miscellaneous
employees, are funded at 78% and 79%, respectively (or 74% and 75% based on Fitch's more conservative 7%
investment return assumption, respectively) based on the county's fiscal 2014 audit. Management prudently
established multi-tiered pension systems, and has negotiated for labor groups to pay the employee portion of
pension contributions.
The county aggressively addressed its OPEB obligation with a combination of pre-funding through an irrevocable
trust and benefit reductions. The resulting liability is small and the plan is 85% funded as of fiscal year end 2014.
SOUND LRB STRUCTURE
The 2015 LRBs contain sound security provisions. The security consists of rental payments from the county for
use of numerous leased assets including a county jail and law building, subject to abatement, which Fitch
considers to be essential assets overall. The assets offer full collateralization of the LRBs. Proceeds will be used
to construct a major regional correctional facility in addition to a number of smaller capital projects. In addition to
the bond proceeds, the correctional facility will be funded by a $100 million state grant and a $10 million equity
contribution from the county.
Insurance provisions are standard, including 24 months of rental interruption insurance, comprehensive insurance,
and title insurance. The cash-funded debt service reserve fund will be sized to 50% of the IRS maximum.
Fitch also affirms the following:
--Riverside County POBs, taxable series 2005A at 'A+';
--Riverside County COPs, series 2005A, 2005B, 2007A, 2007B, 2009, at 'A+';
--Riverside County Asset Leasing Corporation (CORAL) COPS, series 2006A and LRBs series 1997A, 1997B,
1997C, , 2013A at 'A+';
--Riverside County Public Financing Authority LRBs series 2012 at 'A+';
--Southwest Communities Financing Authority LRBs series 2008A at 'A+'.
Contact:
Primary Analyst
Scott Monroe
Director
+1-415-732-5618
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
Secondary Analyst
Karen Ribble
Senior Director
+1-415-732-5611
Tertiary Analyst
Emily Wong
Senior Director
+1-415-732-5620
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: [email protected].
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 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
U.S. Local Government Tax-Supported Rating Criteria
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