Fitch Rates Modesto PFA, California's $67MM Lease Rfdg Revs 'A+'; Outlook Stable

Business Wire, August 5, 2008

SAN FRANCISCO -- Fitch assigns an underlying 'A+' rating to $66.7 million Modesto Public Financing Authority (Stanislaus County, California) lease revenue refunding bonds, series 2008. The Rating Outlook is Stable.

The bonds are expected to sell via negotiation on Aug. 28, 2008. The bonds are secured by lease payments made by the City of Modesto to the authority for use and occupancy of several essential city properties.

The 'A+' rating reflects the city's sound financial position despite pressure from a weakened local residential property market, the downturn in the regional economy, and anticipated state funding reductions. To offset the weakened economy, the city has begun initiatives related to new revenue sources, service delivery changes, and inter-agency strategies to minimize residential property foreclosures. City management remains committed to maintaining unrestricted general fund reserve levels at 8% of expenditures and is adjusting its general fund expenditures accordingly. Fitch notes that maintenance of the city's current general fund balance to at least current levels and the restoration of structural balance are important indicators of management's strength and, therefore, essential to maintenance of the current rating. While local unemployment levels are above-average, the city's local agricultural and manufacturing sectors remain healthy despite the economic pressures on the region's business sector.

Lease features are satisfactory. They include the city's covenant to budget and appropriate sufficiently for lease rental payments, a requirement for rental interruption insurance, and the use of essential city properties as security for the lease revenue bonds. The bonds will refund the authority's $62.3 million in outstanding lease revenue refunding and capital improvement bonds, series 2007, previously rated by Fitch 'A+' with a Stable Outlook. The bonds will also refund $3.3 million in outstanding lease revenue bonds, series 1998 (Capital Improvements and Refinancing Project), not rated by Fitch. For the series 2008 bonds, the city will reinstate in its entirety the fixed-payor swap associated with the series 2007 bonds. Bank of America, N.A. is the counterparty.

Modesto is located in California's Central Valley in Stanislaus County, a region which has experienced significant population growth. While agriculture remains an important industry, the city's role as a commercial center for the region diversified its economy somewhat, creating a source of employment growth which has slowed since fiscal 2006. Assessed values have risen significantly since fiscal 2001, reflecting the city's affordable cost of living. However, the city's property market is currently under considerable pressure. The city's unemployment rate of 9.2% (May, 2008) remains above state and national unemployment rates reflecting the seasonal agricultural nature of the regional economy. Modesto wealth levels are below state and national averages.

The city's financial position is sound although its fiscal 2007 general fund balance represented a decline from fiscal 2006. The fiscal 2007 general fund balance totaled $14.4 million, representing a healthy 11.2% of spending. The unrestricted, unreserved general fund balance of $10.7 million was 8.3% of spending, in line with the city's policy of maintaining an unrestricted general fund reserve of at least 8% of expenditures. Tax revenue sources are diverse. The city is projecting that the fiscal 2008 total general fund balance will decline to $10.5 million or 8.7% of spending. The city is projecting that its total general fund balances will remain above 8% in fiscal years 2009-2012.

With this issuance, the direct debt burden remains low at $454 per capita or 0.6% of market valuation. Overall debt is also low at $1,142 per capita or 1.5% of market valuation. The city does not anticipate any additional debt needs in the near future.

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