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Fitch affirms ‘AA’ ratings for the City of Paso Robles 

paso robles daily news downtown area–Fitch Ratings has affirmed the following ‘AA’ ratings on the City of El Paso De Robles:

  • $12.6 million general obligation (GO) bonds;
  • Issuer Default Ratings (IDR).

 

The rating outlook is stable.

Security

The GO bonds are payable from unlimited ad valorem taxes levied within the city.

Analytical conclusion

The ‘AA’ IDR and the GO rating reflect the city’s superior gap-closing capacity, healthy financial margins, solid expenditure flexibility, moderate-to-low long-term liability burden, and strong long-term revenue growth prospects.

Economic resource base

Paso Robles is located in San Luis Obispo County midway between San Francisco and Los Angeles in the Central Coast region. The city, with a population of about 32,000, is a popular wine country destination and experienced a deep economic downturn over the past year. Before the pandemic, the city experienced strong tax base and population growth, and it appears well-positioned for long-term growth after the pandemic with ongoing residential and commercial development activity still planned for the next several years.

Key rating drivers

Revenue Framework: ‘a’

Fitch expects revenue growth to exceed both U.S. inflation and nominal GDP growth in the post-pandemic era, reflecting continued population growth and strong development activity in the city. The city’s legal ability to raise revenues is constrained by state law requiring voter approval for tax increases; however, the city has had success in securing voter approval for tax increases as needed to support its operations.

Expenditure Framework: ‘aa’

Expenditure flexibility is solid. Fitch expects the city’s fixed carrying costs, which were about 18% of expenditures in fiscal 2020, to remain moderate even with additional debt. The city’s labor environment is manageable with policymakers retaining the right to impose economic terms in rare instances where negotiations reach an impasse. Growth in spending is likely to be in line with revenue gains over time.

Long-Term Liability Burden: ‘aa’

The city’s long-term liability burden is currently low-to-moderate relative to its resource base at just under 10% of personal income.

Operating Performance: ‘aaa’

The city has superior gap-closing capacity, given its very strong reserves and solid expenditure flexibility. Budget management is also strong with particularly proactive efforts to pay down pension liabilities and careful long-term financial planning.

Rating sensitivities

Factors that could, individually or collectively, lead to positive rating action/upgrade:

  • An improvement in the long-term liability assessment with overall debt and net pension liabilities consistently remaining below 10% of resident personal income after the city addresses major capital projects that are currently under consideration.

 

Factors that could, individually or collectively, lead to negative rating action/downgrade:

  • A decrease in the financial resilience assessment due to the emergence of ongoing imbalances between revenues and expenditures, leading to a significant reduction in reserves;
  • Sustained post-pandemic revenue weakness that reduces the city’s revenue growth to below the rate of U.S. nominal GDP growth.

 

Best/worst case rating scenario

International scale credit ratings of sovereigns, public finance, and infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D.’ Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best-and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Current developments

The city’s economy has been hard hit over the past year by periodic shutdowns of its tourism industry. Employment fell by more than 10-percent over the past year, which is worse than both state (9-percent) and national (5.5-percent) job losses. The outsized job losses reflect the stringency of the state’s virus mitigation efforts as well as the city’s tourism exposure. Paso Robles’ non-seasonally adjusted unemployment rate rose to 7.5-percent in January 2021 from just 2.9-percent a year earlier.

The city reports that tourism activity has begun to return, and it appears well-positioned to benefit from a resumption inactivity as a popular drive-to tourism destination within driving distance of both Southern California and the San Francisco Bay Area. Its mild climate allows year-round outdoor activities and dining, and its vineyards and proximity to the coast have been enduring draws.

While the city is best known for tourism and viticulture, its top employers and taxpayers show some diversity, including software and manufacturing enterprises along with the typical big box retailers and governmental entities. The city also participates in the broad and diverse San Luis Obispo regional economy with a large state government, university, and utility presences.

The city has benefited from significant home building in recent years and remains a draw for retirees and remote workers with major development projects continuing despite recent disruptions. Income indicators are healthy with median household income at 99.6-percent of the national level, albeit below the state’s high levels. The individual poverty rate is well below national and state rates at just 9.4-percent.

Credit profile

Paso Robles’ financial performance remains strong, despite pandemic-related pressures on economically sensitive revenues. Sales tax collections, which account for about 35-percent of general fund revenues, fell 5.3-percent in fiscal 2020, reflecting a sharp decline in economic activity in the final four months of the fiscal year, which ended June 30, 2020. Transient occupancy taxes, which account for about 12-percent of revenues, declined 18.2-percent. Property taxes, which account for about 27-percent of revenues, rose 5.3-percent, helping partially offset the loss of economically sensitive revenues and yielding a manageable 3.1-percent decline in tax revenues for the year. Total revenues rose 2.8-percent due to increases in charges for services and intergovernmental revenues.

General fund results for fiscal 2020 were strong, reflecting the city’s strong pre-pandemic margins and expenditure reductions in the final months of the year. Expenditures fell 5-percent in fiscal 2020, as policymakers took prompt action to trim capital spending, hiring, excess pension contributions and equipment replacements. For the year, the general fund posted a $1.8 million surplus that equaled 4.2-percent of spending after transferring $7.4 million to the city’s capital fund. Unrestricted general fund balance rose to $27.5 million, or 63.2-percent of spending, providing a strong cushion against future revenue uncertainty.

Management expects a manageable operating deficit in fiscal 2021. The city budgeted a $5.7 million use of general fund balance in fiscal 2021, but it now expects to use $2 million because revenues have outperformed projections with sales, property, and transient occupancy taxes running well ahead of budget and slightly above fiscal 2020 levels. While the city’s tourism sector has experienced periodic shutdowns throughout the year, it has seen continued demand when open, reflecting the relative resilience of drive-to tourism destinations with outdoor attractions. Management expects unassigned fund balance to well exceed the city’s normal 25-percent fund balance policy and has instituted a temporary increase of the reserve minimum to 30-percent of spending during the pandemic.

The city’s financial estimates do not include about $6 million of aid that the city expects to receive under the American Rescue Plan (ARP). The recently-enacted ARP will provide $350 billion in direct aid to state and local governments and additional funding for transit systems and school districts (through the states) as well as a significant amount of economic stimulus that should have a positive near-term impact on state and local government revenues. Fitch does not expect the stimulus aid to alter the long-term credit fundamentals of state and local governments but should bridge near-term fiscal gaps (for more information, see: ARP Boosts State and Local Government Budgets).

Fitch believes revenue risks are likely to remain for the city until pandemic-related restrictions on travel end. However, we expect the city’s reserves to remain well above the level required for an ‘aaa’ financial resilience assessment through the current and future downturns with the city expected to take action as necessary to adjust budgets to evolving revenue conditions.

Future results will also be bolstered by a very large influx of sales tax revenues approved by voters in November 2020. Voters authorized the city to increase its local option sales tax to 1-percent from 0.5-percent for 12 years, beginning April 1, 2020. The city expects the tax to raise an additional $10 million of revenues annually and to increase its overall revenues by about 25-percent. The sales tax is not legally restricted as to use, but the city plans to use the funds to bolster public safety and street programs.

In addition to the sources of information identified in Fitch’s applicable criteria specified below, this action was informed by information from Lumesis.

See the complete report here. 

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The news staff of the Paso Robles Daily News wrote or edited this story from local contributors and press releases. The news staff can be reached at info@pasoroblesdailynews.com.