Fitch Rates Midpeninsula ROSD, CA's Promissory Notes 'AA+'; Outlook Stable

Fitch Ratings rates Midpeninsula Regional Open Space District, California's (the district) promissory notes as follows:

--$26 million refunding promissory notes 2014 at 'AA+'.

The notes are expected to sell via negotiated sale the week of Dec. 15, 2014. Proceeds will be used to refund outstanding revenue bonds for interest savings.

In addition, Fitch affirms the following ratings:

--$30.7 million refunding promissory notes series 2012 (1999 project lease) at 'AA+';

--$20.5 million series 2011 lease revenue bonds (LRBs), issued by the Midpeninsula Regional Open Space District Financing Authority, at 'AA';

--Implied general obligation bonds (GOs) at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The notes are payable from a senior lien on the district's portion of property tax revenues levied on all taxable properties in participating cities of San Mateo and Santa Clara counties. The LRBs are payable from lease payments from the Midpeninsula Regional Open Space District Financing Authority to the district for use of various parcels of open space. Neither security has a debt service reserve fund.

KEY RATING DRIVERS

LARGE, DIVERSE ECONOMY: The 'AA+' implied GO rating reflects the district's strong economy and resilient tax base, encompassing mostly wealthy areas of Santa Clara and San Mateo counties. The region is well integrated into the large and diverse San Jose and San Francisco economic markets.

STRONG FINANCIAL OPERATIONS: The rating also reflects the district's strong financial operations, characterized by very high fund balances, significant expenditure flexibility, and sizeable structural operating surpluses. However, the district's structural surplus may narrow in future years as the district seeks to acquire new land and improve existing land holdings, with ongoing related maintenance costs.

SOLID DEBT SERVICE COVERAGE: The 'AA+' note rating reflects strong debt service coverage levels and the historical stability of the pledged revenue source. Considerable practical constraints to excessive leveraging mitigate the notes' low additional bonds test (ABT) and lack of a debt service reserve fund.

ADEQUATE DEBT PROFILE: The district's debt burden is low to moderate and its capital plan is flexible and discretionary. However, carrying costs are high and rising even with slow amortization, and will likely continue to grow with the district's recent voter-authorized and sizeable GO bond program.

SATISFACTORY LEASE FRAMEWORK: The LRBs' 'AA' rating is one notch below the implied GO rating as lease payments are not subject to abatement and Fitch considers the leased assets to be essential to the entity's sole purpose of preserving open space.

RATING SENSITIVITIES

CONTINUED STRUCTURAL BALANCE: Fitch likely would downgrade the ratings if the district's cost structure increased sufficiently to result in the elimination of structurally balanced financial operations.

CREDIT PROFILE

The district serves approximately 705,000 residents in predominantly wealthy portions of northwest Santa Clara County (67% of the tax base) and San Mateo County (33%). Established in 1972, the district's primary objective is to preserve and maintain open space. Its chief method for doing so is to acquire land using district property tax revenues, state and federal grants, gifts of open space land and joint projects with other governmental agencies and private nonprofits.

STRONG TAX BASE

The district's tax base encompasses mostly wealthy suburban cities with mature and stable housing stocks. Assessed valuation (AV) growth over the past five years has averaged a steady 3.4% annually, and dipped by just .6% in fiscal 2011 before rising each year through fiscal 2014 to a record of $193.6 billion. Fiscal 2014 AV performance was particularly robust, gaining 8.1%. The tax base is well diversified in the top 10 payers, which make up just 5.4% of total AV. Because the district participates in the counties' Teeter plans, the district is not directly exposed to property tax delinquencies.

The regional employment market is very large and diverse with a well-educated labor force, though the district area contains a notable degree of concentration in high tech industries. September 2014 unemployment rates of 5.2% and 4.1% in the counties of Santa Clara and San Mateo, respectively, are below state and national rates and year-over-year employment trends for both counties look quite positive.

SOLID DEBT SERVICE COVERAGE

Established by voters in 1972, the district's primary revenue source, property taxes, are a portion of the 1% Proposition 13 general property tax. This revenue stream covers maximum annual debt service (MADS) on the notes, including parity notes, by 3.9 times (x). At current leverage levels, property tax revenues could withstand an extreme 74% decline before senior MADS coverage would fall to 1.0x.

Property tax revenues cover all-in MADS (all of the district's debt service, including lease-backed debt and private placement notes) by a lower but still strong 3.6x.

SOMEWHAT WEAK LEGALS MITIGATED BY PRACTICAL CONSTRAINTS

The notes' legal provisions are somewhat weak, with no DSRF and a low ABT that requires 1.25x coverage of maximum annual debt service. However, the district faces significant practical constraints against excessive leveraging as net revenues after debt service must support substantial and growing operating expenses. This dynamic, in conjunction with the recent large GO authorization that is likely to be sufficient to finance capital needs going forward, largely offset Fitch's concerns about the notes' structural weaknesses.

SOLID FINANCIAL OPERATIONS

District financial operations are good overall. General fund performance net of bond proceeds is strong with positive operating margins in each of the last seven fiscal years before consideration of capital spending. The district's fiscal 2015 budget and its projections through fiscal 2019 suggest the district will continue to benefit from sizeable structural surpluses moving forward.

Fitch expects operating costs to rise as management expands public access to its existing vast land holdings. GO issuances after the June 2014 passage of a $300 million authorization will add to the holdings. The intermediate-term effect of the GO authorization will shift capital costs now borne by the general fund to the district's new debt program. Over time, related land acquisitions likely will result in higher operating expenditures, which may reduce the district's structural surpluses. Fitch's rating incorporates the expectation that management will constrain future operating costs to ensure maintenance of a solid financial profile.

The district enjoys a high degree of expenditure flexibility, given its ability to defer, cancel, or scale back discretionary land purchases, as needed.

ADEQUATE DEBT PROFILE

The district's direct and overlapping debt burden is a high $4,706 per capita, but registers at a low to moderate 2.14% of AV owing to high local wealth levels. The vast majority of the debt burden stems from overlapping debt issuances. Principal amortizes somewhat slowly, with 33% maturing over 10 years when accreted interest is treated as principal.

The district's OPEB plan is funded at a satisfactory level, and the district retains its OPEB funds in an irrevocable trust. The district participates in the California Public Employees Retirement system (CalPERS), with a funded ratio of 78.8%, assuming Fitch's standardized 7% discount rate (the system assumes a more generous 7.5% rate). Carrying costs (OPEB, pension, and debt service costs over total governmental expenditures) are high at 28.7%, and likely will rise given anticipated pension contribution rate hikes and the sizeable new GO authorization.

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

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=936395

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