Fitch Affirms Alameda County Joint Powers Auth, Lease Revs at 'AA'; Outlook Revised to Positive

Fitch Ratings: Fitch Ratings has affirmed the following Alameda County, California bond ratings:

--$774.7 million Alameda County Joint Powers Authority (the authority) lease revenue bonds series 2004D (juvenile justice facility), 2008A (juvenile justice facility), 2010A (multiple capital projects), and 2013 (multiple capital projects), and lease revenue refunding bonds series 2012 at 'AA';

--$43.5 million California Infrastructure and Economic Development Bank (I-Bank) revenue bonds series 2004 (North County Center for Self-Sufficiency Corporation Project) at 'AA';

--Implied unlimited tax general obligation (ULTGO) at 'AA+'.

The Rating Outlook is revised to Positive from Stable.

SECURITY

The authority's lease revenue bonds and the I-Bank revenue bonds are each repayable under the county's covenant to budget and appropriate lease rental payments equal to debt service for the right to use and occupy various public safety, social service, health, and educational facilities, among other assets. The county's covenant to make such lease rental payments are subject to abatement in the event of material damage to or destruction of the leased facilities.

KEY RATING DRIVERS

STRONG FINANCIAL POSITION: The Positive Outlook reflects the county's consistently positive general fund operating margins, high cash balances, and substantial reserves.

DIVERSE ECONOMY AND TAX BASE: The county benefits from a diverse employment base with access to the broad San Francisco Bay Area economy. Economic recovery has been strong with the result that employment and taxable assessed value (TAV) levels now exceed pre-recession peaks.

AFFORDABLE LONG-TERM OBLIGATIONS: Overlapping debt levels are high on a per capita basis but moderate relative to TAV. Amortization of direct debt is average and carrying costs for debt service, pensions, and retiree benefits are affordable. The county also benefits from substantial pre-funding of retiree health benefits.

RATING SENSITIVITIES

HEALTH CARE TRANSITION: Fitch views as a key credit factor the Alameda Health System's (AHS) ability to make an orderly transition to the new federal health care funding structure in a manner that does not increase the risk to general government financial operations. A smooth transition combined with continued strong county financial performance would likely result in an upgrade.

CREDIT PROFILE

Alameda County is located on the eastern shore of San Francisco Bay, covers 813 square miles, and includes fourteen incorporated cities. There were almost 1.6 million residents in 2014. The county is relatively built-out with the result that recent population growth has been well below state and national averages.

STRONG FINANCIAL POSITION

The county has maintained consistently positive operating margins and has continued to add to reserves throughout the recent downturn and subsequent recovery. The unrestricted general fund balance of $991 million was equal to a high 46% of general fund spending at the end of 2014, an increase of almost $39 million from the year prior. Liquidity levels are similarly impressive with general fund cash and investments of approximately $973 million at fiscal 2014 year end, equivalent to almost six months of operating expenses. The county has budgeted to maintain its strong unrestricted general fund balance through fiscal 2015.

In addition to general fund reserves, the county maintains a trust funded from the proceeds of surplus property sales. This trust fund grew in fiscal 2014 by $11 million, or 3.5%, to $326 million (equivalent to 16% of fiscal 2014 general fund spending). Interest earned on the trust fund is available for capital projects, including payment of debt service on the county's juvenile justice facility, but the corpus is preserved by board policy. Combined, this trust fund plus the county's unrestricted general fund balance total $1.3 billion, a very strong 62% of general fund spending in fiscal 2014.

The county's substantial financial cushion and its ability to contain operating costs are an important mitigant against its limited revenue flexibility. The county estimates that only 24% of its general fund revenues are truly discretionary. Approximately 61% of its budgeted fiscal 2015 general fund revenues are intergovernmental (including pass-through transfer payments with minimal county share of cost). This reliance on intergovernmental revenues means the county is vulnerable to state and/or federal government revenue reductions. Property tax rates are subject to constitutional limits and voter approval is required to implement, increase, or extend taxes. However, the county was successful in obtaining voter approval for extensions of sales taxes for county health care services and transportation initiatives in 2014.

MANAGEABLE CONTINGENT LIABILITIES

AHS remains reliant upon the county for capital funding and cash flow support. The county has placed a $195 million limitation on net loans to AHS. This limitation was recently approached as a result of a poorly executed AHS financial system upgrade, facilities expansion, lower reimbursement program receipts, and senior management turnover. As part of a package of remediation actions, the county and AHS agreed that the current loan balance, which is now back down to approximately $147 million, would be paid down over an extended timeframe through 2034. This recognizes that 71% of voters in June 2014 approved a measure to extend the county's half-cent sales tax for healthcare services through 2034. Three-quarters of the more than $100 million raised annually from this taxation source is allocated to AHS which will assist it to repay the county loan.

Healthcare reform has the potential to alter the county's healthcare marketplace as the positive effect of lower numbers of uninsured patients is balanced against potential external competition. Fitch expects that the county's ongoing financial support for AHS will remain a manageable component of its annual financial obligations as healthcare reform is implemented.

The county's other continent liabilities related to OACCA stadium and arena lease revenue bonds do not represent a material risk to the county's financial position.

DIVERSE ECONOMY AND TAX BASE

The county participates in the broad San Francisco Bay Area regional economy and benefits from its diverse labor market, high income levels, and strong tax base. Total employment levels have risen steadily since early 2011, resulting in a 9.2% cumulative increase through 2014. Unemployment rates have similarly improved, dropping from 11.7% in mid-2010 to 5% in December 2014. The county's growth has benefited from a strong regional economy and even larger employment gains in neighboring San Francisco and Silicon Valley, with broad-based gains in nearly all industries led by the volatile technology and construction sectors.

The county's tax base has also recorded solid gains following two years of TAV declines (a cumulative decline of 4.1%) during the recession. Since 2011, TAV has rebounded by 14.1%, raising 2015 TAV levels to a historical peak of $223.3 billion. The tax base is benefitting from a strong housing market, a rebound in new construction, and the redevelopment of the former Alameda naval base. Per capita TAV levels are fairly high at about $138,000.

Wealth and income levels for the county remain above-average relative to state and national levels, although notably lower than the wealthy MSA's average. Residents' educational attainment levels remain above-average.

MANAGEABLE LONG-TERM OBLIGATIONS

Overall debt levels are high at $5,145 per capita, or a more moderate 3.7% of market value. Amortization of direct debt is about average with 56% of outstanding principal repaid within 10 years when taking into account accreted interest on the county's POBs and COPs, as well as conservatively including all outstanding OACCA bonds.

Employee pension benefits are provided through a county-level cost-sharing multi-employer plan, with the county representing 80% of total contributions and members. The county has consistently funded its annual required contribution and reports a 76% funded ratio assuming a 7.6% investment return. Fitch estimates the funding ratio at 71%, based on its more conservative 7% investment return assumption. Other-post employment benefits (OPEBs) are also funded through the plan, and are supported by reserves of approximately $652 million. The county considers its OPEB liabilities as non-vested and limited to assets on hand, but would achieve an 85% funded ratio assuming benefits are maintained as currently structured.

Carrying costs for debt service, pension contributions, and retiree benefits were an affordable 11.6% of total governmental spending in fiscal 2014.

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=982073

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