TEXT-Fitch affirms Hayward, Calif. COPs at 'AA'

Wed Aug 8, 2012 1:42am IST

Aug 7 - Fitch Ratings has affirmed the following rating for the city of
Hayward, California (the city):

--$26.1 million 2007 refunding certificates of participation (COPs) (Civic
Center and Capital Projects) at 'AA'.

In addition, Fitch assigns the following rating:
--Implied general obligation at 'AA+'.

The Rating Outlook is Stable.

SECURITY
The COPs are secured by lease rental payments made by the city for use of the
civic center and are subject to annual appropriation. The city is not obligated
to levy or pledge any form of taxation to repay the COPs.

KEY RATING DRIVERS

NARROW LOCAL ECONOMY: Government, education and health, and manufacturing
underpin the city's employment base, although residents benefit from the wider
employment opportunities available from the greater San Francisco Bay area.
Socio-economic indicators are mixed when compared to national averages.

PLANNED RESOLUTION OF STRUCTURAL IMBALANCE: The solid management team has
demonstrated a willingness to curtail expenses sharply and implement revenue
enhancements to address long-standing budgetary imbalances, resulting in the
planned elimination of projected out-year operational gaps. Fitch will view
negatively a reliance on reserves or one-time revenues in order to balance the
fiscal 2014 budget.

SOUND RESERVES: Conservative budgeting coupled with one-time remedies has
permitted the city to maintain consistently solid general fund reserve levels.
Liquidity levels are moderately high.

WELL-MANAGED DEBT BURDEN: Overall debt levels are moderately low and capital
plans do not rely upon debt financing. Rising pension costs have the potential
to pressure the credit.
LEASE REVENUE BONDS: The one-notch rating distinction on the lease revenue bonds
reflects the city's general credit quality as well as covenant to budget and
appropriate sufficiently for lease rental payments, a requirement for rental
interruption insurance, and the use of essential city property as security.

WHAT COULD TRIGGER A RATING ACTION

FAILURE TO ACHIEVE STRUCTURAL BALANCE: The city's inability to match recurring
revenues to expenditures by fiscal 2014 could indicate a systemic degree of
financial pressure that is inconsistent with the current rating.

DETERIORATION OF RESERVES: Near-term fund balance use above current projections
could compromise the city's financial cushion.

CREDIT PROFILE

LONG-TERM STRUCTURAL IMBALANCE

The city's financial profile has consistently reflected budgetary imbalances.
One-time measures have supplemented conservative revenue forecasting and
substantial expenditure reductions to allow the city to maintain solid reserves.
The city's liquidity position is consistently healthy, with general fund cash
exceeding liabilities by approximately four times for the past three fiscal
years.

Total city revenues have increased since the economic downturn, as a
voter-approved utility user tax that became effective in fiscal 2010 helped
offset property and sales tax declines. The city and its employees agreed upon
stringent cost containment measures, including furloughs, retirement packages,
and departmental tightening in response to the on-going revenue declines.
Nevertheless, the city has been unable to realize positive operating margins.

One-time transfers to the general fund and prudent revenue forecasting drove the
fiscal 2010 surplus of $4.2 million. Fiscal 2011 concluded with an $11.1 million
surplus, equal to 9.1% of spending, largely attributable to a $10.3 million land
transfer into the general fund. Non-recurring revenues of approximately $2
million were necessary to realize the operating portion of the surplus. The
city's unrestricted fund balance equalled a solid 24.5% of spending, consistent
with the prior year's results, since the portion of the surplus attributable to
the land transfer was categorized as restricted fund balance.

The adopted fiscal 2012 budget utilized non-recurring revenues, including a $4.2
million fund balance appropriation, to help close a $20.6 million gap, equal to
a high 16.9% of spending. The city reports that fiscal 2012 expenditures are
tracking well. In addition, revenues, including sales taxes, are slightly above
budget. Currently, the city projects that fund balance use should be less than
$3.4 million and possibly below $2 million.

PLANS TO RESTORE BUDGETARY STABILITY

The biannual fiscal 2013-2014 budget outlines the city's plan to institute
structural balance, even with the continued pressure attributable to rising
pension costs. City employees have agreed to further wage and benefit
concessions and the city has indicated its willingness to implement revenue
enhancements. The fiscal 2013 budget incorporates the use of around $4.6 million
of reserves in order to mitigate the need to institute all of the employee
concessions immediately. The budget includes an additional use of $1.1 million
of fund balance to fund one-time expenses. The fiscal 2014 baseline budget
indicates the need for $5.6 million of reserves and out-year gaps increased to
$22.5 million by the end of the 10-year forecast period.

City management has since identified additional expenditure reductions that it
believes will reduce the out-year gaps to no more than $12.4 million during the
forecast period. The identified out-year gaps are driven by planned other
post-employment benefit (OPEB) contributions, deferred capital expenses, and
some assumed wage increases. City officials have indicated that they are
committed to eliminating the operational portions of the out-year gaps. The city
plans to revise the fiscal 2014 budget so it will be structurally balanced and
to continue in the out-years to identify sufficient recurring revenues to meet
expenses, including funding of the OPEB annual required contribution (ARC).
Fitch will not consider the use of reserves to finance capital or other one-time
projects as a credit weakness, assuming maintenance of sound reserves. However,
Fitch believes a failure of the city to adopt a structurally balanced budget by
fiscal 2014 indicates a systemic imbalance that would be inconsistent with the
current rating.

MANAGEABLE FINANCIAL RAMIFICATIONS FROM RDA DISSOLUTION

Fitch does not anticipate undue ongoing financial pressures arising from the
dissolution of the city's redevelopment agency (RDA) as a consequence of
state-wide legislation. The non-spendable portion of the city's general fund
balance includes a long-term receivable from the RDA, equal to $7.8 million at
the conclusion of fiscal 2011 as well as a $5.9 million land asset transfer from
the RDA. The state has disallowed an annual $800 thousand repayment from the RDA
towards the receivable, although the city believes that a recent trailer to the
state budget will improve the likelihood of a future approval. The city
prudently does not incorporate any portion of the repayment in its operating
budget. Additionally, the city states that there is a question if the transfer
will ultimately be allowed. Fitch notes that any disallowances regarding the
annual repayment and land transfer affects the non-spendable portion of the fund
balance, which Fitch does not view as providing financial flexibility to the
issuer.

The state has disallowed an annual $450 thousand administrative overhead
allocation from the RDA to the city. The city reports that it has absorbed this
loss in its general fund operating budget. Fitch anticipates that the city can
accommodate the lost revenue without materially altering the credit profile,
assuming all other credit factors remain constant.

BROAD REGIONAL EMPLOYMENT OPPORTUNITIES, NARROW LOCAL COMMERCIAL BASE

The city is located 14 miles south of Oakland and benefits from its
participation in the San Francisco Bay's diverse employment opportunities. The
city's own employment base is somewhat narrow. Large city employers include
government, California State University-East Bay, and Kaiser Permanente. Other
large employers include mid-size manufacturing firms, with bio-science firms
somewhat offsetting the substantial presence of traditional manufacturers.

The city has shared in the economic downturn that affected the Bay area since
the recession, although signs of stabilization are emerging. Declines in both
housing prices and assessed value appear to be moderating. The May 2012 10.1%
unemployment rate declined 10.6% on a year-over-year basis. Unemployment remains
well above the national 7.9% rate, although Fitch notes positively that the
annual decrease exceeded that of the nation. Wealth indicators are below that of
the wealthy region and mixed relative to the nation.

LIMITED DEBT PRESSURES

Overall debt ratios are moderately low at $3,577 per capita and 3.3% of market
value, driven mainly by county and school debt. Amortization is rapid with 66%
of principal retired within 10 years. COPs and general fund debt service
requirements equal a low 2.3% of the combined spending of the COPs debt service
and general funds, a level that Fitch believes does not pressure the credit. The
city's fiscal 2013-2022 capital improvement plan totals $356.7 million,
including $170 million for projects for the self-supporting enterprise funds.
The city is considering a minimal debt issuance for a fire station.

Rising pension costs have the potential to pressure the credit, although the
city has included projected payment escalations in its budget forecast.
Substantially all city employees participate in the California Public Employees'
Retirement System (CalPERS). Fiscal 2011 city contributions equalled 13% of
general fund spending, a level that Fitch believes can narrow financial
flexibility. Recently negotiated labor concessions include employees assuming
their full contribution cost as well as a portion of the city's retirement
contribution. Nevertheless, the city projects that its pension costs will
increase by $1.3 million in fiscal 2013, partly attributable to CalPERS'
lowering the discount rate. Fitch notes positively that the city has elected to
assume the increase in one fiscal year, rather than opt to phase-in the increase
over two years.

The OPEB ARC equals a moderate 5.2% of general fund spending. In fiscal 2011,
the city began to contribute to full funding of the ARC. The city has
incorporated full ARC funding by fiscal 2019 into its budget. In addition, the
city has implemented a two-tier benefit for police employees to help cap ARC
growth.

AVERAGE LEASE STRUCTURE

The city has covenanted to budget and appropriate lease rental payments for the
use of the civic center, home to the city's primary municipal function and city
council chambers. The city may substitute other property for the leased civic
center, although the substituted property must have comparable appraised value,
essentiality, and useful life. The lease requires the city to provide rental
interruption insurance equal to at least the maximum payment payable in any two
consecutive fiscal years in the remaining term of the lease. Lease payments
would be abated proportionately during any period where there is substantial
interference with the city's use and occupancy of the property, although not if
insurance proceeds or reserve fund amounts are available to pay the lease. The
city waives its right to terminate the lease in the event of damage or
destruction.

Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

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 the National Association of Realtors.

Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).

Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
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