Sacramento gets a Fitch Ratings upgrade

Bonds

Fitch Ratings has upgraded Sacramento, California’s issuer default rating to AA from AA-minus.

The outlook is stable.

Monday’s upgrade “reflects the city’s steady improvements in financial resilience based on incremental gains in reserves. Sacramento’s underlying economic growth coupled with a voter-approved sales tax, which has been permanently renewed, have fueled the increase in reserves,” Fitch analysts wrote. “The rating also incorporates Sacramento’s solid long-term revenue growth prospects, tight budget management, adequate expenditure flexibility, and moderate long-term liabilities.”

A view of Sacramento, California’s state capital, which received a Fitch Ratings upgrade this week.

Bloomberg News

Sacramento is California’s state capital and sixth-largest city with approximately 512,000 residents. The city’s economy is driven by the government sector but is slowly diversifying into healthcare, education, and business services, according to Fitch.

Fitch also upgraded the rating to A-plus from A on $250 million in Golden 1 Center 2015 lease revenue bonds issued by the Sacramento Public Financing Authority.

The bonds are payable from lease rental payments from the city to Sacramento Public Financing Authority for use and occupancy of the Golden 1 Center arena, home of the NBA’s Sacramento Kings basketball team.

The city has covenanted to budget and appropriate lease rental payments from any legally available resource. The lease is subject to abatement risk, and bondholders lack the right to foreclose on the property in a default.

The lease revenue bonds are rated two notches below the issuer default rating because the city’s repayment plan relies on prospective revenues that Fitch views as uncertain.

The rating anticipates “solid revenue growth that outpaces inflation but remains below U.S. economic performance. Property and sales taxes dominate the revenue profile and are expected to grow considering continued housing demand and population gains. The city’s independent ability to raise revenues is constrained by state tax limitations but satisfactory relative to the city’s low revenue volatility.”

The city’s adequate level of spending flexibility is underpinned by strong control over headcount, according to Fitch.

Carrying costs associated with other post-employment benefits, pensions, and debt are moderately elevated, and the collective bargaining environment is complex with binding arbitration for large public safety unions. The natural pace of spending is likely to be in line with to marginally above revenues in the absence of policy action, analysts wrote.

Debt and pensions are a moderate burden relative to personal income with overlapping debt accounting for nearly half the liability burden.

Moody’s Investors Service assigns Sacramento its Aa2 issuer rating with a stable outlook and S&P Global Ratings has the city’s issuer rating at AA and stable.

Factors that could lead to further upgrades are stronger natural revenue growth during the economic recovery period that exceeds GDP on a sustained basis and improvement in Fitch’s assessment of the city’s expenditure flexibility due to declines in fixed debt service and retiree benefit costs.

Factors that could lead to a downgrade are a deterioration of the city’s financial flexibility as a result through an over-reliance on reserves (or other non-structural items), overly demanding labor negotiations that reduce expenditure flexibility, or evidence that the lingering effects of the pandemic materially weaken the city’s economic and revenue growth prospects.

As is similar in other cities, the pandemic has caused mixed results for Sacramento’s revenues. According to city officials, the first 11 months of fiscal 2021 through May 31 showed property taxes trending 7% above FY 2020 property taxes in the same time frame, for $11.8 million. Fiscal 2021 general fund sales tax collections were 5%, or $3.8 million, above fiscal 2020, but those gains were offset by a nearly 16%, $14 million, decline in charges for services.

The city benefited substantially from voters in 2018 renewing and increasing a city sales tax sales tax for general purposes.

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