Fitch Ratings downgraded San Jose redevelopment bonds four notches Tuesday, lowering $1.7 billion in San Jose Redevelopment Agency tax allocation bonds to BBB-minus from A. At the same time, the agency’s housing set-aside tax allocation bonds were downgraded to A from A-plus.
The city’s redevelopment areas have experienced declining property tax assessments, reducing the revenue it receives from property tax.
Fitch said the downgrades were the result of routine surveillance. Though the downgrades came shortly after Gov. Jerry Brown proposed phasing out redevelopment in California, that was not a factor in the rating, according to Fitch.
“Under the proposed plan the existing debt and other contractual obligations would be repaid as they come due,” Fitch said in its news release.
The downgrades are based on the sizable decline in pledged revenue for fiscal 2011, and the probability of further declines due to the weak residential and commercial property markets, according to Fitch.
Fitch dropped the redevelopment bonds to the lowest investment-grade rating because they have very narrow debt-service coverage by current year revenues, which would decline to just 1.0 times if the tax base declines in fiscal 2012 at the same rate it did in fiscal 2011.
“The vast majority of the debt service reserve requirements for both the merged area and housing TABs are met through surety bonds, all of which would have questionable availability of funding if called on,” Fitch said. “However, Fitch believes the agency would have sufficient resources (cash and/or asset sales) to cover debt service for a limited period of time.”
