Fitch Ratings affirmed its BBB-plus rating and stable outlook for almost a billion dollars in Sacramento County, California, pension obligation bonds.
The county, home to the state capital, has $944 million in pension obligation bonds outstanding issued between 1995 and 2013. It has $122 million in certificates of participation issued in 2006, 2007 and 2010 that Fitch also affirmed at BBB-plus.
The issuer default rating is A-minus, “which reflects the county’s challenged revenue framework and operating performance, somewhat offset by its limited long-term liabilities,” Fitch said in its Thursday report.
The POBs are absolute and unconditional obligations imposed by law and payable from any money available to the county while the COPS are supported by lease payments appropriated by the county.
The county of 1.5 million residents was hit hard by declines in property values and employment during the recession but has seen gains over the last five years, Fitch’s analysts said. The state government remains a top employer for county residents along with health care providers and technology firms.
Sacramento County’s general fund revenues have lagged behind the national level although they are expected to grow at the same rate as inflation, the report said. However, Fitch expects future expenditures to outpace revenue growth.
“The county has an adequate ability to cut expenditures, as demonstrated by its performance in the last recession, but faces considerable obstacles in implementing such reductions,” Fitch’s analysts said.
A low reserve level was another area of concern, Fitch said. At the end of the 2017 fiscal year, the county had an unrestricted general fund balance of $37 million or 1.6% of its general fund spending.
“Annual budgets are typically balanced but the county has been slow to restore financial flexibility despite an improving economy,” the agency said. “Fitch expects incremental improvements in financial flexibility as revenues continue to increase, but the county's minimal operating cushion remains vulnerable to revenue declines in the event of a new downturn.”
