Rebounding oil prices have been good news for Alaska the last few months.
Kern County's property tax revenues have been hit hard by massive drop in crude oil prices.

LOS ANGELES — Kern County, Calif.'s smaller credits may be hit harder by the collapse in oil prices than those of the county itself, according to Gurtin Fixed Income Management LLC.

The county declared a fiscal emergency on Jan. 27 anticipating a $27 million shortfall, as one-third of the county's property tax revenues come from oil companies and a $60 million reduction in property taxes is anticipated.

In a report this month, Gurtin called Kern County's actions a prudent budgetary maneuver and not a sign of looming distress. At the same time, the firm exited positions in West Kern Community College, Taft City Elementary Schools and Wasco Union High School District.

Those credits have tax bases that are far smaller than Kern County's - the smallest is 1/40th the size - and a higher percentage of debt payments that are dependent on oil and gas revenues, said Michael Johnson, a managing partner, co-chief Investment officer, and head of the research department at Gurtin.

The third largest county in California, Kern County encompasses roughly 8,073 square miles and has a population of 884,923. Located in the southern part of the Central Valley, it is also the largest oil producer in the continental U.S., according to S&P Analyst Li Yang.

"We believe the county's problems are ultimately manageable, but a number of secondary obligors in the county have thus far escaped scrutiny [from the media and rating agencies] even though their dire financial profile is imminently weaker than that forecasted by Kern County," Gurtin said in the report.

Gurtin exited all of its positions in the three smaller credits at attractive levels, before rating agencies took any action on their public ratings, Johnson said.

"It is interesting to note that, even given the scrutiny in Kern County, these three obligors continue to maintain deceptively high A1 or A-plus ratings from Moody's Investors Service or Standard & Poor's - only four notches removed from their highest AAA rating," according to the report. Moody's and S&P hadn't issued updates on the credits when Gurtin exited in early February.

While the drastic decline in oil prices would result in a degree of budgetary stress for the county, research metrics show in the short run it is strong enough to cover the strain, Johnson said.

"I think our biggest point is declaring a fiscal emergency isn't necessarily a precursor to default; it gives them an opportunity to open up contracts," Johnson said. "They have given themselves more opportunities, which we think is positive, but they will have to follow through. It's too early to tell at this point."

Nancy Lawson, the county's budget director, said the fiscal emergency declaration gives the county flexibility, such as the ability to make changes to fire department schedules, which require constant staffing under the union agreement. It also allows the county to dip into its $40 million general fund reserve to cover the $27 million shortfall.

The county's declaration prompted rating reports from Moody's Investors Service and Standard & Poor's. Neither downgraded the county's ratings, though analysts at both rating services revised their outlooks to negative. Moody's outlook change affected $86 million in certificates of participation it tracks, while S&P's revised outlook, which included affirmation of an A-plus rating affects the county's long-term debt.

The county has $104.5 million in outstanding COPs and $323 million in outstanding pension obligation bonds, according to its comprehensive audited financial report for the fiscal year ended June 30, 2014.

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