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May 09, 2005
S&P trims San Jose RDA debt rating
The change in outlook reflects the region's economic reality and its repercussions for the agency. The RDA enjoyed huge, annual increases in its tax revenue in the late 1990s and early 2000s followed by precipitous annual drops. Its tax revenue is largely derived from assessments on business equipment and commercial and residential real estate within agency project areas scattered throughout the city.
Since the end of the high-tech boom, declining occupancy in commercial properties, particularly in North San Jose, has reduced agency property tax revenue from nearly $190 million in 2002-03 to a projected $145.7 million in the fiscal year that begins July 1. That decline reflects not only the drop in value for real estate but the declining value in business equipment as companies have failed, left the region or stopped re-investing in capital goods.
The combination of declining revenue and bond covenants that set revenue-debt ratios have forced the agency to stop issuing new public debt. That puts a brake on the start of new capital projects. The narrowing of the margin between revenue and required debt payments, which in the upcoming fiscal year are expected to reach nearly $110 million, has caught the attention of the debt-rating agencies.
"(S&P) lowered its underlying ratings to 'A -' from 'A' on San Jose Redevelopment Agency... outstanding bonds, reflecting a leveraged position that, combined with declining project area assessed value, has seriously eroded debt service coverage," the new report says.
"The outlook is negative, and a further lowering of the rating will occur if the project area's assessed value trend remains negative," it continues.
The agency expects the debt service-revenue squeeze to tighten in its next fiscal year but projects it will ease thereafter.
S&P of New York City is the second of the nation's three large debt-rating companies to temper its enthusiasm for San Jose RDA debt. Moody's Investors Service (NYSE: MCO) of New York City, advancing much the same observations as S&P, lowered its rating in December 2003. Both agencies continue to consider the debt investment grade.
Fitch Ratings of New York City, the third large debt-rating agency, has not changed its "A" rating. It, too, considers agency debt investment grade.
As recently as 2004, the agency enjoyed $1.24 in property tax revenue for every dollar in debt service it owed, S&P says. Next fiscal year, the city expects the ratio to fall to $1.08 in revenue for every $1 in annual debt service. If a revenue source like Cisco Systems Inc., the RDA's largest taxpayer, were to be lost, the agency would no longer have enough revenue to service its debt, S&P says.
Agency Finance Director David Baum and Assistant Executive Director Sharon Landers say the agency retains enough money to finance its current projects, including the second phase of the so-called Heart of the City redevelopment in downtown San Jose. The first, $31.7 million phase, to which the agency committed several million dollars, is under construction and will bring apartments, condominiums and retail space to what had been a surface parking lot.
The second phase, however, has yet to break ground. That $250 million project, which involves two towers with more than 330 for-sale condominiums and extensive parking, includes a $26.5 million agency contribution. A tentative agency budget, which will be revised this summer after Santa Clara County Tax Assessor Larry Stone releases the final assessment roll, includes capital reserves of more than $100 million from which that obligation will be met, Mr. Baum says.
"I would say beginning in about the 2006-07 fiscal year, they (the RDA) need to see some positive growth or they are going to have to look at some debt restructuring," says Matthew Jones, an analyst in Moody's public finance unit who has tracked the RDA.
"I think it is likely they would see growth," but it's difficult to know what to anticipate until Mr. Stone releases his tax roll each year, he adds.
The assessor's office has lowered the taxable value on thousands of properties by billions of dollars in the past two years. These reductions, which are mandated by Proposition 8, have been a large source of unpredictability, Mr. Jones says. "I'm not saying those reductions have been inappropriate," he says. "I am saying that he (Mr. Stone) has been aggressive."
City Councilman Chuck Reed says he is not surprised by S&P's decision. "I think it's what you have to expect when revenues go down, and you're living on borrowed debt."
The agency issued a $135 million bond in late 2003. Its current cash flow is insufficient to cover its debt service obligations and operating expenses, meaning that it is essentially using that $135 million debt to bridge its revenue gap until the economy improves.
"We're not out of money this year or next, but after that, I don't know," Mr. Reed says.
Councilwoman Cindy Chavez says the RDA has been a large source of economic stimulus for San Jose and that without it, the city will face tougher times.
"The good news is that we have a history in San Jose of being creative about raising revenue and how we spend it," she says. "I think of it mostly as a bump in the road, but something that we are going to have to keep our eye on."Posted by Coalition Webbies at May 9, 2005 05:21 PM