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Fitch Ratings raises concerns over Convention Center refi bonds

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Fitch Ratings has given its stable A+ rating to $230 million in lease revenue bond issuances in connection with the first expansion of the Convention Center and ongoing infrastructure needs, while warning there could be clouds on the horizon.

The instruments include $141 million in Convention Center Expansion Financing Authority lease revenue refinancing bonds and $89 million in San Diego Public Financing Authority lease revenue bonds.

While the A+ rating is quite a distance from the AAA+ rating that is the high water mark, Fitch explains that this is still a high credit quality ranking. Single A ratings do have issues, however.

“This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings,” Fitch warns.

Fitch said the lease revenue bonds, which mature between 2028 (Convention Center) and 2042 (public facilities), could be subject to exposure on several fronts.

The report warns that if the general fund continues to bankroll what had been paid for by redevelopment monies before, a downgrade could be coming. What’s more, Fitch said the general fund could also be affected if city voters approve Proposition A, which would ban project labor agreements. Last October, Gov. Jerry Brown signed SB 922 into law, which among other things, states a project won’t receive state funding if a PLA ban is in place.

Fitch notes that voter approval of a June 5 ballot measure to prohibit project labor agreements could adversely affect the city’s receipt of capital grant funding from the state ($194 million over the past two years), thereby creating more need for general fund support of capital projects.

Fitch also said while taxable assessed valuation trends have performed relatively well, it expects relatively stagnant performance over the near term.

The rating service also expressed concern about the city’s unemployment rate of 9.5 percent as of the end of March, or roughly 1.5 percent higher than the national average. Depressed housing and commercial property prices were also listed among the concerns.

Fitch said while there are plenty of potential pitfalls, San Diego is at least for the moment in a strong position.

“The city benefits from a diverse economy, a variety of revenue streams, and its desirable location as a place to live and work or visit,” Fitch wrote, adding that San Diego is much more fiscally strong than it was during the midst of the recession.

“The overall debt burden is moderate and expected to remain so despite planned debt issuances to address what the city reports as significant unmet infrastructure maintenance needs,” Fitch added.

The city projects a $17.8 million budget surplus for fiscal 2012 due to everything from increased hotel tax revenues to savings from a higher than anticipated number of retirements.

Looking ahead, Fitch suggested that if the Proposition B pension reform measure is passed on June 5, it could go quite a ways toward securing San Diego’s fiscal future and its credit rating.

“The city’s independent budget analyst suggests that if successful, the potential net savings from the measure could be $963 million over the next 30 years,” Fitch added.

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