Fitch Rates Pittsburg Redevel Agency, CA 2006 Bonds 'A-'; Upgrades Outstanding to 'A'.

SAN FRANCISCO -- Fitch assigns an 'A-' rating to $162.6 million Redevelopment Agency of the City of Pittsburg, CA's Los Medanos Community Development Project tax allocation bonds, consisting of:

-- $54,195,000 subordinate tax allocation bonds, 2006 series A

-- $54,195,000 subordinate tax allocation bonds (taxable), 2006 series B

-- $43,695,000 subordinate tax allocation refunding bonds, 2006 series C

-- $10,465,000 housing set aside tax allocation bonds, 2006 series A.

The new bonds are scheduled to sell via a negotiated sale led by E.J. De La Rosa & Co. on Nov. 29, 2006. The Rating Outlook on all bonds is Stable.

Also, Fitch upgrades $196.8 million in senior tax allocation bonds to 'A' from 'A-', in recognition of these bonds' senior lien position (with no future issuance permitted) and significantly higher debt service coverage. Finally, the 'A-' rating applies to $128.3 million in outstanding subordinate tax allocation bonds, 2004 series A and B and $17.7 million in housing set aside tax allocation bonds, 2004 series A.

The rating reflects the project area's large size, diverse tax base, sound debt service coverage, and a good outlook for continued development. Offsetting factors include taxpayer concentration, some exposure to unsecured valuation, a history of large appeals, and very slow debt amortization. The bonds' solid legal structure partially offsets the taxpayer concentration and aggressive assessment appeals. The project area includes nearly all of the developable area of the city of Pittsburg, which has exhibited rapid growth in population and assessed valuation (AV). The outlook for future economic gains is good based on the area's affordability and proximity to employment centers and mass transit.

Pittsburg is a rapidly growing city with a large industrial base; however, the city now includes a sizeable and growing residential base and related commercial development. The project area's assessed valuation has shown strong growth, with current assessed value for the project area over 14 times that of the base year, parts of which date back to 1962. A largely industrial sub-area was added in 1993; however, these parcels subsequently experienced declining valuations and negative tax increment generation due to a series of successful taxpayer appeals. The agency removed the negative parcels from the project area in fiscal 2004. In spite of deleting some properties from the project area, total assessed value increased 10% annually on average from fiscal 2001-2007. Incremental value was even stronger, experiencing 20% growth per year on average.

Debt service coverage for the subordinate and senior tax allocation bonds, including the new issues, is sound with fiscal 2007 projected revenues covering maximum annual debt service (MADS) 1.25 times (x). MADS coverage for the senior bonds alone is much higher at 2.9x. The additional bonds test (ABT) for all bonds is solid, and partially offsets concern over taxpayer concentration. The two-pronged ABT requires that net revenues cover MADS 1.25x and that adjusted net revenues cover MADS 1.0x. Adjusted net revenues reflect the elimination of taxpayers representing over 7.5% of total assessed valuation. Fiscal 2007 coverage of annual debt service is conservatively projected at 1.68x. Projected coverage levels do not include supplemental (post lien date) tax revenues, which have averaged about 7% of pledged revenues since fiscal 2003. Debt service is slightly increasing, including three years of capitalized interest on the new money non-housing bonds, which contributes to the slow amortization of just 29% in 10 years.

Pledged revenue for the housing set-aside bonds consists of tax increment from two of the three sub-areas that make up the overall project area. Coverage for the housing set-aside bonds is strong, projected at 1.5x in fiscal 2007, partially offsetting the higher concentration in the subject sub-areas, as required by the second part of the ABT. The top 10 taxpayers for the housing set-aside bonds' sub-areas represent 49% of total incremental value. The largest taxpayer is a recently developed power plant, representing 29% of the assessed valuation. Elimination of the top taxpayer results in 1.0x coverage.

Concentration for the overall project area is high, but improved since 2004 due to the removal of two large parcels in fiscal 2004. The 10 largest taxpayers make up 27% of total assessed value, two of which exceed 7.5% of total assessed valuation. The two largest taxpayers are recently completed power plants that have regularly appealed their assessed valuation since completion. A conservative stress scenario with no growth in the existing assessed valuation and eliminating the two top taxpayers (18.5% of AV) reduces coverage of annual debt service in fiscal 2008 to 1.16x and MADS coverage to 1.0x.

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