Fitch Rts Santa Clara Valley Wtr Dist, CA $78MM COPs 'AA+'; Stable Outlook.

SAN FRANCISCO -- Fitch assigns an 'AA+' rating to approximately $78 million Santa Clara Valley Water District (the district), California, refunding and improvement certificates of participation, series 2007A. The certificates are scheduled for negotiated sale led by Morgan Stanley on or around Feb. 6, 2007. The certificates mature from Feb. 1, 2008 through 2030. The 'AA+' rating also is assigned to approximately $154.7 million of parity certificates. The Rating Outlook is Stable.

The 'AA+' rating reflects the strong debt service coverage levels provided by pledged revenues, which include a dedicated per-parcel property assessment, and a closed lien. Credit strengths also include the district's strong financial position, evidenced by solid reserve levels, as well as the essential service provided to a large, wealthy, and growing tax base. Offsetting credit factors are limited to the cyclicality of the Santa Clara County economy and slow debt amortization.

The district is a multi-purpose special district authorized to provide flood protection services and supply water to county residents. The certificates are secured by gross revenues of the flood control services. In 1986 and 1990, voters authorized the district to levy benefit assessments based on the benefit received from flood control services while simultaneously limiting the assessment to 1.25 times (x) maximum annual debt service (MADS) on certificates outstanding prior to June 30, 2000. The district covenants to annually reset the benefit assessments to provide debt service coverage of at least 1.25x MADS. The assessment is levied on property on the same basis as ad valorem taxes and the collection rate is close to 100%. The property tax base is diverse; the top 10 largest benefit assessments account for less than 6% of the total.

Financial results within flood control operations (which are included in the district's general government activities) are strong, characterized by high fund balance levels. Though certificates are first secured by assessment levies, they are ultimately secured by a gross revenue pledge on virtually all flood control system revenues, which includes the district's portion of the county 1% property levy. As a result, actual debt service coverage exceeds the 1.25x assessment levy. Historically above 3.0x, debt service coverage in fiscal 2005 and 2006 declined to 2.37x as a result of the state shifting the 1% property tax revenue away from special taxing districts during fiscal years 2005 and 2006. The district expects such revenues to return to historical levels. Projected debt service coverage through fiscal 2011 is at least 3.4x.

In spite of the effective closed lien on new money issuances, the district is able to generate cash for new projects by refinancing existing certificates and taking the savings as new money; the resulting debt service is essentially the same. The current offering follows this structure and refinances the outstanding 2000A and 2000B certificates and moves the 2000B certificates to the senior lien from a subordinate position. The release of the cash reserve fund, in addition to debt service savings, generates about $12 million for projects. Future capital plans appear manageable, totaling an estimated $48.4 million over the next five years. Funding is expected primarily from pay-as-you-go operations, capital reserves, a special parcel tax, and state and federal funding. The district does not have plans to seek to extend or expand the voter authorization.

A seven-member board oversees district operations. The district encompasses the entire county of Santa Clara, which totals 1,330 square miles, 1.8 million residents, and more than 400,000 parcels. Despite the economic downturn in the early part of the decade, the county's assessed valuation increased each year and average annual growth for fiscals 2000 through 2007 was 7.4%.

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