OREANDA-NEWS. June 30, 2015. Fitch Ratings has upgraded the ratings for the following Palm Springs Community Redevelopment Agency bonds:

--\\$14.7 million Merged Project No. 1 tax allocation bonds (TABs), series 2007A & B to 'AA-' from 'A';
--\\$6 million Merged Project No. 2 TABs, series 2007C to 'A' from 'A-'.

The Rating Outlook is Stable.

SECURITY

Per the indenture, the 2007A&B and 2007C bonds are secured by a pledge of and first lien on incremental property tax revenues in merged project areas no. 1 and no. 2, respectively, less amounts set aside for low- and moderate-income housing and amounts due to overlapping jurisdictions. The TABs additionally are payable from surplus former 20% housing set-aside revenues per dissolution statute.

KEY RATING DRIVERS

COVERAGE GAINS FOLLOW REFUNDING: The upgrades are based on materially improved debt service coverage and assessed value cushions following the 2014 refunding of parity debt as subordinate. Coverage is resistant to Fitch-designed stress scenarios and could withstand unprecedented declines in assessed values.

POTENTIAL TAX LOSS: Revenues supporting the bonds include possessory interest taxes on tribal-owned properties that are currently the subject of litigation. Fitch's analysis assumes the full loss of disputed revenues.

TAXPAYER AND ECONOMIC CONCENTRATION: The two-notch rating distinction for debt supported by merged project area no. 2 is based on its relatively high tax base concentration and greater exposure to potential losses of possessory interest value. In addition, the tax base for both merged project areas is dependent on the economically sensitive tourism sector, consistent with the broader Palm Springs economy.

CLOSED LIEN AFTER DISSOLUTION: Fitch considers all TAB liens to be closed, as successor agencies (SAs) are not permitted to issue new money TABs. In addition, all of the 20% housing set-aside revenues are available for non-housing TAB debt service as the agency has no outstanding housing debt.

RATING SENSITIVITIES

COVERAGE CHANGES: Significant shifts in taxable assessed value (TAV) resulting in meaningful debt service coverage changes could prompt a rating action, either positive or negative.

CREDIT PROFILE

Palm Springs is located in central Riverside County in a desert community that has long served as a regional resort destination. It is located 111 miles from Los Angeles and 136 miles from San Diego and is also home to an international airport, allowing it to draw upon a broad base of potential visitors. Merged project area no. 1 consists of seven sub-areas totaling 1,864 acres while merged project area no. 2 includes three sub-areas totaling 1,393 acres.

COVERAGE GAINS FOLLOW REFUNDING

Coverage on the bonds has improved materially following the 2014 refunding of parity debt. Assuming no further growth in TAV, pledged revenues are 3.2x maximum annual debt service (MADS) for the 2007 A and B bonds (project area no. 1) and 3.0x MADS for series C (project area no. 2), as compared to 2.1x and 1.5x, respectively, in 2013.

Coverage is resilient under Fitch-designed stress scenarios that include the loss of top taxpayers and TAV declines similar in magnitude to those experienced in the last recession. TAV would have to decline by more than 50% in both project areas from current levels to reduce coverage below 1.0x.

POTENTIAL TAX LOSS

Pledged revenues could be impaired by a recent lawsuit challenging the levy of possessory interest tax on properties owned by the Agua Caliente band of Cahuilla Indians. The tribe is a major landowner in the city of Palm Springs and its redevelopment areas, and much of its land is leased to private parties. Riverside County currently levies a possessory interest tax on leasehold interests and above-ground improvements in place of property tax in such circumstances, which the tribe has challenged following recent changes to federal law and regulation.

Management of the SA to the redevelopment agency estimate that 9.8% of TAV in merged project area no. 1 and 30.2% in merged project area no. 2 derive from tribal property, and could be at risk from the suit. Fitch's coverage calculations conservatively assume that revenues from such properties will not be available for debt service payments in future years.

TAXPAYER AND ECONOMIC CONCENTRATION

Taxpayer concentration is somewhat elevated in the two merged project areas. The top 10 taxpayers in merged project area no. 1 account for 14% of assessed value and 19% of incremental value. In merged project area no. 2 such proportions rise to 21% and 28%. The two-notch rating distinction for debt supported by merged project area no. 2 results from its higher tax base concentration, as well as greater exposure to tax base losses as a result of its higher proportion of possessory interest value.

The bonds face additional vulnerability from a tax base that is economically sensitive to tourism activity. Such concerns are somewhat offset by renewed TAV growth in recent years and good prospects for additional gains.

The redevelopment of a largely vacant downtown mall is underway in merged project area no. 1 and, with an estimated construction cost of approximately \\$400 million, will likely boost TAV considerably following its expected completion. Financing for the project relies upon a 1% sales tax increase that Palm Springs voters approved in November 2011 and is expected to spur related development in the downtown area. Two new hotel projects are currently in the planning stages and appear likely to contribute to further increases in the local tax base. In addition, merged project area no. 2 has seen strong recent TAV growth primarily due to recovery of the local housing market.

POSITIVE ASPECTS OF DISSOLUTION

California's dissolution of redevelopment in 2012 under AB1X26 eliminated the potential for issuance of new money debt and effectively closed the lien for outstanding TABs. Debt service coverage is likely to strengthen in line with future TAV growth. In addition, revenues previously set aside for affordable housing requirements are now available to support debt service on the bonds.