OREANDA-NEWS. July 14, 2015. Fitch Ratings has upgraded San Jose Financing Authority, CA's (the authority) parking revenue bonds as follows:

--\\$31.7 million parking revenue bonds to 'BBB' from 'BBB-'.

The Rating Outlook is Positive.

SECURITY
The bonds are special limited obligations of the authority, secured by a pledge of surplus tax increment revenues (tax revenue) from the redevelopment agency (subordinate to senior and subordinate tax allocation bonds [TABs]) and gross parking revenue from the city's parking enterprise fund.

KEY RATING DRIVERS
TAX INCREMENT BONDS UPGRADED: The upgrade coincides with the upgrade to 'BBB' rating of the redevelopment agency's (the agency) senior TABs. The parking bonds have a lien subordinate to senior and subordinate TABS.

UPGRADE REFLECTS IMPROVED COVERAGE: The upgrade reflects strong assessed value (AV) gains in fiscal 2015 and estimated for fiscal 2016 resulting in improved debt service coverage (DSC) of 1.47 times (x). When coupled with the closed lien, Fitch views the 28% AV cushion (defined as the required decline in AV required for sum sufficient DSC) as adequate for the rating level given expected moderate revenue volatility.

SOME BENEFIT FROM PARKING SYSTEM PLEDGE: All-in debt service coverage by tax increment is estimated at 1.35x for fiscal 2016, compared to 1.47x for TABs with liens senior to the parking revenue bonds'. However, the parking revenue bonds benefit somewhat from a gross pledge of parking system revenue.

POSITIVE OUTLOOK: The Positive Outlook reflects the expectation that gains in DSC, primarily from tax base growth would result in a stronger AV cushion.

ADEQUATE PARKING FUND PROFILE: The parking fund's financial profile is currently adequate but is vulnerable to economic cycles. The city estimates fiscal 2015 will be a fourth consecutive year of increasing revenues. Fitch estimates sound fiscal 2015 coverage of debt service by net revenues of 1.67 x, up from about 1.17x in fiscal 2013. Though reduced, the system did maintained solid operating reserves throughout the recession.

OPERATING RESERVE SUPPORT: The city's pledge to maintain a parking system operating reserve equal to 25% of expected expenditures provides additional support to the parking system.

RATING SENSITIVITIES
Fitch may take positive rating action if solid AV growth continues, resulting in materially increased DSC and AV cushion.

SURPLUS TAX REVENUE EXPECTED TO BE AVAILABLE GOING FORWARD

The 'BBB' rating reflects Fitch's view that surplus tax revenues will continue to be available to pay parking bond debt service as property values have recovered and new development continues. In addition, dissolution legislation (AB1x26) precludes the issuance of additional bonds and eliminated the housing set aside requirement, allowing the agency to use residual housing funds for non-housing debt service, including for the parking revenue bonds.

PARKING FUND PLEDGE RESULTS IN RATING ON PARITY WITH SENIOR TABS

The city's parking system includes eight garages, six parking lots, and on-street metered spaces. The city estimates that the city's system accounts for about 40% of the total parking supply in the downtown area.

The parking fund's financial performance improved again in fiscal 2015 with estimated net parking revenues up 7% over fiscal 2014 after a 35% gain the year prior. While the city expects tax increment to pay the bonds' debt service, the city conservatively budgets for debt service payments in the parking fund. Despite this and a planned use of \\$6 million in capital reserves for the city's arena, the parking fund is budgeted to end fiscal year 2016 with a \\$9 million fund balance. This equates to about 90% of Fitch-calculated annual operating expenditures. The city plans to maintain reserves at about the fiscal 2016 forecast level.

Fitch expects parking fund performance to continue fluctuate with economic cycles. The fund's performance is highly correlated with downtown employment and commercial occupancy rates. The city's economy is currently healthy and expanding. Commercial vacancy rates in the first quarter of 2015 were low at 14%. Parking occupancy has likewise improved to 64% year to date through December 2014 from 50% in fiscal 2012. Strong fund balances in the parking fund help offset concerns about its volatility.

The parking fund's historically strong reserves were greatly reduced from fiscal 2009 by operating deficits and loans to the agency for the purpose of making debt service payments on the bonds. However, at the end of fiscal 2014, the parking fund retained approximately \\$13.9 million in cash (equal to 472 days of operations). Fitch views the cash balances as a benefit to the parking system and a modest enhancement to the cushion provided by pledged tax revenue.

For more info, see 'Fitch Upgrades San Jose RDA, CA's TABS to 'BBB'; Outlook Positive', dated July 10, 2015.