OREANDA-NEWS. February 25, 2016.  Fitch Ratings has affirmed the rating on the following Atwater Public Financing Authority, CA (the authority) obligations issued on behalf of the City of Atwater, CA (the city) at 'BBB-':

--\\$18.4 million wastewater revenue bonds, series 2008.

The Rating Outlook is Stable.

SECURITY

The series 2008 bonds are secured by installment payments made by the city to the trustee as assignee of the authority. The city's obligation to make installment payments is payable from gross revenues of the city's sewer system (the system). The bonds are also secured by a cash-funded debt service reserve fund (DSRF) funded at the maximum amount allowable by law and held with the trustee.

KEY RATING DRIVERS

ADEQUATE FINANCIAL PERFORMANCE TO CONTINUE: The system continues to demonstrate adequate financial performance. Fitch-calculated debt service coverage (DSC) dipped slightly to 1.25x in fiscal 2015 (unaudited) due primarily to various one-time spending after equaling 1.3x each of the prior two years. Fitch-calculated DSC is estimated at 1.3x-1.4x through the forecast period.

STRUCTURAL BALANCE ACROSS FUNDS: The city continues to implement revenue-raising actions begun in 2013 that eliminated structural imbalances in its general, water and sanitation funds, thus reducing pressure on the sewer fund.

STABILIZED CASH; LOANS OUTSTANDING: The city's pooled cash position has stabilized after drawdowns due to deficits accumulated in various internal funds. Risks of further loans by the system to shore up deficits in other city funds appear reduced. Further, the city established an interfund loan policy and loan repayment amortization schedule for outstanding loans owed to the system.

HIGH DEBT, MANAGEABLE CAPITAL: The city's succession of debt issuances to complete construction of a new wastewater treatment plant in order to comply with environmental requirements has resulted in high debt levels and slow amortization.

LIMITED RATE FLEXIBILITY, ECONOMIC METRICS: Monthly charges are substantially higher than surrounding communities and Fitch's affordability threshold. Moreover, the service area's below-average income metrics and high unemployment challenge the city's ability to increase rates in the future.

RATING SENSITIVITIES

CONTINUED FISCAL SUSTAINABILITY: Fitch expects continued structural balance across all city funds and gradual improvement in overall liquidity. Re-emergence of imbalance or reduction of reserves could result in negative rating action.

MAINTENANCE OF SYSTEM FINANCIAL PROFILE: The rating is based on achievement of at least forecast DSC. As such, a material decline in coverage without mitigating factors could lead to negative rating actions.

CREDIT PROFILE

Atwater is located in northeast Merced County, in the central portion of California's San Joaquin Valley. With a population of about 28,000, it is a small agricultural-based community with a federal prison at the site of the former Castle Air Force Base, which closed in 1995. The sewer system provides wastewater collection, treatment, and disposal to the city's residents and to the Town of Winton (population of about 9,000), a U.S. penitentiary (inmate population of around 1,200), and Castle Airport Aviation. These three customers combined provide about 20% of service charge revenues.

STRUCTURAL BALANCE ACROSS FUNDS; RATE FLEXIBILITY CONSTRAINED

The city continues to address structural deficits in the general, water, and sanitation funds that stemmed largely from declining revenues, rising expenditures, and failure to raise rates in the water (for 20 years) and sanitation funds (for 10 years). For the general fund, home values dropped severely during the downturn, significantly reducing property tax revenues. In addition, almost all other general fund revenues, with the exception of sales taxes, also experienced declines.

To boost revenues and move towards budgetary balance, the city implemented a five-year water rate package that increased rates for typical users by 40% in fiscal 2014, followed by additional increases of 15% annually through fiscal 2018. Further, the city implemented a sanitation rate increase that increased rates 63% in fiscal 2014, followed by 6%-7% annual increases through fiscal 2018. The city had implemented a series of sewer rate increase through fiscal 2012 to fund increased debt service costs and does not expect any additional increases in the near term. While Fitch views the city's actions to stabilize the water and sanitation funds as positive, the combined water/sewer rates are now \\$100.23 per month, or 2.9% of median household income. These rates are well above those of surrounding communities and Fitch's affordability threshold. Consequently, future system rate flexibility will be constrained.

On the general fund side, in March 2013 voters approved a 10-year one-half-cent sales tax (Measure H) restricted for public safety spending. The fiscal 2016 budget indicates the sales tax is expected to generate \\$1.75 million. These funds are not expected to increase reserve levels but are expected to improve cash flow and reduce what otherwise could have been significant wage pressure.

ADEQUATE FINANCIAL POSITION

The structural imbalances in the city's general, water, and sanitation funds eroded the city's fiscal capacity and led to a sharp reduction in city pooled cash resources in the fiscal 2012-2013 timeframe. The drawdown of pooled cash negatively affected sewer fund cash levels given that the sewer fund reserves accounted for most of the city's total cash balance. According to management, all funds are now self-supporting and will require no additional interfund transfers from the sewer fund. Further, the city council adopted an interfund transfer policy requiring council approval of transfers and more transparent reporting. City council also adopted resolutions outlining the amortization schedules of the outstanding loan payments to the sewer fund totaling \\$8.7 million, which is to be repaid from fiscals 2016 to 2030.

Cash increased in fiscal 2015 (unaudited) as expected after a 2014 accounting change in which sewer fund cash was reduced to bring cash deficits in the other funds to zero. The sewer fund's cash balance stood at \\$4.5 million, or 321 days, in fiscal 2015 (unaudited) from just \\$2.5 million in fiscal 2014 (233 days). Going forward cash levels are expected to gradually increase given the loan repayments as well as lack of additional planned interfund borrowing. Fitch-calculated DSC, which has been adequate in the 1.2x-1.3x range in recent years is expected to improve slightly to 1.4x through fiscal 2020.

WILLINGNESS-TO-PAY/ACCELERATION CONCERNS LESSENED

The city council declared a fiscal emergency in October 2012 but did not pursue any additional steps to erode its perceived willingness to pay system bonds. Moreover, in November 2012 the city council ceased its discussion related to possible confidential mediation process with creditors pursuant to the state's A.B. 506. The city also passed a fiscal 2013 budget in February 2013 and an operationally balanced budget for fiscals 2014 through 2016. Fitch does not currently anticipate that the city will enter into the A.B. 506 process and/or file for Chapter 9 bankruptcy protection.

ELEVATED DEBT PROFILE; LIMITED CAPITAL NEEDS

The system currently operates one wastewater treatment plant (WWTP). The authority has issued approximately \\$64 million in wastewater revenue bonds since 2008 - nearly tripling outstanding system debt - to construct the new WWTP. The WWTP was designed to comply with more stringent requirements associated with the system's discharge permit, including a move to tertiary treatment standards. As a result of the authority's recent debt issuances, system per customer and per capita debt levels are 6-7x higher than Fitch's national medians and projected debt levels are about 4-5x higher. In addition, amortization of principal is very slow, with just 19% and 50% of principal retired in 10 and 20 years, respectively. However, future capital needs are modest with just \\$1.8 million in planned capital spending through fiscal 2020 and no additional borrowing expected.

WEAK ECONOMIC INDICATORS

Typical of agricultural communities, unemployment levels (13.1% as of December 2015) are well above state and national averages. Further, median household incomes are well below, and poverty rates well above, state and national averages. The area experienced a significant slowdown in growth during the economic downturn as exemplified by a sharp decline in connection fee revenues and city assessed values (AV). However, the economy continues to rebound with a combined AV increase of 26% from fiscal 2013 to 2016.