Friday, October 24, 2008

Fitch Ratings: PPH May Be Required To Increase Property Tax Rate

The PPH Board just voted to issue $110 million of Prop BB authorized bonds two years ahead of schedule. The original schedule for the third issuance of Prop BB bonds was in FY 2011 as shown in this slide presentation from July 29, 2004 (slides 18-19, pdf pages 20 & 21 of 25). http://civics.robroy.cc/PPHFinancePlan080404.pdf

The projected tax rate for paying for the Prop BB bonds was based on a later third issuance, AND on a property tax base that grows at an average of 6.1% per year between FY 2005 and FY 2046. Much of the PPH district has experienced a collapse in real estate values on the order of 30 to 50%, which collapse will likely translate into a shrinking tax base. No credible estimates have the property tax base growing by 6.1% for the foreseeable future.

I am convinced that the accelerated issuance of these bonds, the recent collapse of real estate values, and the current slowdown in PPH revenues, makes it mathematically impossible for PPH to maintain the promised tax rate of $17.75 per $100,000 of assessed valuation promised to the voters in 2004.

The requirement for the PPH Board to raise the property tax rate is echoed by Fitch Ratings in its just published (October 21, 2008) evaluation in advance of the accelerated issuance of $110 million of Prop BB bonds:

"The tax rate and levy to repay debt is unlimited, although PPH is legally required to pay the general obligation debt if the ad valorem taxes are insufficient. Fitch notes that the tax base vulnerability may require PPH to exceed the tax rate promised to voters in order to accommodate the rising debt service schedule."
marketwatch.com: Fitch Rating Article
digital50.com: Fitch Rating Article

The accelerated issuance of $110 million in bonds is covering for PPH's inability to issue additional revenue bonds at this time. The two main reasons for not issuing revenue bonds at this time: 1) PPH failed to generate sufficient revenues in FY 2008 to now support an offering for additional revenue bonds; and 2) PPH must now refinance variable rate revenue bonds issued in 2006 ($180 million) which have interest rates set in weekly auctions held by Citigroup, and those interest rates have doubled during to the current financial crisis.

Based on my calculations, I am certain that property tax revenues at the tax rate now being levied ($17.75/100K) will not cover the required debt payments for the Prop BB bonds being issued. The question now is, will the PPH Board vote to raise the tax rate, or will the PPH Board cover the shortfall with its own funds. I find it highly doubtful that the PPH Board will vote to cover the shortfall with its own funds. PPH does not have the funds to cover a property tax shortfall. That being the case, then the current PPH Board just took an action that will result in higher future property taxes on the average property owner in the PPH district.

A stealth property tax increase by the current PPH Board!

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