Rating Action: Moody's affirms A2 rating on Sacramento Tourism Infrastructure District No. 2018-04, CA's assessment bonds; outlook revised to stable from negativeGlobal Credit Research - 30 Mar 2022New York, March 30, 2022 -- Moody's Investors Service has affirmed the A2 rating on the Sacramento Tourism Infrastructure District (STID) No. 2018-04's assessment bonds issued on its behalf by the City of Sacramento (Aa2 stable). The STID has $49.6 million outstanding assessment bonds. The outlook was revised to stable from negative.RATINGS RATIONALEThe A2 rating on the bonds reflects the underlying economic strength of the assessment district, which includes all of the City of Sacramento (Aa2 stable) and neighboring unincorporated areas of Sacramento County (A1 stable) primarily to the east. While the assessment district was newly established in 2018, it is nearly contiguous with a tourism marketing district formed in 2012, which has a track record of collecting similar assessments, and prior to the coronavirus outbreak, was experiencing robust growth in travel and tourism. Revenue per Available Room has fully recovered to pre-pandemic levels, supported in part by recent construction of new hotel rooms, as well as full recovery of occupancy rates.The A2 rating further reflects the limited nature of the assessments pledged to repay the bonds, which are economically sensitive. The assessment district was formed by lodging businesses in the Sacramento area for the purpose of funding a second ballroom at the city's convention center through a 1% assessment on lodging revenues. The rating incorporates the solid historical demand for hotel rooms, as demonstrated by the rapid growth in assessments collected in the overlapping tourism marketing district, as well as projected demand resulting in notable new hotel construction. The rating further incorporates favorable debt structuring and legal provisions, which are key credit features.Coverage for the bonds from current revenue provided 0.7 times in fiscal 2021, requiring very modest general fund support from the city of Sacramento, but is expected to provide 1.0 times coverage in fiscal 2022. The city's support of the district's bond debt service is a governance factor driving this rating action. The district has a surplus revenue account funded to 50% of maximum annual debt service (MADS) equal to $1.4 million available to pay debt service, but which has not been used to do so.RATING OUTLOOKRevision of the outlook to stable reflects our view that the recovery of assessment revenues will be sufficient to maintain the credit profile of the bonds in the near term. While there is a very small amount of bond authorization outstanding, the lien is essentially closed and the city of Sacramento, while not legally obligated to provide for any shortfall in debt service coverage or to fund the authorized project without additional bonds under the district's authorization, has ample resources available to do so.FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATING- Substantial growth in debt service coverage- Trend of robust economic growthFACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATING- Return to a decline of pledged assessment revenue- Substantial new debt beyond the contemplated potential third lien- Depletion of the district's debt service and surplus revenue reserves, not offset by the city- Use of the debt service reserve suretyLEGAL SECURITYThe STID bonds are secured by a first pledge of and lien on all of the pledged revenues from assessments on the lodging businesses in the district, excluding vacation rentals, although any assessments paid by vacation rental owners are also available for payment of debt service. Parity bonds are permitted for refunding outstanding bonds. Subordinate obligations are permitted for other tourism infrastructure projects approved by the tourism district committee in accordance with the STID Management District Plan. There is an additional bonds test (ABT) for bonds of 1.15 times MADS. The debt service reserve account was funded at closing at the lesser of the three-prong test with a surety. Additionally, a surplus revenue account was cash funded at 50% of MADS and any draws will be replenished over time from excess revenues.PROFILEThe Sacramento Tourism Infrastructure District No. 2018-04 was formed through petition by lodging businesses located within the district and approval by the City of Sacramento to provide specific benefits to payors, by providing funding for the construction of a second ballroom as part of the Sacramento Convention Center and other infrastructure project and marketing designed to increase room night sales for assessed lodging businesses. The Tourism District was formed pursuant to the Property and Business Improvement District Law of 1994, as augmented by an ordinance adopted by the City Council pursuant to its charter powers. The assessment rate is 1% of total room revenues of lodging businesses within the district, with collections beginning in September 2019. Assessments on lodging businesses located outside of the city but within the district are collected and remitted to the city by Sacramento County. in 2019, the district had over 100 lodging businesses (excluding vacation rentals) with about 11,000 rooms.Sacramento is located at the confluence of the Sacramento and American rivers in the northern Central Valley, 75 miles northeast of San Francisco (Aaa negative). The city encompasses 99 square miles and has over 500,000 residents as of 2018, making it the sixth largest city in the state. It was incorporated in 1849 and is the California (Aa2 stable) state capital and the seat of Sacramento County (A1 stable). The full-service city is governed by a nine-member city council including an elected mayor.METHODOLOGYThe principal methodology used in this rating was US Public Finance Special Tax Methodology published in January 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1260087. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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