SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed West Hollywood Public Financing Authority, California's (PFA, or the authority) bonds as follows:
--$52.4 million lease revenue bonds (LRBs) series 2009 A & B at 'AA+'.
In addition, Fitch affirms the city of West Hollywood, California's (the city) bonds as follows:
--Implied general obligation bonds (GOs) at 'AAA'.
The Rating Outlook is Stable.
SECURITY
The LRBs are secured by lease payments from the city to the authority for use of a variety of mostly essential leased assets, subject to abatement.
KEY RATING DRIVERS
STRONG FINANCIAL OPERATIONS: The 'AAA' implied GO rating reflects the city's very strong financial position, marked by prudent management practices, an extremely high financial cushion, and good expenditure flexibility.
STRONG LEASE PROVISIONS: The 'AA+' LRB rating additionally reflects strong legal covenants, the essentiality of the leased assets, and a sizeable equity contribution to the project financed by the lease revenue bonds.
SOLID, UPSCALE LOCAL ECONOMY: The city is well-situated within the diversified Los Angeles regional employment market and the local economy has unique strengths with a high-end, niche-oriented commercial sector that is fairly tourism-reliant.
MATURE, RESILIENT TAX BASE: The moderately diversified tax base has held up well, with just one year of modest decline during the housing-led recession, followed by two consecutive years of growth. This resilience reflects the maturity of the tax base and a strong local housing market.
SATISFACTORY DEBT PROFILE: The city's net debt levels are moderately high due to overlapping debt but affordable. The city's record of significant pay-as-you-go financing is a credit strength. Capital needs are manageable but amortization is slow. The city participates in CalPERS and related pension and OPEB liabilities are currently manageable; Fitch expects recent state-wide pension reforms will lower out-year pension cost growth rates.
CREDIT PROFILE
The city of West Hollywood serves about 35,000 residents in a 1.9 square mile area of Los Angeles County. Located nine miles northwest of downtown Los Angeles, the city benefits from its location between Beverly Hills and Hollywood and within the highly diversified Los Angeles region.
ECONOMY BENEFITS FROM HIGH INCOMES, NICHE TOURISM DRAW
The local economy is fairly concentrated in tourism-related sectors, with a significant amount of upscale hotels, restaurants, nightclubs, and boutique retailers. Other major employment sectors include entertainment, arts, and design. Economic indicators are good overall.
Per capita income levels are very strong at 188%, 176% and 188% of county, state, and national averages, respectively. September unemployment fell significantly to a somewhat elevated 8.6% from 10.6% the year prior. However, the improvement was due to a drop in the workforce participation rate, as the employment base contracted by a slight 0.2% during the same period.
The local tax base is not concentrated, with the top 10 payers making up 11.4% of assessed value (AV). Due to the maturity and strength of the local housing market, the city's AV has performed well. AV fell in just one year during the housing-led recession by a modest 3% in fiscal 2011 before returning to growth the following year. For fiscal 2013, AV is up 3.1% to an all-time high of $7.6 billion. AV per capita is an impressive $221,000, reflective of high local wealth levels.
STRONG FINANCIAL OPERATIONS
The city's financial profile is very strong. General fund revenues are well-diversified by source and reached an all-time high in fiscal 2012, though a significant portion of revenues are economically cyclical. Fiscal 2011 general fund operations (the last year for which an audit is available) produced a solid $6.6 million surplus, after transfers, raising the total and unrestricted general fund balances to extremely high levels of $75 million (121% of expenditures and transfers out) and $74.4 million (119.7%), respectively. Unaudited data for fiscal 2012 points to a surplus of $1.2 million, and the city's fiscal 2013 budget is balanced. Fitch believes the city may outperform its budget given management's history of conservative revenue budgeting, and strong year-to-date revenue performance.
The city expects the general fund balance to be drawn down over time to fund one-time capital projects. In previous years management had expected a draw-down to a still impressive $50 million (70.5%). However, capital project costs have been running well below the city's prior estimates, so fund balances may stabilize above the former target.
GOOD EXPENDITURE FLEXIBILITY AND PRUDENT MANAGEMENT PRACTICES
The city enjoys a good degree of legal expenditure flexibility, should it be needed. The city has achieved good operating results without the use of layoffs or furlough days to date. Public safety is contracted through the county sheriff's office, and could be scaled back by the city's request, and the city spends an atypically high amount on various social services that are not legally required. However, there could be political impediments to cutting back on either social services or public safety. Finally, the city spends a significant amount on pay-as-you-go capital projects that could be scaled back, deferred, or cancelled.
The city's financial management practices are impressive. These practices require enterprises to be self-supporting, a 25% minimum fund balance, and that unappropriated fund balances be used only for one-time expenditures, such as capital projects. The latter rule had been adhered to for some time, except in fiscal 2010 when the general fund ran a slight structural deficit that was subsequently corrected. The city produces two-year budgets with mid-year corrections, five-year capital improvement plans, and forecasts financial operations over 20-year periods.
SATISFACTORY DEBT PROFILE
The city's overall debt burden is moderately high at $8,135 per capita (3.7%) due to a large amount of overlapping debt related to Los Angeles Unified School District. Fitch views the debt as affordable given the city's high wealth levels. The city's direct burden is much lower but principal amortization is slow, with just 36% of debt retired over 10 years.
The city is building a $16 million parking structure, to be completed in Fall 2014. Management has not yet determined the proportion of debt to pay-as-you-go financing, and Fitch views the size of the project as quite manageable within the scope of the city's resources. The city additionally has $70 million-$150 million of various capital projects that could be moved forward. This capital projects list is sizeable yet manageable due to the flexibility of the projects, the city's significant historical use of pay-as-you-go capital financing, and management's intent to move forward with projects only as new significant revenue generators come online to finance them, such as new upscale hotels and other venues.
The city participates in CalPERS, and related pension payments have been manageable. Recent state-wide pension reforms likely will have minimal short-term benefits, though out-year pension cost hikes will be subdued somewhat. The city offers a small OPEB benefit to retirees, with a small and quite manageable unfunded liability. The city currently pays for OPEB on a pay-as-you-go basis.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
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