SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA+' rating to the following West Hollywood Public Financing Authority, California (the PFA) lease revenue bonds (LRBs):
--$19.1 million LRBs series 2013.
The bonds will sell via negotiated sale the week of Aug. 19. Proceeds will be used to finance the construction of an automated parking garage.
In addition, Fitch affirms the following ratings:
--$50.8 million LRBs series 2009A & 2009B at 'AA+';
--Implied general obligation (GO) bond rating at 'AAA'.
The Rating Outlook is Stable.
SECURITY
The LRBs are secured from annual appropriated payments by the City of West Hollywood (the city) to the authority for use of various essential leased assets. The city covenants to budget and appropriate the annual payments, equal to debt service, subject to abatement. The 2009 LRBs additionally are secured by a cash-funded debt service reserve fund.
KEY RATING DRIVERS
STRONG FINANCIAL OPERATIONS: The 'AAA' implied GO rating reflects the city's very strong financial position, marked by an extremely high financial cushion, a well-performing and diverse stream of revenues, and good expenditure flexibility.
SOUND LEASE PROVISIONS: The 'AA+' LRB rating reflects sound legal covenants, including standard insurance provisions and a covenant to budget and appropriate lease payments, and the essentiality of the leased assets.
STABLE, 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 growing, high-end, and niche-oriented commercial sector that is nonetheless 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 and positive signs for fiscal 2014. This resilience reflects the maturity of the tax base and a strong local real estate market with ongoing in-fill development.
ABOVE-AVERAGE LONG-TERM LIABILITIES: The city's net debt levels are moderately high due to overlapping debt but affordable. Slow amortization is mitigated by manageable capital needs, low carrying costs, and significant pay-as-you-go capital financing. The city's OPEB liability is minimal, and its participation in CalPERS likely will result in rising but affordable pension costs moving forward.
RATING SENSITIVITIES
The rating is sensitive to shifts in fundamental credit characteristics including the city's strong economy, financial operations, and management practices. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely.
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 number 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 190%, 180% and 191% of county, state, and national averages, respectively. April unemployment fell significantly to a somewhat elevated 7.8% from 8.9% the year prior owing to a solid 2.3% expansion in the employment base. The labor force expanded 1% during the same period, reversing the prior year's contraction.
The local tax base exhibits moderate concentration levels, with the top 10 payers making up 12.4% of 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. Fiscal 2013 AV gained 3.1% to an all-time high of $7.6 billion. AV per capita is an impressive $246,000, reflective of high local wealth levels.
The city is largely built out and there are a number of in-fill development projects approved and under way that could boost AV and various forms of tax revenues in future years. These include a major hotel, apartments, mixed-use structures, and retailers. Total estimated AV from these developments equal nearly $1 billion and would add over 1,000 residential units, nearly 300 hotel rooms, and 3/4 million square feet of retail and office space.
STRONG FINANCIAL OPERATIONS
The city's financial profile is very strong. General fund revenues are well diversified by source and surpassed pre-recessionary peak levels in fiscal 2012, though a significant portion of revenues are economically cyclical. Fiscal 2012 general fund operations produced a $1.2 million surplus, raising the total and unrestricted balances to extremely high levels of $76 million (107% of expenditures and transfers out). The city estimates that fiscal 2013 ended with a solid $5 million surplus, which would raise the total fund balance to $80.8 million (114%). The surplus well exceeded the city's budgeted balanced operations due to conservative budgeting practices and strong revenue performance. Major revenue categories include property, sales, and transient occupancy taxes, which were estimated to exceed their budgeted amounts by 7%, 6%, and 11%, respectively.
The fiscal 2014 budget points to a $2.8 million general fund deficit caused by a one-time retroactive health insurance liability payment related to a change in premium-setting methodology. The city participates in an insurance joint power authority. Excluding the payment, the budget is roughly balanced. The city's history of budgeting conservatism suggests that actual general fund results for fiscal 2014 could significantly outperform the budget.
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. Lastly, the city spends a significant amount on pay-as-you-go capital projects that could be scaled back, deferred, or cancelled.
The city entered into multi-year labor contracts that last through fiscal 2015 with its labor union that covers roughly 90% of its full time employees. The contract calls for annual 0-3.5% wage increases tied to inflation and prudently include salary re-openers should revenues decline by over 5%. The city's conservative multi-year projections include these cost escalations and suggest that they are affordable.
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 forecasted financial operations over 20 year periods.
A SATISFACTORY DEBT AND OTHER LONG-TERM LIABILITY PROFILE
The city's debt burden is a moderate 3.8% of AV but a high $8,441 per capita due predominantly to a large amount of overlapping debt issued by the Los Angeles Unified School District. The city's very high wealth levels mitigate concerns over the higher per capita debt levels. Principal amortization is slow with just 33.6% retired over 10 years. Slow amortization derives from the fact that all of the city's outstanding long-term general fund debt has been issued in the past four years. These rates are mitigated by the city's high level of financial flexibility, manageable capital needs, and significant use of pay-as-you-go capital financing. Also, the city's carrying costs (debt, pension, and OPEB costs) are quite affordable at less than 10% of governmental fund spending (net of capital projects).
The city has $70-$150 million of capital projects that could be moved forward, including park improvements and other items. 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 commercial real estate developments.
The city participates in CalPERS with a funded ratio of 72.3% that drops to a weak Fitch-adjusted 68.5% after adjusting the assumed investment return rate to a standardized 7% from 7.5%. The weak funded level is mitigated by the city's manageable level of pension costs relative to its budget and by management's prudent assignment of $6 million of general fund balance in the event that pension costs rise significantly from current levels. 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.
SOUND BOND STRUCTURE
The LRBs' security structure is sound, with standard lease-lease back provisions and a covenant to budget and appropriate lease payments. Insurance provisions are standard, including title, comprehensive, and 24-month rental interruption insurance. The bonds do not include a debt service reserve fund which does not affect the rating. The leased assets for the series 2013 bonds include city hall and a maintenance yard, which Fitch views as essential overall. The insured value of the assets equal $18.5 million, excluding land values. Fitch believes the value of the land would push the total value of the assets above the bonds' par value of $19 million, providing for ample collateralization. The city's outstanding 2009 LRBs are overcollateralized with essential assets, including the city's new library.
The majority of bond proceeds will be used to construct an automated parking structure, with a 7,000 square foot community plaza and related street improvements. Some proceeds will also be used to retrofit a city office building. Construction of the parking garage will remove an impediment to economic growth as the entry of new businesses requires the creation of additional parking spaces. Some businesses have been turned away in recent years due to a lack of parking supply.
Additional information is available at 'www.fitchratings.com'.
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
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=797627
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