--Implied general obligation (GO) bonds at 'AA-'.
The Rating Outlook is Stable.
The POBs are an absolute and unconditional obligation of the city imposed by law.
KEY RATING DRIVERS
SOLID FINANCIAL POSITION: The city's financial position is solid, as exhibited by high fund balances, recent voter approval of a new sales tax, years of prudent cost-cutting, and a manageable path to structural balance. Nonetheless, further cost cutting will be required to maintain balanced general fund operations.
BELOW-AVERAGE ECONOMY IN RECOVERY: The city's economy is benefitting from an employment and housing market recovery. Nonetheless, the city was very hard-hit by the housing-led recession, and overall economic indicators significantly lag the state and region.
BELOW-AVERAGE DEBT PROFILE: Overall debt levels are high, largely reflective of substantial redevelopment borrowing. Elevated carrying costs are likely to head higher due to rising pension costs, escalating debt service, and stepped-up efforts to pre-fund other post employment benefits (OPEB). Offsetting these weaknesses, the city's pensions are adequately funded and capital needs are manageable.
STRONG FINANCIAL MANAGEMENT: Seasoned financial management and policymakers have a record of prudent fiscal actions. Institutionalized financial practices are impressive, including a high minimum fund balance policy, new OPEB pre-funding requirements, multi-year forecasting, and a budget stabilization reserve requirement.
FINANCIAL DECLINES WOULD BE NEGATIVE: An unexpected and material deterioration of the city's fiscal position or strong management practices could lead to a downgrade.
UPWARD MOVEMENT LIMITED: Fitch views the implied GO rating as currently capped at 'AA-' due to the city's debt and economic profile weaknesses.
A WEAK EMPLOYMENT MARKET IN RECOVERY
The city's economy was very hard-hit during the housing-led recession, with unemployment peaking above 17% and severe peak-to-trough home value declines of 66.1%, according to Zillow. The local economy has recovered somewhat, with three years of employment expansion lowering the unemployment rate to a still high 10.9% in
HOUSING MARKET, ASSESSED VALUES STABILIZING
Home prices have begun to recover, with December values up a substantial 34% year-over-year to
The city's economy is dominated by heavy industrial enterprises, resulting in high tax base concentration. The top 10 taxpayers equal 35% of AV and the top taxpayer (a natural gas power plant) makes up about 14%.
Per capita income levels are low at 57% and 79% of regional and state levels, respectively. Household incomes are higher, reflecting large household sizes, but still lag the region and state.
STRONG FINANCIAL POSITION
The city's financial operations are strong, in spite of deep recessionary pressures on city revenues. Fiscal 2013 general fund operations produced a manageable
The city is in year three of a seven-year plan to structurally balance its operations. The city has well-outperformed projections since initiation of the seven-year plan, and may approach balance sooner than originally anticipated. Out-performance has stemmed from several factors, including forecasting conservatism, voter approval of a new sales tax, and revenue out-performance.
The city's fiscal 2014 general fund budget includes a
NEW SALES TAX TO TEMPORARILY BOLSTER REVENUES
The Measure P sales tax was approved by a high 74% of voters in
FURTHER CUTS LIKELY REQUIRED TO ACHIEVE LONG-TERM BALANCE
Despite the city's recently strong revenue performance, management projects future cost-cutting will be required to achieve fiscal balance as the city faces increased costs related to pensions, OPEB pre-funding, recent wage hikes, and escalating POB debt service.
The city's seven year plan includes required cuts to reach structural balance, which seems achievable given the council's history of prudently reducing costs as recommended by financial management. Also, the scope of required future cost-cutting has fallen significantly over the past two years due to rising revenues and cost-cutting to date. The projected required cuts range from zero to
The seven-year plan also includes a cumulative
LARGE DEBT BURDEN, RISING CARRYING COSTS
The city's overall debt burden is very high at 13.2% of AV (
The city offers two CalPERS pension plans, which are adequately funded at 87.4% and 83.4% for the miscellaneous and public safety plans, respectively. The funded ratios were boosted due to the issuance of POBs. Capital needs are moderate, consisting mostly of road maintenance, and the city has no plans for additional debt issuances.
STRONG FINANCIAL MANAGEMENT, NEW INSTITUTIONALIZED POLICIES
The city employs a seasoned team of financial administrators and policymakers who acted conservatively during the recession to maintain the city's strong financial position by cutting costs, raising revenues, and instituting conservative policies.
In 2013 city council prudently approved a fiscal sustainability ordinance that created or enhanced a number of conservative financial management policies. These include the doubling of the city's former minimum unappropriated reserve to 30% of operating expenses, establishment of a budget stabilization reserve with a balance ranging between 5%-25% of operating expenses, minimum OPEB pre-funding levels, and a supermajority vote of the council to appropriate reserves. The policy also directs certain excess revenues to additional OPEB pre-funding, and capital repairs.
Management estimates the unappropriated general fund balance will increase to 23% by fiscal year end 2014 and will be fully funded by fiscal 2018 using one-time revenues and transfers.
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 and Zillow.
--'Tax-Supported Rating Criteria' (
--'U.S. Local Government Tax-Supported Rating Criteria' (
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
Tel: +1 212-908-0526
Source: Fitch Ratings
Most Popular Stories
- Reid: Bundy Backers Are 'Domestic Terrorists'
- Twitter Offers App Install Ads
- Judge Tells Dad to Quit Emailing His Kids in All Caps
- Legalize Marijuana But Not Hard Drugs, Say Americans
- Michaels Data Breach May Affect 2.6 Million Cards
- Gabriel Garcia Marquez Dies at 87
- 'Boats 'N Hoes' PAC Sunk by Complaint
- Natural Gas Shoots Up on Bullish Stockpile Report
- Naya Rivera and Lea Michele: The 'Glee' Fight That Never Was?
- Chipotle Plans First Price Rise in 3 Years