News Column

Fitch Affirms Lynwood Public Financing Auth, CA's Lease Revs at 'BBB'; Outlook Revised to Stable

June 11, 2014

SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the following ratings on bonds issued by the Lynwood Public Financing Authority, California (the authority):

--$3.4 million lease revenue refunding bonds (public capital improvement project), series 2003A at 'BBB';

--$9 million lease revenue bonds (civic center improvement project), series 2010A at 'BBB'.

In addition, Fitch affirms the following rating:

--Implied City of Lynwood (city) unlimited tax general obligation bonds (GOs) at 'BBB+'.

The Rating Outlook is revised to Stable from Negative.

SECURITY

The lease revenue bonds are secured by lease rental payments from the city to the authority for use of various essential assets, subject to abatement. The bonds are also secured by cash-funded debt service reserve funds.

The city has no GO bonds outstanding.

KEY RATING DRIVERS

IMPROVED LIQUIDITY: The revision of the Outlook to Stable from Negative reflects the city's recent favorable resolution of deficit balances in its governmental and internal service funds. The city's resulting liquidity and reserve positions are adequate.

BUDGET CHALLENGES REMAINS: A return to deficit operations in fiscal 2014 (estimated) reflect ongoing fiscal challenges resulting from wage and other cost increases outstripping revenue gains. Modest contractual salary increases for fiscal 2015 will contribute to the city's pressured operations.

WEAK LOCAL ECONOMY: The city's economy remains weak but the recently improved unemployment rate primarily reflects employment gains. Its location within the large and diverse Los Angeles employment region provides some degree of economic stability.

STABLE, DIVERSE TAX BASE: The tax base is well diversified and has been growing modestly.

AFFORDABLE FIXED COSTS: Carrying costs, including annual debt service, pension and OPEB costs are moderate at about 14% of non-capital governmental spending. Direct debt amortization is average and the city's future capital needs are funded from various non-general fund sources.

GOOD LEASE SECURITY FEATURES: The 'BBB' lease rating reflects the city's GO credit characteristics as well as a one-notch distinction below the GO rating due to favorable security provisions that include a covenant to budget and appropriate lease payments for use of essential city assets.

RATING SENSITIVITY

FISCAL IMBALANCE: A return to significant structural deficit operations in the general or internal funds could negatively pressure the rating.

ADEQUATE RESERVES: A material reduction in liquidity could result in negative rating pressure.

CREDIT PROFILE

The 4.9-square-mile city, with a stable population of approximately 70,000, is situated approximately 11 miles south of downtown Los Angeles.

DEFICIT FUNDS PAID OFF

The revision of the Outlook to Stable from Negative reflects the city's improved financial position resulting from paying down deficits in governmental and internal service funds. In November 2013, the water fund reimbursed the retirement fund $2.1 million for expenditures made on its behalf between fiscals 1998-2008 and the retirement fund reimbursed the general fund $1.5 million for expenditures made on its behalf from fiscals 2008-2013. The general fund then used the $1.5 million reimbursement plus $1.1 million in one-time revenue from a franchise fee, and $1.8 million from general fund revenues and fund balance to eliminate the various governmental and internal service fund loans which had been payable to the general fund.

As a result, Fitch will no longer discount the city's unrestricted general fund balance to reflect those deficits. Furthermore, the operating deficits in these funds have been eliminated so Fitch does not expect there to be loans from the general fund in the future. The projected budgetary fund balance for fiscal 2014 of about $4.6 million is expected to be largely cash and investments.

DIVERSE REVENUES PROVIDES STABILITY BUT LIMITED GROWTH

The city benefits from diverse revenue sources, though the state constitution limits its ability to raise most revenues without voter approval. Property taxes are the largest contributor to general fund revenues at about 28%, followed by utility user tax (17%), sales tax (12%) and user charges (10%). Overall revenues decreased 3.6% on average annually from fiscal 2007-2011 but have grown modestly since then. Fitch believes the potential for larger gains is limited by the mature and built-out nature of the city and its limited sales tax base.

ONGOING BUDGET PRESSURES

The city ended fiscal 2013 with the first surplus ($623,000, 2.1% of spending), in several years. Management reports that improved results were due in part to labor concessions, one-time revenue and a citywide 10% savings directive.

For fiscal 2014, the city expects to return to deficit operations with a roughly $1.3 million use of fund balance, compared to a budgeted deficit of about $300,000. The larger deficit is driven by several one-time expenditures, including $1.8 million used to pay down the deficit funds, a one-time holiday bonus to all employees ($77,000), and $439,000 for under-estimated fiscal 2014 sheriff costs. If the draw on fund balance is entirely from the unrestricted portion, Fitch estimates fiscal year end 2014 fund balance at about $5.1 million, or a sound 16.6% of expenditures.

The fiscal 2015 budget is currently being developed. Given contractual increased labor costs (1%-2% raises for all employees), increases to the public safety contracts with Los Angeles County (2%-4%), modest expected revenue gains and limited ability to reduce the workforce further, Fitch expects a moderate use of fund balance to be budgeted for fiscal 2015. However, management reports that the city will comply with its 10% fund balance policy. The city is exploring options to increase revenues to address the mismatch between ongoing revenues and ongoing expenditures. Without such an increase in revenues, the city will be challenged to offset expenditure growth.

LOCATION IN GREATER LOS ANGELES SUPPORTS ECONOMY

The local economy is weak, as exhibited by a 14% December 2013 unemployment rate. However, this still high rate is much improved from a peak unemployment rate of almost 20% in 2010. Year over year employment growth was solid at 2.5% and the labor force remained flat.

Per capita income levels are extremely low at 43% and 46% of state and national levels, respectively. However, median household income levels are much higher at 72% and 84% of state and national levels, respectively.

The city reports improvement in the residential real estate market with prices up about 6% in May 2014 compared to May 2013. According to the city, the county assessor is estimating a 3% increase to the taxable assessed value (TAV) for fiscal 2015 compared to 2.2% in fiscal 2014. Taxable retail sales continue to show modest improvement into fiscal 2014.

While the Los Angeles regional housing market suffered severe declines from peak to trough, the city's mature housing stock provided stability. Citywide TAV has increased by 0.7% on average annually since fiscal 2008 with only one year of moderate decline.

FAVORABLE DEBT PROFILE

The city's debt profile is sound overall. Overlapping debt levels are moderate at $1,691 per capita, or 4.2% of TAV. Direct debt amortization is above average, with almost 60% of principal retiring over a 10 year period. Total carrying costs for debt service, pension and OPEB total a manageable 14% of governmental spending. Pension costs account for about half of the carrying costs. While pension increases appear likely due to a 50% rise in CalPERS rates over five years that is set to begin in fiscal 2016, the city's property tax over-ride for retirement will help offset some of the pension cost increases.

Security provisions on the leases are strong, including a covenant to budget and appropriate. The 2003 lease revenue bonds are secured by lease payments for the city's transit center and the 2010 lease revenue bonds are secured by the city's corporate yard which houses maintenance and capital planning divisions. Both leases are subject to abatement and require standard rental interruption and liability insurance and benefit from cash-funded debt service reserve funds.

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, University Financial Associates, S&P/Case-Shiller Home Price Index, and Zillow.

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=834204

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Karen Ribble

Senior Director

+1-415-732-5611

Fitch Ratings, Inc.

650 California Street, 4th Floor

San Francisco, CA 94108

or

Secondary Analyst

Stephen Walsh

Director

+1-415-732-7573

or

Committee Chairperson

Amy Laskey

Managing Director

+1-212-908-0568

or

Media Relations

Elizabeth Fogerty, New York, +1-212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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