Fitch Ratings assigns an 'A+' rating to the following Municipal Improvement Corporation of Los Angeles (MICLA), CA's lease revenue bonds:
--$40.4 million series 2009-C (capital equipment) tax exempt;
--$21.5 million series 2009-D (recovery zone economic development bonds);
--$69.6 million series 2009-E (real property) tax exempt.
The bonds are expected to sell via negotiation on Dec. 1-2 and are separately secured by the city's lease rental payments to MICLA for various equipment and facilities.
In addition, Fitch downgrades the following ratings:
--$1.5 billion in outstanding City of Los Angeles general obligation bonds to 'AA-' from 'AA';
--$25.9 million in City of Los Angeles judgment obligation bonds to 'A+' from 'AA-';
--$1 billion in outstanding MICLA refunding certificates of participation (Refunding Program AY), series 2005, and lease revenue bonds, series 2006-A, 2007-A, 2007-B1, 2007-B2, 2008-A, 2008-B, 2009-A, and 2009-B to 'A+' from 'AA-';
--$419.7 million in Los Angeles Convention and Exhibition Center Authority lease revenue bonds, series 2003A and series 2008A to 'A+' from 'AA-'.
The Rating Outlook remains Negative.
The downgraded ratings reflect the city's reduced general fund reserves and the limited ability to replenish them given the city's weakened economy and future years' projected sizable general fund structural imbalance. The ratings acknowledge the city's meaningful response to this year's projected budget gap, although solutions enacted provide ongoing savings that address only about one-half of the projected fiscal 2011 operating deficit. As rising pension costs contribute significantly to the future financial needs, the city cites pension reform as necessary to achieve fiscal balance and has already begun discussions with some labor groups. However, Fitch views the ability to achieve savings in this expense as uncertain in both amount and timing, especially since any change to the police and fire retirement systems requires voter approval. Fitch also believes that the city's economic decline, as evidenced by high unemployment, sales tax weakness, assessed value losses, and high home foreclosure and negative amortization mortgage exposure, will impede financial recovery. The revised ratings also reflect the economy's strong underpinnings as the commercial and cultural center of a large and populous geographical area, moderate overall debt burden, and some funding for retiree medical costs beyond current year payments.
The Negative Outlook results from the size of future years' projected budget gaps along with substantial efforts needed to further reduce spending, enhance revenues, or a combination of both. Fitch views meaningful and ongoing progress in achieving savings through pension reform or other means as critical to retaining ratings at these new levels.
In the meantime, fiscal 2010 is likely to be balanced at year-end through the drawdown of at least some reserve funds, significantly diminishing reserve levels to low amounts. The fiscal 2010 adopted budget closed a $529 million budget gap, including $326 million in personnel expenditure reductions, of which $13 million still need to be finalized. Due to outstanding solutions, delayed implementation of previously agreed solutions, and a $75 million shortfall in revenue receipts, the total budget shortfall for fiscal 2010 is currently $98.1 million. Solutions for this budget shortfall have yet to be fully detailed and agreed upon by all needed parties including labor unions. If these savings cannot be achieved, the city will use reserves to fund the residual imbalance.
The city's four-year financial projections indicate a worsening structural imbalance even incorporating the recurring portion of the budget savings enacted this year. The forecast is projecting ongoing revenue declines in fiscal 2011 from property-related taxes, sales and business taxes, licenses, permits, and fees. The budget shortfall is projected at $408 million for fiscal 2011, a high 9% of general fund spending. The gap reaches $1 billion by fiscal 2014, about one-half of which represents additional pension costs arising from market corridor changes enacted this fiscal year to produce near-term savings. The gaps in fiscals 2012-2014 prudently include cost of living adjustments to salaries, which are deferred for fiscals 2010 and 2011. Full resolution of the structural imbalance will require significant financial discipline in all spending categories as well as agreement between elected officials, the unions, and citizens.
Historically, the city's financial operations have weakened gradually over a number of years. The general fund went from a $180.3 million operating surplus in fiscal 2005 to a $110.1 million operating deficit in fiscal 2008, with operating losses in each of the fiscal years in between. As a result, while still sizeable, the unreserved general fund balance in fiscal 2008 has declined to $418.7 million (9% of spending) from a high of $578.9 million (15.4% of spending) in fiscal 2005. By implementing various budget balancing measures, the city closed a total fiscal 2009 budget gap of $35.3 million, using a moderate amount of reserves.
In 2008, Los Angeles' economy saw its first overall job decline since 2003. All sectors have been shedding jobs. Between September 2008 and September 2009, the unemployment rate rose sharply to 14% from 9%. The city's unemployment rate is consistently higher than those of the county, state, and nation. Income levels are consistently below state and national levels. Assessed valuation declined 1% in fiscal 2010 and is likely to show a somewhat larger loss for fiscal 2011, following several years of strong gains. The city's mortgage foreclosure rate exceeds the national average, as does the share of negative amortization mortgages. However, the city's share of subprime mortgages is below the national average.
Los Angeles' debt issuance has been increasing although the debt burden remains affordable. The overall debt burden is moderate at $3,838 per capita and 3.6% of market value, and Fitch expects it will remain affordable given the city's above-average amortization rate of 66% in 10 years.
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