Fitch Ratings assigns an 'A' rating to the following Lynwood Public Financing Authority's (CA) lease obligation:
--$9 million Lynwood Public Financing Authority's (authority) lease revenue bonds, 2010 series A (civic center improvement project).
In addition, Fitch affirms the rating on the following lease obligation:
--$6.2 million lease revenue refunding bonds, series 2003.
The bonds are expected to sell via negotiation on June 9, 2010.
The Rating Outlook on both series is revised to Negative from Stable.
RATING RATIONALE:
--The Negative Rating Outlook is based on the likelihood of diminished financial flexibility resulting from planned use of fund balance in fiscal years 2010 and 2011 coupled with flat to declining tax revenues.
--The city is largely residential with some industrial and commercial properties and is located in an area just south of Los Angeles which has very low socio-economic indicators, from income, unemployment, and education.
--While the city's assessed valuation (AV) has increased nicely in recent years, and even increased modestly in fiscal 2010, foreclosure rates are very high and, as a result, home prices and AV may be vulnerable to decline in the coming years.
--General fund financial operations were healthy through fiscal 2009, resulting in very high fund balance levels. However, the city has three special revenue funds outside the general fund which have accumulated deficits; on a combined basis, operations are adequate. Furthermore, the city expects to post deficits in fiscal 2010 and fiscal 2011, drawing down fund balance to adequate levels.
--Even including this issuance, the city has very low direct debt levels. Most capital investments are being funded from tax increment. Overall debt ratios are moderate.
--Operations are aided by a property tax levy for retirement costs and special assessments for lighting, landscaping and traffic safety.
WHAT COULD TRIGGER A DOWNGRADE?
--Management inability to achieve balance between ongoing revenues and ongoing expenditures which would require significant spending cuts and/or pursuit of increased revenues.
--Absence of economic stability resulting in persistent downward pressure in tax revenues.
SECURITY:
Bonds are secured by lease payments made by the city of Lynwood (city) to the authority for beneficial use and occupancy of the city's corporate yard, with an insured value of $11 million. Additional security will be provided by a standard cash reserve fund. The 2003 lease revenue bonds are secured by lease payments made by the city for use of its transit center.
CREDIT SUMMARY:
The city is located about 11 miles south of downtown Los Angeles and is largely residential but also benefits from some industrial and commercial properties as well as a large non-profit hospital. The 4.9 square mile city is largely built out so population is stable and economic growth will result from redevelopment and infill. The city's income levels are low - per capita income is just 44% of the state average - but both per capita and median household income levels increased more rapidly, 6.8% and 9.1% annually, respectively, than the county, state or national rates of increase from 2000-2008. The unemployment rate trends higher than the county and state and has remained very high over the last year, climbing to 19% in March 2010 compared to 17% in March 2009 after the city lost 2% of its job base over the same period. This is an improvement from the 20% unemployment rate in January 2010 and a loss of 5% of jobs during the twelve months ending January 2010, and may reflect some stability in the local economy. The city benefits from its location in the middle of the Los Angeles and Long Beach metro area.
The city's tax base saw strong growth through fiscal 2009, averaging 9.4% annual growth, and remained positive into fiscal 2010 with a 2.3% increase. The city is projecting up to a 4% decline in AV in fiscal 2011. The relative stability of the tax base may point to the lower level of residential and commercial property turnover in recent years, resulting in fewer properties valued at the peak of the market. Property taxes only make up about 8% of city general fund revenues so there is limited exposure to fluctuations in the city's AV.
The city's financial position is sound, although it is under pressure. The fiscal 2009 audit reveals a total fund balance of $9.5 million, equal to 33% of expenditures and transfers out. However, adjusted for about $4 million which is due from other city funds currently without the resources to repay the general fund, the unreserved fund balance falls to a still strong $5.6 million, or 19% of spending. The city used about $2.8 million in fund balance to balance its fiscal 2010 budget and estimates show actual use of about $2.3 million. This will result in an unreserved fund balance at fiscal year end 2010 of $6.6 million (22% of spending) or $2.6 million when adjusted for the receivable, equal to 9% of spending. The fiscal 2011 budget will likely include the use of up to $3.5 million in fund balance, which would result in very thin reserves. The city typically ends the year better than budget and has recently only permitted departments to spend about 97% of their budget, but budgetary pressures are likely to continue past fiscal 2011.
The city's revenues are diverse and have remained fairly stable. Revenues are led by utility user taxes, which after a recent voter-approved adjustment, makes up about 21% of total revenues, followed by in-lieu property taxes from the state (also 21%), charges for services (13.5%), sales taxes (10%) and property taxes (8%). Overall revenues are down about 3.7% between fiscal 2006 and fiscal 2010.
The city's debt burden is low, with direct debt totaling about $370 per capita and 0.9% of market value. Amortization of the lease obligations and a $5.7 million HUD loan is rapid at 64% in 10 years. Including overlapping entities, per capita debt is $1,381 and 3.3% of market value. The city's pension obligation is manageable and the entire general fund portion of annual pension costs are paid from a non-expiring voter-approved retirement levy. Its other post-employment benefit (OPEB) liability is about $27.3 million with a $2.5 million annual required contribution.
Applicable criteria available on Fitch's website at www.fitchratings.com:
--'Tax-Supported Rating Criteria,' dated Dec. 21, 2009.
--'U.S. Local Government Tax-Supported Rating Criteria', dated Dec. 21, 2009.
Additional information is available at www.fitchratings.com.
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