Fitch Ratings assigns an 'A+' rating to the following Los Angeles (CA) judgment obligation bonds:
--$49.6 million series 2010-A.
In addition, Fitch affirms the following ratings:
--Approximately $1.5 billion in outstanding Los Angeles (CA) general obligation (GO) bonds at 'AA-';
--Approximately $359.9 million in outstanding Los Angeles (CA) sanitation equipment charge revenue bonds, series 2001-A, 2003-A, 2003-B, 2004-A, and 2005-A, and outstanding solid waste resource revenue bonds, series 2006-A, 2009-A, and 2009-B at 'AA-';
--Approximately $25.9 million in outstanding Los Angeles (CA) judgment obligation bonds at 'A+';
--Approximately $1.1 billion in outstanding Municipal Improvement Corporation of the City of Los Angeles (MICLA) refunding certificates of participation (COPs) (Refunding Program AY), series 2005, and lease revenue bonds, series 2006-A, 2007-A, 2007-B1, 2007-B2, 2008-A, 2008-B, 2009-A, 2009-B, 2009-C, 2009-D, and 2009-E at 'A+';
--Approximately $419.7 million Los Angeles Convention and Exhibition Center Authority lease revenue bonds, series 2003A and 2008A at 'A+'.
The Rating Outlook is Stable. The series 2010-A bonds are expected to sell via negotiation on June 10, 2010.
RATING RATIONALE:
--The city of Los Angeles is the commercial and cultural center of a large, diverse economy with strong and stabilizing underpinnings although key taxation revenues continue to decline, the city's property market remains pressured, and its unemployment rate remains stubbornly high.
--The city's four-year financial projections indicate a growing structural imbalance which will be difficult to resolve without significant economic improvement, a stronger assessable tax base, and further personnel expenditure reductions. Pension and benefit reform remain significant factors in out-year budget balancing.
--Reserves are currently low and near-term replenishment is uncertain.
--The city's budget process is very political which hinders its ability to respond swiftly to revenue declines.
--Despite continued plans for increased leverage, debt ratios are moderate and Fitch expects that they will remain affordable.
KEY RATING DRIVERS:
--Resolution of general fund structural imbalance in an environment of declining tax revenues, a pressured real estate market, and rising personnel-related costs.
--Rebuilding of general fund balances and reserves.
--Implementation of planned long-term expenditure reduction initiatives including labor concessions to curb personnel costs.
SECURITY:
The judgment obligation bonds are secured by the city's absolute and unconditional obligation to pay principal and interest. The GO bonds are secured by the city's full faith and credit and unlimited taxing power. The sanitation equipment charge revenue bonds and solid waste resources revenue bonds are secured by a first lien on pledged solid waste resources fee revenues, including penalties and interest, net of administrative costs. The MICLA COPs and lease revenue bonds are secured by the city's lease rental payments to MICLA for various facilities and equipment, subject to appropriation. The Los Angeles Convention and Exhibition Center Authority lease revenue bonds are secured by the city's lease rental payments made to the authority for the use and occupancy of the convention and exhibition center, subject to appropriation.
CREDIT SUMMARY:
Los Angeles is an important economy in its own right and by virtue of its size and diversity is well positioned to benefit from eventual national economic recovery. However, it has experienced substantial recessionary pressures which have caused sharp taxation revenue declines, though the city expects such revenues to start stabilizing in fiscal 2011. The length of time it has taken to achieve political consensus around the budget actions taken to date indicate how politically difficult it is for the city to respond nimbly to economic contraction. Rebuilding the general fund reserves will need concerted action from the city's elected officials, administrators, and labor unions, as well as support from the voters for those solutions requiring voter authorization. The fact that the mayor approved the fiscal 2011 budget with only one line-item veto suggests a shift toward improved cooperation.
After transferring a total of $146 million from the reserve fund to balance the fiscal 2010 general fund budget and maintain liquidity, the city expects total general fund reserves to approximate $127.2 million on July 1, 2010 (2.9% of general fund revenues). While this reserve level is a decline from fiscal 2009 reserves, it is considerably higher than previously estimated. The city's April 2010 worst-case scenario contemplated the Los Angeles Department of Water and Power not making the budgeted fiscal 2010 transfer to the general fund, but the transfer was successfully completed along with slight improvements in property tax revenue receipts and continued expenditure reductions. The mix of one-time and ongoing solutions to fill the $492 million budget gap for fiscal 2011 has improved the budget outlook for fiscal years 2012-2015.
The city maintains a range of budget options available to move it toward structural balance, but meaningful budget impacts will require tough political decisions and/or labor concessions. The city is analyzing proposals to increase revenues, consolidate functions, identify operational efficiencies, and develop public-private and public-non-profit partnerships to realize additional savings in the out-years of the projection period. The city was initially planning to benefit from most of these initiatives starting in fiscal 2011 but has recently adopted a more realistic three-year timeframe for the most politically challenging proposals, consequently extending the timeframe for benefit to the bottom line. However, the city is still planning to increase its general fund reserves in fiscal 2011 from the proceeds of a long-term lease of its parking facilities to private operators.
Applicable criteria available on Fitch's website at 'www.fitchratings.com' include:
--'Tax-Supported Rating Criteria,' dated Dec. 21, 2009;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Dec. 21, 2009
For Appropriation Debt:
The unlimited taxing power of most local government general obligation pledges is the broadest security a U.S. local government can provide to the repayment of its long-term borrowing, and therefore is the best indicator of its overall credit quality. Some debt repayment requires annual legislative appropriation, and this lesser long-term commitment to repayment is reflected in a lower rating than that of the general obligation rating, usually by one to two notches.
The average local government general obligation rating is 'AA ' with approximately 85% rated at or above 'AA-' and 1% rated 'BBB+' or below. The relatively high ratings reflect local governments' inherent strengths: the authority to levy property taxes, nonpayment of which can result in property foreclosures; additional taxing power that can include sales, utility, and income taxes; and essentiality of and lack of competition for services provided by local governments. Those with low investment-grade or below-investment-grade ratings generally have a combination of a limited or highly volatile economic base, high levels of long-term liabilities including debt and post-employment benefits, and/or unusually limited financial flexibility.
Additional information is available at 'www.fitchratings.com'.
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or
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Email: cindy.stoller@fitchratings.com