Fitch Ratings assigns an 'AA+' rating to the following Beverly Hills Public Financing Authority, California lease revenue bonds:
--$63.2 million 2010 series A (various projects), B (various projects), and C (various projects - Build America Bonds).
In addition, Fitch affirms:
--$260.9 million in outstanding lease revenue bonds at 'AA+';
--Implied general obligation (GO) rating at 'AAA.' (The city has no outstanding GO bonds.)
The Rating Outlook is Stable.
The bonds are expected to sell via negotiation during the week of July 26, 2010.
RATING RATIONALE:
--The city of Beverly Hills has a strong and mature economic base, with a tax structure that captures much of the city's economic activity.
--The city's financial position is strong, as evidenced by solid financial reserves, an affordable debt burden, and thorough financial management.
--The city has a strong business base, with particularly prominent retail and hotel businesses, and is a net job importer.
--However, two of the city's main revenue sources, sales and transient occupancy taxes, are particularly sensitive to economic downturns, and new development is significantly constrained.
--The city is addressing current revenue declines through permanent expenditure reductions and implementation of new revenue sources.
--The legal structure for the lease transaction is strong.
KEY RATING DRIVERS:
--Continued long-term balance between revenues and expenditures.
--Continued solid performance by the city's private sector businesses.
--Continued augmentation of revenue streams when necessary.
SECURITY:
The bonds are secured by the city's lease rental payments to the authority subject to annual appropriation by the city.
CREDIT SUMMARY:
The 'AAA' implied general obligation rating reflects the city's strong and mature economic base, a tax structure that captures much of the city's economic activity but also presents vulnerability to economic cycles, and sound financial position. Currently, sales and transient occupancy taxes have demonstrated the sensitivity to economic downturns that is inherent to these revenue sources. The city has a strong business base, which balances the significant constraints on new development. In response to the current economic downturn, the city continues to address current revenue declines with permanent expenditure reductions, which in fiscal 2010 included workforce reductions and employee benefits modifications, combined with implementation of new revenue sources.
The 'AA+' lease rating reflects the factors above as well as all lease transactions' strong legal structures. Lease features include the city's covenant to budget and appropriate sufficiently for lease rental payments, and a requirement for rental interruption insurance. Of the $260.9 million in outstanding lease revenue bonds, $119.5 million are repaid by revenues from city enterprises.
Beverly Hills is a mature, stable, and wealthy community covering a small 5.7 square miles. It is almost entirely developed, with limited potential for redevelopment. The major taxpayers are office, retail, and high-end hotel owners. While the resident population is approximately 35,000, workers and visitors raise the daytime population by more than 100,000. The city's unemployment rate softened slightly to 8.3% in April 2010 and remains considerably lower than the county, state, and nation. Income levels are very high with a median household income 1.6 times that of the nation's. Taxable value is also very high, at approximately $591,711 per capita.
City finances benefit from a diverse revenue stream with four particularly significant sources of operating support: sales, transient occupancy, property, and business taxes. While sales and transient occupancy taxes are particularly sensitive to economic downturns, the economic impact on property and business taxes is less immediate, which has given the city's experienced financial management team time to respond appropriately to the current economic downturn. The city maintains sizable financial reserves, with a total general fund balance of $93.4 million in fiscal 2009, a substantial 57% of total general fund expenditures, transfers, and other uses. In addition to an also high unreserved general fund balance of $36.5 million (22% of spending), the city expects to release $32 million in reserved funds currently being held as collateral for a construction loan and adding them to the unreserved general fund balance. This will increase the unreserved general fund balance to $68.5 million, a very high 41% of spending, and reflecting a small decline from fiscal 2008. The city projects its fiscal 2010 results to remain strong, benefiting from timely expenditure controls in response to the city's revenue pressures. The city is confident that further expenditure controls, coupled with expanded revenue sources, will ensure balanced operations through fiscal 2011.
As a result of its disproportionately large commercial sector, small geographic size and population, and very high property values, Beverly Hills' debt burden is high as a per capita dollar amount but affordable relative to taxable value. Including overlapping debt, the ratios are $17,078 per capita and 2.9% of market value.
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.
Considerations for Taxable/Build America Bonds Investors
The following sector credit profile is provided as background for investors new to the municipal market.
Local Government General Obligation Bonds:
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. 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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