Fitch Ratings affirms its 'AA-' rating on the following lease revenue bonds:
--Long Beach Bond Finance Authority, series 1998B (Temple and Willow Facility);
--Southeast Resource Recovery Facility Authority (SERRFA), series 2003A and B.
In addition, Fitch affirms the following rating:
--Implied general obligation rating at 'AA'.
The Rating Outlook is Stable.
SECURITY
Both series of lease revenue bonds are secured by Long Beach's (the city) covenant to budget and appropriate lease payments for use and occupancy of certain facilities, subject to abatement. The leased asset for the 2003 SERRFA bonds is the Southeast Resource Recovery Facility and the leased asset for the 1998B authority bonds is the refuse facility and the West Long Beach Police Station. Additional security is provided by 24 months rental interruption insurance.
KEY RATING DRIVERS
SATISFACTORY RESERVES: Financial performance was solid in fiscal 2011 and the city's unrestricted general fund balance remains at satisfactory levels for the rating. The city benefits from a diverse revenue base, prudent financial policies and practices, and a demonstrated ability to reduce expenditures to meet revenue levels.
EXPECTED BALANCE DESPITE ONGOING BUDGETARY PRESSURE: The city continues to project budgetary deficits resulting from weak revenues and rising salary and benefit costs. Management retains options for reducing spending, although several years of cuts have left the city with few options that do not affect service levels. Fitch's rating assumes management will continue to balance recurring spending with recurring revenues, pursuant to city policy.
MODERATE DEBT BURDEN; HIGH PENSION COSTS: The city's overall debt burden is moderate and the city has no debt issuance planned over the next few years. However, pension costs were about 15% of spending in fiscal 2011.
DIVERSE ECONOMIC BASE; SLOW RECOVERY: The city's economy remains diverse and fundamentally sound, supported by the large port and by Boeing. However, its unemployment rate remains high and recorded only modest improvement over the past year with limited employment gains and a modest labor force contraction.
POTENTIALLY STABILIZING TAX BASE: The city's taxable assessed value (AV) grew by a modest 0.8% in fiscal 2012 after two consecutive years of declines aggregating 5.6%.
WHAT COULD TRIGGER A RATING ACTION
REDUCED RESERVES: A larger than expected decline in the general fund's unrestricted reserves would likely result in a rating downgrade.
IMBALANCED FINANCIAL OPERATIONS: The city's ability to adhere to its policy of maintaining a structurally balanced budget is critical to the current rating level.
CREDIT PROFILE
SOUND RESERVES AND SOLID FINANCIAL PERFORMANCE
The city's financial performance in fiscal 2011 was solid with the unrestricted general fund balance (combined committed, assigned, and unassigned balances from the previously separate general fund and Upland Oil fund) increasing by $15.6 million to $64.2 million (15.9% of adjusted general fund spending). The city benefits from a diverse revenue base with property tax (28% of fiscal 2011 revenues), sales tax (15%), utility tax (10%), and structural oil revenue (4%) making up approximately 57% of total revenue. Fitch notes as an important credit strength the city's general adherence to its prudent financial management practices and policies, and demonstrated ability to reduce spending to match decreased revenue levels.
Fitch believes management's expectation for balanced general fund performance in fiscal 2012 (fiscal year end Sept. 30) appears reasonable given the city's effort to correct for a projected $11 million revenue shortfall stemming from lower utility tax and departmental revenues. To address the mid-year shortfall, the city took several actions that included reducing departmental spending and reinstating a transfer from certain internal service and enterprise funds that had been deferred in fiscal 2011 due to the general fund surplus. The city's proposed budget for fiscal 2013 assumes reduced revenues in line with the projected levels for fiscal 2012.
ONGOING BUDGETARY PRESSURE
The city faces continued budgetary pressure in fiscal 2013 with the proposed budget projecting a $17.2 million deficit resulting from negotiated salary increases, rising healthcare costs, and reduced revenues that remain below pre-recession levels. The proposed budget closes the fiscal imbalance by eliminating positions, consolidating some operations, and other difficult choices that may affect city service levels. The rating is based on Fitch's expectation that the city will continue to reduce spending to align with recurring revenue.
PENSION REFORM AND LABOR RELATIONS
The city obtained concessions from all but the largest labor group regarding pension reforms that will require employees to pay their own share of the employee pension contribution in exchange for a one-time increase in base salary. The city's largest labor group recently voted against the city's pension reform proposal. In addition, the city lost and has appealed a lawsuit filed by the same labor group regarding city-imposed furlough days from fiscal 2010.
The proposed budget does not include a reserve against an unsuccessful appeal, although Fitch views the city's exposure as manageable. Fitch views the city's labor relations with some concern as the inability to negotiate savings could further restrict the city's options for closing its structural budget gap.
MODERATE DEBT PROFILE; HIGH PENSION COSTS
The city's debt profile, largely driven by overlapping issuances, is moderate at $3,207 per capita and 3.4% of fiscal 2012 AV. The city identified approximately $54.2 million in capital projects for fiscal 2012, although the general fund's portion is a relatively low $2.9 million. The city does not plan on issuing any additional long-term debt in the near term. The city's plan for $23 million of tax revenue anticipation notes for fiscal 2013 represents a significant decrease compared to fiscal 2012.
The city participates in a statewide pension plan and regularly makes its full actuarially required contribution. In fiscal 2011, the city's share of the total pension contribution was $75 million or a high 14.9% of fiscal 2011 spending. Pension reforms negotiated with most of the city's labor groups are expected to temper future pension cost increases.
BROAD ECONOMY EVIDENCES SLOW RECOVERY
The city of Long Beach is California's seventh largest city, with a relatively stable population of approximately 465,000. The city is largely built out and covers 52 square miles along the coast in south Los Angeles County, positioning it to benefit from the large and diverse economies of the greater Los Angeles area and Orange County.
Long Beach's economy benefits from its proximity and participation in the regional economy of the greater Los Angeles area along with the presence of Boeing and the Port of Long Beach, but remains pressured and vulnerable to negative economic shocks. The city's unemployment rate remains high at 12.2% (May 2012) and has shown only modest improvement over the past year with employment growth recording a modest year-over-year gain of 0.6%.
The city's AV recorded modest growth in fiscal 2012 after experiencing declines in the two previous years. In fiscal 2012, AV increased by 0.8% bringing the city's net loss to 4.9% from fiscal 2009 to fiscal 2012. The city's tax base is diverse with the top 10 taxpayers making up 4.2% of fiscal 2011 AV.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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, IHS Global Insight, National Association of Realtors.
Applicable Criteria and Related Research:
--'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
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