SAN FRANCISCO--(BUSINESS WIRE)--
Fitch Ratings takes the following actions on Pico Rivera, CA (the city):
--$32.9 million 2009 Pico Rivera Public Financing Authority (the authority) lease revenue bonds affirmed at 'A';
--Implied general obligation (GO) bond rating affirmed at 'A+'.
The Rating Outlook is Stable.
The bonds are secured by the city's covenant to annually budget and appropriate lease rental payments for use and occupancy of several governmental facilities and city parks, subject to abatement. The bonds are supported by a cash-funded debt service reserve and rental interruption insurance.
KEY RATING DRIVERS
STRUCTURAL CHALLENGES PERSIST: The city's operating performance has been volatile in recent years and expenditure growth continues to pressure available revenues. Management projects a smaller than budgeted drawdown of reserves for fiscal 2013 and currently plans to achieve operating balance in fiscal 2014. Financial flexibility, as evidenced by unrestricted cash and general fund balances, remains adequate despite recent challenges.
PRESSURES OUTSIDE GENERAL FUND: The city faces continued pressures from a failed redevelopment project dating to the 1990s that has required ongoing deferrals of sales tax revenues to support debt service payments. In addition, the city's water enterprise has required general fund support in recent years to meet operating needs, although a series of water rate increases appears likely to reduce future demands on the general fund.
MIXED ECONOMIC RECOVERY: The city continues to benefit from the recovery of the greater Los Angeles economy but unemployment levels remain high. Taxable assessed values (TAV) were fairly stable through the recent downturn and home prices reflect strong year-over-year improvements. Household income levels are somewhat low relative to the state average but exceed national averages.
MODERATE DEBT AND CARRYING COSTS: Overlapping debt levels are moderate and amortization of outstanding principal is slow. Carrying costs for debt service and retirement benefits are affordable.
REDUCED FINANCIAL FLEXIBILITY: A reduction in cash or unrestricted general fund balances from current adequate levels would increase downward rating pressure. Sufficient reserves are a key credit factor given the city's reliance on economically sensitive sales tax revenues.
Pico Rivera is a mid-sized city within the vast southern California metropolis. It has a population of approximately 63,000 in an 8.84 square mile area of eastern Los Angeles County, about 11 miles from downtown Los Angeles.
ONGOING STRUCTURAL CHALLENGES
The city ended two of the last five fiscal years with sizable general fund deficits and is on track to record a small deficit for fiscal 2013. Management plans to adopt a balanced budget for fiscal 2014 but faces limited options for reducing expenditures following a two-year reduction in employee compensation approved in fiscal 2013. Continuing sales tax growth may limit the need for new reductions. Pico Rivera voters approved a permanent one-cent sales tax increase in 2008, tying the city for the highest rate in the state. Total governmental sales tax receipts rose from just under $9 million in fiscal 2009 to nearly $14 million in fiscal 2012.
The city's financial flexibility has remained adequate despite the recent budget strains and the general fund had an unrestricted cash balance of $6.4 million at the end of 2012 (equivalent to two months of general fund spending). The city's financial statements also report a total general fund balance of $42.9 million (equal to 121.3% of spending) but this amount includes loans to the former redevelopment agency and the water enterprise that management does not expect to be repaid in the near term. Unrestricted fund balance at the end of fiscal 2012 was much lower, but still healthy, at $12.3 million (equal to 34.7% of spending).
PRESSURES OUTSIDE GENERAL FUND
The city faces ongoing pressures stemming from a failed redevelopment project supporting Northrop-Grumman's production of the B-2 bomber for the U.S. Air Force. The city's redevelopment agency initially sold debt to support the project in the 1980s, and following termination of the bomber program in the late 1990s, issued refunding debt that was purchased by its water enterprise. The water enterprise issued revenue bonds at the same time, with the intent to pay debt service from payments received on the redevelopment debt. The city and Los Angeles County also agreed to defer sales and property tax revenues from the redevelopment area to offset reduced tax increment following closure of the plant.
The city's share of support for the redevelopment debt is capped at approximately $1 million per year and sales tax deferrals that support this commitment appear likely to continue through the final maturity of the bonds in fiscal 2033. In addition, the city will be challenged to collect a separate $21 million loan to its redevelopment agency before the bonds are fully amortized.
The general fund also faces risks from shortfalls in the city's water enterprise, which has struggled to maintain operating balance for several years. A multi-year series of rate increases beginning in 2009 has recently improved the enterprise's operating profile, but a return to deficits would likely reduce general fund financial flexibility. The general fund's $18 million loan to the water enterprise represents the value of capital assets transferred upon its creation in 1999. Repayment of the loan is due from surplus water operations revenues, which management does not expect to realize within the next 10 years.
MIXED ECONOMIC RECOVERY
The city continues to benefit from the recovery of the greater Los Angeles economy but unemployment levels remained elevated at 9.5% as of December 2012. Taxable assessed values (TAV) were fairly stable through the recent downturn and topped pre-recession peaks in 2013. Local home prices rose by 10.2% year-over-year as of February 2013 according to Zillow.com, suggesting further TAV growth ahead. Median household income levels are close to the national average while per capita incomes are much lower.
MODERATE DEBT AND CARRYING COSTS
Debt levels are moderate but amortization of outstanding principal is slow. The city participates in a state-sponsored pension plan that is 76% funded, or an estimated 70% under Fitch's assumption of 7% investment returns. Carrying costs for debt service and retirement benefits are affordable at 15% of noncapital governmental expenditures, but are likely to rise substantially following a recent decision by CalPERS to increase pension contribution rates by 50% over a five-year period beginning in fiscal 2016.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the 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, and Zillow.com.
Applicable Criteria and Related Research:
--'Tax-Supported 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
U.S. Local Government Tax-Supported Rating Criteria
Stephen Walsh, +1-415-732-7573
Fitch Ratings, Inc.
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Karen Ribble, +1-415-732-5611
Amy Laskey, +1-212-908-0568
Elizabeth Fogerty, +1-212-908-0526 (New York)