Fitch Rates LA County Public Works Fin Auth Lease Revs 'A+'; Outlook Revised to Positive

SAN FRANCISCO--()--Fitch Ratings has assigned an 'A+' rating to the following Los Angeles County Public Works Financing Authority (the authority), California lease revenue bonds (LRBs):

--$167.5 million LRBs (multiple capital projects), 2015 series A.

The LRBs will be sold via negotiation on Jan. 14, 2015.

In addition, Fitch affirms various other outstanding ratings as listed at the end of this press release, including the county's 'AA-' implied unlimited general obligation (ULTGO) bond rating.

The Rating Outlook is revised to Positive from Stable.

SECURITY

Repayment of the series 2015 bonds is from the county's annual lease rental payments to the authority, payable from legally available funds, under a covenant to budget and appropriate, subject to abatement. The county's outstanding LRBs and certificates of participation (COPs) are similarly covered by the county's covenant to budget and appropriate annual lease payments from legally available funds, subject to abatement.

KEY RATING DRIVERS

SOLID FINANCIAL MANAGEMENT: The Positive Outlook reflects the county's well-managed financial operations, with strong general fund balances throughout the economic cycle, and strengthened reserve policies.

ONGOING GENERAL FUND SUPPORT FOR HEALTH SYSTEM: The county Department of Health Services' (DHS) reforms continue to improve its financial position. However, DHS' finances remain vulnerable to state and federal funding changes and heavy social service expenditures, and will continue to need significant general fund support.

SIGNIFICANT LONG-TERM LIABILITY EXPOSURE: While the county has a moderate overall debt burden, it also has increased pension contribution costs in fiscal 2015 and a large other-post employment benefits (OPEB) unfunded accrued actuarial liability (UAAL).

LOCAL ECONOMY IMPROVING: The county's vast economy and tax base is vulnerable to economic cycles despite its diversity and maturity. Economic indicators are mixed, with improving tax base and revenue streams but a high unemployment rate.

LEASE RATINGS REFLECT ABATEMENT RISKS: The one-notch rating distinction between the county's implied ULTGO rating and the majority of its COPs and LRBs represents the county's covenant to budget and appropriate for lease payments, subject to abatement. There is a further one-notch distinction for non-standard leases for Department of Social Services buildings which the county leases but does not purchase, due to increased non-appropriation risk, since the county will not own the facilities upon lease maturity.

ESSENTIAL ASSETS: Proceeds from the series 2015 bonds will fund construction of a new family support center and a new public library. The leased assets include the new public library and essential county office and utility buildings.

RATING SENSITIVITIES

A sustained trend of positive operations, strong general fund balances, improved reserves, reduced liabilities, and manageable general fund support for DHS could result in a ratings upgrade.

CREDIT PROFILE

SOLID FINANCIAL MANAGEMENT

The implied long-term ULTGO rating of 'AA-' reflects the county's diverse and mature economy, moderate debt burden, sound financial reserves, and prudent management efforts to achieve fiscal balance amid ongoing and sizable financial pressures. These pressures stem from a heavy social service spending burden, state funding changes, DHS cash flow issues, a large unfunded pension liability, and a costly retiree medical program.

The county ended fiscal 2014 with a solid surplus for the second consecutive year, increasing the unrestricted general fund balance to $2.790 billion (18.1% of spending) from the prior year's $2.566 billion (17.2%). These results follow a pattern of notably stable county financial operations throughout the challenging recent economic downturn.

For the second time in six years, the county did not have to close a budget gap for its fiscal 2015 recommended budget and is not planning major spending cuts. The county expects ongoing revenue increases in fiscal 2015 which will be partially offset by agreed employee remuneration increases and targeted service enhancements.

The county's rainy day reserve fund is now $256 million, a $24 million increase since January. The county remains committed to achieving its goal of $500 million through the annual allocation of at least 10% of surplus revenues to either the rainy day reserve fund and/or the county's OPEB trust. In September 2014, the county added a further budget policy requiring the annual appropriation of 5%-10% of new ongoing discretionary revenues for a contingency reserve, with any unused monies at the end of the year transferred to the rainy day reserve fund and/or the OPEB trust. Fitch views the strengthening of the county's reserve policies as a credit positive because of the extra insulation provided against the next economic downturn.

DHS FINANCIALS IMPROVING BUT GENERAL FUND SUPPORT STILL REQUIRED

DHS ended fiscal 2014 with a $192 million surplus, representing its fifth consecutive year of improved year-end financial results. This is the result of more stable revenue streams, stable contributions from the general fund, and improved patient demographics under health care reform, and significant operational changes. DHS is currently projecting a much smaller $20.4 million surplus at fiscal 2015 year-end given its cash funding of a new electronic health record system ($105 million) and the redirecting of $155.4 million in realignment revenues to social services as required under state Assembly Bill (AB) 85.

In fiscal 2014, the net county contribution was $665.3 million or 14% of the total DHS budget and 4.3% of general fund spending. The net county contribution peaked in fiscal 2008 at $827.7 million or 18.2% of the total DHS budget. The net county contribution is budgeted to decline in fiscal 2015 to $561 million or 12.6% of the total DHS budget.

However, while the net county contribution is declining, general fund loans to DHS to assist with cash flow issues are increasing due to realignment program funding reconciliations and state billing reimbursement delays. At fiscal 2014 year-end, there was $870 million in outstanding general fund loans, counteracting the downward trajectory that had occurred between fiscal year-ends 2011 ($1 billion outstanding) and 2013 ($770 million outstanding). The county expects the higher fiscal 2014 loan level to persist while health care reform provisions settle in.

DHS pressures continue to be partially alleviated by the extension of a federal section 1115 waiver through Oct. 31, 2015 and the negotiation of a unique formula for the county under AB 85. The waiver facilitated increased enrollment of newly eligible Medi-Cal patients under health care reform which improved DHS' payor mix. Negotiations with the federal government have commenced over further extending the waiver to cover the future costs of uninsured patients. The negotiation of a unique formula under AB 85 has allowed the county to maintain a fairly stable source of funding for DHS.

SIGNIFICANT LONG-TERM LIABILITY EXPOSURE

The county's overall debt burden is a moderate $3,631 per capita or 3.0% of market valuation. Principal and interest amortization is average at an estimated 64% in 10 years.

The county faces sizeable long-term unfunded pension and OPEB liabilities. As of June 30, 2013, the pension system's UAAL was $13.3 billion and its funded ratio was 75% using the county's 7.5% assumed rate of return. Fitch estimates the funded ratio at 71.1% when adjusted to reflect a more conservative 7% rate of return. The county's cash contributions to the pension system, which are equal to the annually required contribution (ARC), continue to grow to a projected $1.4 billion in fiscal 2015 from $676.7 million in fiscal 2006. Fitch considers the expected future increase to be manageable and notes that the most recently implemented pension tier with lower benefits for new hires should decrease costs slightly over time.

The county also has a $25.7 billion UAAL for OPEB, which it has begun to address by recently establishing an OPEB trust. At its current balance of $473 million, the trust funds approximately 1.8% of the outstanding OPEB liability. The county aims to increase its OPEB trust funding from future surplus revenues. Fitch views the OPEB funding effort as positive but modest and recognizes the county has a funding challenge as recent pay-as-you-go contributions have been only 20%-43% of ARC.

A new OPEB tier has been created for employees hired on or after July 1, 2014. It eliminates spousal and dependent coverage and requires mandatory enrollment in Medicare at age 65. This new tier is projected to save $840 million over 30 years.

The combined carrying costs for debt service, pension ARC, and OPEB pay-go in fiscal 2014 were very manageable at 12.8% of total governmental spending.

LOCAL ECONOMY IMPROVING

The county's unemployment rate (7.8% in September 2014) remains higher than the state's (6.9%) and the nation's (5.7%). However, there has been growth in both employment opportunities and the labor force which has brought the unemployment rate down from 9.6% a year prior. The county's socioeconomic characteristics are below average relative to the state and somewhat mixed relative to the nation.

Due to the county's highly developed and mature nature, taxable assessed valuation (TAV) losses were relatively low at 0.5% and 1.8% decreases in fiscal years 2010 and 2011, respectively, indicating a significant Proposition 13 cushion. In the subsequent four years, the property market has rebounded increasingly strongly with 1.4%, 2.2%, 4.7%, and 5.5% TAV increases over fiscal years 2012-2015, respectively. The county projects further TAV growth over fiscal years 2016-2020.

ESSENTIAL ASSETS

Proceeds from the series 2015 bonds will fund construction of the new Zev Yaroslavsky Family Support Center and the new Manhattan Beach Public Library. Both buildings are located on county-owned property and will provide core governmental services. The leased assets will include the new public library for which the county will have beneficial occupancy before the series 2015 bonds are issued. The other two leased assets support core governmental services: the county's Internal Services Department headquarters, and the county civic center heating and refrigeration plant. The value of the leased assets exceeds the series 2015 bond par amount.

OUTSTANDING DEBT RATED BY FITCH

Fitch has affirmed the following outstanding ratings:

--Implied county ULTGO bond rating at 'AA-';

--$71.1 million county COPs, series 1993 Disney Parking Project and 2012 refunding COPs (Disney Concert Hall Parking Garage) at 'A+';

--$50.5 million Los Angeles County Capital Asset Leasing Corporation lease revenue bonds (LAC-CAL Equipment Program), series 2011A and 2014A at 'A+';

--$1.156 billion Los Angeles County Public Works Financing Authority lease revenue bonds, series 2005 (Calabasas Landfill Project), lease revenue bonds (multiple capital projects), 2010 series A (tax-exempt) and series B (Build America Bonds), and lease revenue bonds (multiple capital projects II), series 2012 at 'A+';

--$76.8 million Sonnenblick-Del Rio El Monte Asset Leasing Corporation senior COPs, series 1999 (Department of Public Social Services Facility) and series 2001 (Department of Public Social Services Facility - Phase II) at 'A';

--$35.8 million Sonnenblick-Del Rio West Los Angeles Leasing Corporation senior COPs, series 2000 (Department of Public Social Services Facility) at 'A'.

Additional information is available at 'www.fitchratings.com'.

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, and National Association of Realtors.

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

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=961916

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Contacts

Fitch Ratings
Primary Analyst
Alan Gibson
Director
+1-415-732-7577
Fitch Ratings, Inc.
650 California Street
4th Floor, San Francisco, CA 94108
or
Secondary Analyst
Scott Monroe
Director
+1-415-732-5618
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Alan Gibson
Director
+1-415-732-7577
Fitch Ratings, Inc.
650 California Street
4th Floor, San Francisco, CA 94108
or
Secondary Analyst
Scott Monroe
Director
+1-415-732-5618
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com