Fitch Rates Pasadena, CA's $123MM Pension Obligation Rfdg Bonds 'AA'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has assigned an 'AA' rating to the following Pasadena, CA (the city) pension obligation bonds:

--$123 million taxable pension obligation refunding bonds, series 2015A & B.

In addition, Fitch affirms the following ratings:

--Implied general obligations (GO) affirmed at 'AA+';

--$100.2 million pension obligation bonds, series 1999A, 1999B, and 2012 affirmed at 'AA';

--$159 million lease revenue bonds, series 2010A, 2010B, 2010C, 2010D, issued by the Pasadena Public Financing Authority, affirmed at 'AA';

--$174 million in outstanding certificates of participation, series 1993, series 2006A, series 2008A & B & C affirmed at 'AA';

--$25.9 million taxable lease revenue refunding bonds (Paseo Colorado parking facilities) series 2008 affirmed at 'AA-';

--Paseo Colorado parking facilities taxable lease revenue refunding bonds, series 2008 bank bonds affirmed at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The pension obligation bonds (POBs) are unconditional obligations of the city. The bonds are not secured by the city's taxing authority.

The lease revenue bonds and certificates of participation are secured by lease payments made by the city from all legally available funds for the use and occupancy of a variety of leased assets. The city covenants to budget and appropriate annually for debt service, subject to abatement if the facilities are not available for full use and occupancy. The bonds are also covered by standard rental interruption insurance.

KEY RATING DRIVERS

SOLID FINANCIAL PERFORMANCE: The city's structurally balanced financial operations are supported by a diverse revenue base and prudent budgeting practices. The city projects positive operating performance over the next five years, which is supported by the city's demonstrated ability to make significant expenditure reductions to preserve financial margins.

SOUND RESERVES: The city maintains a healthy financial cushion. The unrestricted general fund balance was $54.9 million or a sound 25.7% of spending at the end of fiscal 2014. Liquidity levels remain solid.

WEAK DEBT PROFILE: The city's debt profile is characterized by a slow amortization rate, high debt per capita, and above average exposure to variable rate debt and interest rate swaps.

RESILIENT ECONOMY: A key credit strength remains Pasadena's diversified local economy, educated workforce, above-average wealth levels, and growing tax base. Significant commercial and residential development activity is on-going and planned for the city, which should support additional growth in assessed values over the near term.

SECURITY CHARACTERISTICS: The ratings reflect the city's general credit characteristics as well as the security features supporting the pension obligation bonds, lease revenue bonds, and certificates of participation.

RATING SENSITIVITIES

CONTINUED POSITIVE TRAJECTORY: The ability to achieve stable-to-positive operating results while increasing financial reserves sufficiently to offset risks associated with the city's debt profile could lead to positive rating action over the next few years.

CREDIT PROFILE

SOLID FINANCIAL PROFILE

The city recorded an operating surplus (after transfers) of $1.3 million or 0.6% of spending in fiscal 2014. The surplus marked three consecutive years of positive financial margins, reflecting the significant budget adjustments that were implemented from fiscals 2008 through 2013. Over the time period, operating expenditures were reduced by approximately 4.3% through workforce reductions and by other means to structurally balance the city's financial operations.

Financial performance is supported by the city's diverse revenue base. Taxes comprised approximately 66% of total general fund revenue in fiscal 2014 with property tax (23%), sales tax (17%), and utility user tax (15%) as the primary revenue sources.

The city also benefits from relatively high transfers in from the city-owned power fund, which contributed $14.5 million or approximately 6.8% of fiscal 2014 total general fund revenue. The city's transfer from the water fund, which has historically been much smaller than the power fund transfer, will be reduced starting in fiscal 2015 as part of a settled lawsuit brought against the city. Fitch expects the overall impact from the modest $1.7 million reduction in the transfer amount to be manageable. Financial projections show an expected surplus of $4.8 million in fiscal 2015.

Management's five year financial forecast reflects positive operating results through fiscal 2019. The projections include reasonable expectations for revenue growth and conservative decisions not to include potential new sources of revenue. For example, the forecast does not the city's share of property tax revenue from an expired redevelopment area that could amount to several million dollars annually.

The city's unrestricted general fund reserve increased to $54.9 million or 25.7% of spending in fiscal 2014 from $46.5 million (20.3%) in fiscal 2011. Additional increases in the unrestricted reserve balance are expected due in part to city council adopted policy to raise the emergency reserve to 20% from 10% of appropriations through incremental increases beginning in fiscal 2015. Fitch views the policy and the city's general trend towards higher reserve levels positively.

WEAK DEBT PROFILE

The city's debt profile remains weak with high to moderate overall debt levels, significant exposure to variable rate debt, and a slow amortization rate. Overall debt metrics are high at $6,908 per capita and midrange at 4% of assessed value (AV).

The debt burden includes approximately $401 million of general fund-backed debt supported by non-general fund revenue including hotel taxes and operating revenue of the conference center, Rose Bowl, and municipal parking system. Carrying charges on this debt are approximately $20.2 million in fiscal 2015 or roughly 9.4% of fiscal 2014 general fund spending. Debt service coverage from these sources is generally very thin, even with very slow amortization. A decrease in those revenue streams could pressure the general fund budget given the city's relatively limited ability to increase traditional general fund revenue sources.

The city also has an above average degree of variable-rate debt exposure, which exposes the city to the possibility of unexpected financial demands. Following this issuance, approximately 26% of outstanding debt synthetically fixed, variable rate debt and an additional 4% will be unhedged, variable rate debt.

SB 481 LITIGATION & FPRS

The city has benefitted from Senate Bill 481 (SB 481), passed in 1987, which permitted the usage of annual tax increment revenue from the city's Downtown Project Area to support the Fire and Police Retirement System (FPRS) through Dec. 31, 2014. SB 481 funds were sufficient to make supplemental payments to the pension system and pay the annual debt service on outstanding POBs, along with generate a reserve of approximately $40 million to POB repayment.

The ability of the city to use the $40 million amount to pay down a portion of the POBs is uncertain following the state's decision that SB 481 payments do not qualify as 'enforceable obligations', thereby preventing the revenue from going to the city. The city sued the state and won in court, although the state appealed the decision in March 2013. The timeframe for reaching a final resolution is uncertain and the funds are currently held by the county.

While Fitch views the accumulated funds under SB 481 as providing a potentially significant benefit to the city, an unfavorable court ruling is not expected to affect the rating as the city's rating reflects the already elevated debt levels.

The city participates in both FPRS and CalPERs to provide pension benefits for retirees. Positively, the funded position of FPRS has improved with the most recent actuarial study (June 30, 2014) showing a funding ratio of 81.6%. Contributions to CalPERs are expected to continue increasing over the near term, although the increases are incorporated into the city's financial projections.

SOLID ECONOMY AND RESILIENT TAX BASE

Pasadena is a mature, built-out community with a population of 139,731. The city benefits from the presence of several colleges and universities, above-average education levels, and a diversified employment base representing several industries including high tech, finance, research, tourism, and education.

City management estimates that Pasadena's daytime population roughly doubles as the city serves as a regional employment center. This positive credit characteristic supports revenue growth for the city as well as employment opportunities for its residents. Over the past couple of years, the city has benefitted from above average employment and labor force growth. The unemployment rate, which stood at 5.6% (December 2014), is modestly above that of the nation (5.4%) but compares favorably to the state average (6.7%).

Positively, the city's primary industries tend to support higher-income jobs, which are reflected in the city's socioeconomic indicators. City residents exhibit above-average wealth levels with per capita and median household income at 146% and 130%, respectively, of the national average. Education levels are also above average with approximately 22% of city residents holding an advanced degree compared with the national average of 10.8%.

GROWING TAX BASE

The tax base benefits from its diversity and resiliency. With the exception of a very modest 0.2% decline in AV in fiscal 2010, AV has increased annually over at least the last decade. Most recently, AV increased by 5.5% in fiscal 2015 due to a combination of new development and rising property values.

Fitch expects AV levels to continue growing at a modest rate over the near term given the number and scope of development projects within the city and the continued positive employment growth in the area. Several new hotels, nearly 1,700 residential units, a large-scale mixed use project, and several new commercial and retail developments are among the various on-going and planned projects in the city.

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, 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=982926

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Contacts

Fitch Ratings
Primary Analyst
Matthew Reilly
Director
+1-415-732-7572
Fitch Ratings, Inc.
650 California St., 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Karen Ribble
Senior Director
+1-415-732-5611
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
Matthew Reilly
Director
+1-415-732-7572
Fitch Ratings, Inc.
650 California St., 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Karen Ribble
Senior Director
+1-415-732-5611
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com