Fitch Affirms Pico Rivera Public Financing Authority, CA's Lease Revs at 'A'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings takes the following actions on Pico Rivera, CA (the city):

--$31.7 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.

SECURITY

The bonds are backed 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

IMPROVED OPERATING PERFORMANCE: The city's finances have strengthened with the recovery of general fund revenues and continued expenditure controls. Reserves remain strong and are supplemented by substantial non-general fund savings.

REDUCED EXTERNAL PRESSURES: Rate increases have helped to end general fund support for its water enterprise, but the city continues to set aside a portion of its sales taxes to support debt service payments on a failed redevelopment project dating to the 1990s.

ONGOING ECONOMIC RECOVERY: The ongoing recovery of the greater Los Angeles economy has benefited the city's employment levels and tax base as well as its finances. Recent job growth has been strong and taxable assessed values have shown steady gains.

MODERATE DEBT AND CARRYING COSTS: Overall debt levels are moderate while amortization of outstanding principal is slow. Carrying costs for debt service and retirement benefits are affordable.

RATING SENSITIVITIES

STABLE OPERATIONS: Continued strong operating results, with maintenance of healthy reserves, could result in upward rating pressure.

CREDIT PROFILE

Pico Rivera is a mid-sized city within the vast southern California metropolis. It has a population of approximately 64,000 in an 8.8 square mile area of eastern Los Angeles County, about 11 miles from downtown Los Angeles.

IMPROVED OPERATING PERFORMANCE

The city's operating performance was positive for the past three years and a fourth year of strong results appears likely for fiscal 2015 based on year to date performance. Strong revenue growth averaging 7% per year between 2009 and 2014 has been a key factor in these results, in combination with relatively stable expenditures. Sales tax growth has been particularly strong, due both to a permanent one-cent local sales tax approved by voters in 2008 and recent increases in taxable sales.

The city's financial flexibility has benefited from its improved operating performance. Unrestricted general fund revenues increased to a high 49.5% ($17.7 million) of general fund spending in fiscal 2014, an important mitigant to the city's reliance on economically sensitive sales taxes. In addition, the city transferred $6.5 million to a revocable trust for other post-employment benefits (OPEBs) in fiscals 2013 and 2014, providing additional financial flexibility outside the general fund.

REDUCED EXTERNAL PRESSURES

Pico Rivera's finances continue to reflect the consequences of a failed 1980s redevelopment project, but general fund impacts have been largely offset. The city's redevelopment agency sold debt to support the project and, following its termination 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 incremental taxes following termination of the project.

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 city's water enterprise shows an improved operating profile after several years of rate increases, reducing risks to its general fund. It retains an $18 million obligation to the general fund, representing the value of capital assets transferred upon its creation in 1999. Repayment of the loan is due from surplus water operations revenues, but the timeframe for such repayment remains uncertain.

Management has prudently written off, reserved against, and classified as non-spendable the bulk of the general fund's loans to the city's former redevelopment agency and water enterprise, reducing balance sheet reliance on such uncertain items.

STEADY ECONOMIC RECOVERY

The city continues to benefit from the recovery of the greater Los Angeles economy. Year-over-year job growth has exceeded 2% for 29 consecutive months, lowering unemployment to 7.1% as of February 2015, just above the state average and nearly five percentage points below its pre-recession peak. Taxable assessed values (TAV) were fairly stable through the downturn and growth has accelerated in the past two years. Local home prices rose by 3.8% year-over-year as of February 2015 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

Overall debt levels are moderate but amortization of outstanding principal is slow. The city participates in a state-sponsored pension plan with an estimated 63% funded ratio under Fitch's assumption of 7% investment returns. Carrying costs for debt service and retirement benefits were affordable at 13% of 2014 governmental expenditures, but are likely to rise over the next several years due to planned CalPERS contribution rate increases.

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 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

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=983329

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Contacts

Fitch Ratings
Primary Analyst
Stephen Walsh
Director
+1-415-732-7573
Fitch Ratings, Inc.
650 California Street, 4th floor
San Francisco, CA 94108
or
Secondary Analyst
Karen Ribble
Senior Director
+1-415-732-5611
or
Committee Chairperson
Arlene Bohner
Senior Director
+1-212-908-0554
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Stephen Walsh
Director
+1-415-732-7573
Fitch Ratings, Inc.
650 California Street, 4th floor
San Francisco, CA 94108
or
Secondary Analyst
Karen Ribble
Senior Director
+1-415-732-5611
or
Committee Chairperson
Arlene Bohner
Senior Director
+1-212-908-0554
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com