Fitch Affirms Los Angeles County Public Works Financing Authority, CA Revs at 'AAA'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has affirmed the following Los Angeles County Public Works Financing Authority, California (the authority) ratings:

-- $4.5 million (Los Angeles County Flood Control District) refunding revenue bonds, series 2003A at 'AAA';

-- $12.1 million (Los Angeles County Flood Control District) revenue bonds, series 2005A at 'AAA'.

In addition, Fitch has affirmed the Los Angeles County Flood Control District's (the district) implied unlimited general obligation (ULTGO) bond rating of 'AAA'.

The Rating Outlook is Stable.

SECURITY

The bonds are repaid by installment purchase payments made by the district to the authority. Payments are absolute and unconditional obligations of the district and backed by a gross revenue pledge of the district's two main revenue sources: the district's share of countywide 1% property tax levy revenues, and, to the extent the property taxes are insufficient to pay the installment payments in any given fiscal year, assessments levied on the beneficiaries of district projects.

KEY RATING DRIVERS

EXCELLENT FINANCIAL PERFORMANCE: The district's financial performance is strong, with large available fund balances and strong fiscal oversight provided by the county. The district's operational and capital responsibilities are scoped to fit within the balance of funding remaining after debt service is paid and the flexibility provided by the district's very high available general fund liquidity.

COVERAGE REMAINS STRONG: Pledged property tax and benefit assessment revenues provide extremely strong gross debt service coverage, particularly since the majority of the outstanding series 2003A bonds have now been repaid.

LOCAL ECONOMY CONTINUES TO IMPROVE: The diversity and maturity of the county's vast economy and tax base help offset its evident cyclical vulnerability. The county is currently benefiting from economic growth and a rebounding tax base, which help offset its persistently above-average unemployment rate.

MODERATE DEBT BURDEN: The district's debt burden is moderate with rapid amortization and no further issuance plans.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics including the district's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

The district provides flood risk management, water conservation, and watershed management services for 2,752 square miles, the majority of the county. The district operates and maintains a vast infrastructure network, including 14 major dams, 487 miles of open channels, 3,073 miles of underground storm drains, and 48 pump plants.

The district's bond ratings are not capped by Los Angeles County's (the county) implied unlimited GO bond rating ('AA-', Positive Outlook). Fitch believes that the district's status as a separate legal entity from the county, with its own board of directors, legally-dedicated funding streams, and independently audited financial statements, would insulate it in the unlikely event of a county bankruptcy.

EXCELLENT FINANCIAL PERFORMANCE; COVERAGE REMAINS STRONG

The district's financial position is strong with very healthy reserves, strong debt service coverage ratios, and the ability to offset any revenue volatility with expenditure revisions. The total general fund balance was a very high $303.8 million or 157.4% of spending at the end of fiscal 2014. The district's unprecedentedly high cash and investments balance ($333.6 million) is partially the result of funding set aside for projects, some of which have been delayed while waiting for regulatory permit approvals.

Gross debt service coverage from combined property tax and benefit assessment revenues has been very high, with fiscal 2014's property tax and benefit assessment revenue of $227.3 million covering annual debt service 73.6x. Given the roll off of the majority of outstanding series 2003A debt which occurred in fiscal 2013, coverage is expected to remain at such strong levels going forward (fiscal 2016 coverage is budgeted at 70.3x). In fiscal 2014, property tax revenues alone provided 37.9x annual debt service coverage. Revenues in excess of debt service requirements are applied primarily to capital projects.

The district has limited revenue-raising flexibility due to property tax limitations and the need for voter approval to increase the benefit assessments; however, these two revenue streams have proven quite stable over time and the district appears to have sufficient expenditure flexibility to manage any variability. The district's operational and capital responsibilities are modulated annually to fit within the balance of funding remaining after debt service is paid.

LOCAL ECONOMY CONTINUES TO IMPROVE

The county's unemployment rate (7.7% in February 2015) remains higher than the state's (6.8%) and the nation's (5.8%). However, there has been growth in both employment opportunities and the labor force which has brought the unemployment rate down from 8.7% a year prior. The county's socioeconomic characteristics are below average relative to the state and somewhat mixed relative to the nation. Educational attainment is similarly mixed relative to national averages.

Due to the county's highly developed and mature nature, taxable assessed value (TAV) losses were relatively low at 0.5% and 1.9% decreases in fiscal years 2010 and 2011, respectively, indicating a significant Proposition 13 cushion. Since then, the property market has rebounded with a 14.4% TAV increase during fiscals 2012-2015, and an estimated 5.9% TAV increase in fiscal 2016.

MODERATE DEBT BURDEN

The district's debt burden is a moderate 3.1% of market value, or about $3,647 per capita, mainly the result of overlapping debt. The outstanding direct debt fully amortizes over the next 10 years. The district has no further debt issuance plans and expects to pay for upcoming capital projects from ongoing revenues. The lack of issuance plans allays concerns about the weak additional bonds test of 1.0x maximum annual debt service.

The district has no direct pension or OPEB liabilities as it has no employees; however, its proportionate share of the county's pension and OPEB liabilities are built into the district's cost reimbursements to the county for use of county staff on district projects.

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

Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosures

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985713

Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Alan Gibson, +1-415-732-7577
Director
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Amy Laskey, +1-212-908-0568
Managing Director
or
Committee Chairperson
Marcy Block, +1-212-908-0239
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Alan Gibson, +1-415-732-7577
Director
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Amy Laskey, +1-212-908-0568
Managing Director
or
Committee Chairperson
Marcy Block, +1-212-908-0239
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com