SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed the following West Hollywood Public Financing Authority (PFA), California's lease revenue bond (LRBs) ratings:
--$47.2 million LRBs series 2009A & 2009B at 'AA+';
--$18.7 million LRBs series 2013 at 'AA+'.
In addition, Fitch has affirmed the city of West Hollywood, California's (the city) implied general obligation bonds (GOs) at 'AAA'.
The Rating Outlook is Stable.
SECURITY
The LRBs are payable from annual appropriated payments by the city to the PFA for use of various essential leased assets. The city covenants to budget and appropriate the annual payments, equal to debt service, subject to abatement. The 2009 LRBs additionally are secured by a cash-funded debt service reserve fund.
KEY RATING DRIVERS
STRONG FINANCIAL OPERATIONS: The 'AAA' implied GO rating reflects the city's very strong financial position, marked by an extremely high financial cushion, a well-performing and diverse stream of revenues, and good expenditure flexibility.
SOUND LEASE PROVISIONS: The 'AA+' LRB rating reflects sound legal covenants, including standard insurance provisions and a covenant to budget and appropriate lease payments, and the essentiality of the leased assets.
STABLE, UPSCALE LOCAL ECONOMY: The city is well-situated within the diversified Los Angeles regional employment market and the local economy has unique strengths with a growing, high-end, and niche-oriented commercial sector that is nonetheless fairly tourism-reliant.
MATURE, RESILIENT TAX BASE: After just one year of modest decline during the housing-led recession, the tax base has rebounded strongly, reflecting both its maturity and ongoing good development prospects.
SATISFACTORY DEBT PROFILE: The city's debt profile benefits from a history of pay-as-you-go capital financing, manageable capital needs, an overfunded OPEB system, and affordable carrying costs. While the overall debt burden is high as a dollar amount, it is moderate as a percentage of the city's strong tax base.
RATING SENSITIVITIES
Weakening of the city's currently strong financial position could put negative pressure on the rating.
CREDIT PROFILE
The city of West Hollywood serves approximately 36,000 residents in a 1.9 square mile area of Los Angeles County. Located nine miles northwest of downtown Los Angeles the city benefits from its location between Beverly Hills and Hollywood and within the highly diversified Los Angeles region.
STABLE, UPSCALE LOCAL ECONOMY
The local economy is fairly concentrated in tourism-related sectors, with a significant number of upscale hotels, restaurants, nightclubs, and shops. Other major employment sectors include entertainment, arts, and design. Economic indicators are good overall.
Per capita income levels are very strong at 185%, 184% and 193% of county, state, and national averages, respectively. The April 2015 unemployment rate fell to 5.9% from 6.4% the year prior, placing it between the averages for the state (6.1%) and the nation (5.1%). The city benefitted from 2014 employment expansion (2.6%) which exceeded labor force growth (1.2%).
MATURE, RESILIENT TAX BASE
The local tax base exhibits some concentration, with the top 10 property taxpayers making up 14.7% of assessed value (AV). Due to the maturity and strength of the local housing market, the city's AV has performed well. AV fell during the housing-led recession by only a relatively modest 5.9% in fiscal 2011 before rebounding 22.3% to end fiscal 2015 at an all-time high of $8.978 billion. The city is projecting a further 6.5% growth in fiscal 2016. AV per capita is an impressive $286,000, reflective of high local wealth levels.
The prospects for further tax base growth are strong. Approximately $800 million in projects is due to be completed over the next couple of years, including three hotels, 900 condominiums, and 135,000 square feet (sf) of new retail and restaurant space. These new developments will augment not only property tax revenues, but also transient occupancy tax and sales tax revenues. A further $600 million worth of projects has been approved for construction which, upon completion, will result in a further 150 hotel rooms, 150 condominiums, and 440,000 sf of retail, restaurant, office, and film studio space. Another $400 million worth of pending projects have yet to be considered by the city council.
STRONG FINANCIAL OPERATIONS
The city's financial profile is very strong. General fund revenues are well diversified by source and have been rising steadily since the recession. Fiscal 2014 general fund operations produced a $10.4 million surplus, raising the unrestricted general fund balance to an extremely high $93.1 million (118% of spending). For fiscal 2015 year end, the city is projecting that it will add a further $1 million to $2 million to its total general fund balance primarily as a result of revenues which came in 14% higher than budget. These enhanced revenues will allow the city to add to fund balance while also making its final $5.3 million cash contribution to its library project and transferring $4.2 million to an irrevocable CalPERS OPEB trust.
The city plans to draw the general fund balance down over time to fund one-time capital projects. In previous years management had expected to draw down to a still impressive $50 million (64% of spending). However, capital project costs have been running well below the city's prior estimates, so fewer draws have been necessary.
GOOD EXPENDITURE FLEXIBILITY AND PRUDENT MANAGEMENT PRACTICES
The city enjoys a good degree of legal expenditure flexibility, should it be needed. Contracted public safety services could be scaled back at the city's request, as could the costs for various social services that are not legally required, although such cuts could be politically difficult. Finally, the city spends a significant amount on pay-as-you-go capital projects that could be scaled back, deferred, or cancelled.
The city is currently in negotiations with its two largest bargaining units and is expecting to arrive at affordable settlements. The city's labor contracts are typically flexible as they permit reopeners, layoffs and furloughs, and do not require binding arbitration or mandatory consideration of regional compensation (except in the case of position reclassifications).
The city's solid financial management practices require 25% minimum general fund reserves and self-supporting enterprises, and only allow the use of unappropriated fund balances for one-time expenditures, such as capital projects. The city produces two-year budgets with mid-year corrections, five-year capital improvement plans, and forecasted financial operations over 20 year periods.
SATISFACTORY DEBT PROFILE
The city's debt burden is a moderate 2.8% of AV but a high $8,076 per capita due predominantly to a large amount of overlapping debt issued by the Los Angeles Unified School District. Very high wealth levels mitigate concerns over the higher per capita debt levels. Principal amortization is average with 46% retired over 10 years.
The city participates in CalPERS with a funded ratio of 69% that drops to a weaker Fitch-estimated 66% after adjusting the assumed investment return rate to a standardized 7% from 7.5%. The city recognizes that its employer contributions will grow over the next few years as CalPERS seeks to improve its funded ratio. The city has set aside $3 million in the assigned general fund balance to offset future increases related to the city's long-term pension costs. The city offers a limited, fixed-stipend OPEB benefit to retirees and has established an irrevocable CalPERS OPEB trust ($4.2 million) that more than fully funds the accrued OPEB liability.
The city's debt repayment, annually required pension contribution, and OPEB carrying costs were an affordable 11.7% of fiscal 2014 governmental fund spending.
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
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=987824
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