Fitch Rates Pasadena, CA's Rfdg COPs 'AA'; Outlook Stable

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

--$55.3 million refunding certificates of participation (COPs) series 2015A.

The bonds are expected to sell via negotiation the week of November 16. Proceeds will be used to refund COPs, series 2008C to achieve debt service savings.

In addition, Fitch affirms the following ratings:

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

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

--$123 million taxable POBs, series 2015A & B at 'AA';

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

--$174 million COPs, series 1993, series 2006A, series 2008A & B & C at 'AA';

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

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

The Rating Outlook is Stable.

SECURITY

The lease revenue bonds and COPs 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. Proposed amendments associated with the issuance of series 2015A COPs include elimination of the reserve fund requirement, and elimination of the right to take possession of and re-let the leased property.

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

KEY RATING DRIVERS

SOLID FINANCIAL PERFORMANCE: The city's diverse revenue base and prudent budgeting practices have produced four consecutive years of general fund surplus operations. The city projects continued 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.

ROBUST RESERVES: The city maintains a healthy financial cushion aided by financial policies approved by city council. The city estimates the unrestricted general fund balance at over 30% of spending at year-end fiscal 2015. 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: Pasadena's diversified local economy, which has an educated workforce, above-average wealth levels, and growing tax base, is a key credit strength. Significant commercial and residential development activity is on-going and planned for the city, which should support additional growth in assessed values (AV) over the near term.

SECURITY CHARACTERISTICS: The ratings reflect the city's general credit characteristics as well as the security features supporting the POBs, lease revenue bonds, and COPs.

RATING SENSITIVITIES

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

CREDIT PROFILE

Pasadena is a mature, built-out community with a population of approximately 140,000. It covers about 23 square miles 10 miles northeast of Los Angeles.

SOLID FINANCIAL PROFILE

The city estimates an operating surplus (after transfers) of $9.5 million or 4.5% of spending for the fiscal year that ended on June 30, 2015 versus $4.8 million estimated in April. The surplus marked four consecutive years of positive financial margins, reflecting the significant budget adjustments that were implemented from fiscals 2008 through 2013. Over this 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, was 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.

Management's five-year financial forecast reflects the expectation of positive operating results through fiscal 2020. The projections include reasonable expectations for revenue growth and a conservative decision not to include potential new sources of revenue. For example, the forecast does not include the city's share of property tax revenue from an expired redevelopment area which could amount to several million dollars annually.

The city's unrestricted general fund reserve increased to an estimated $67 million or over 30% of spending in fiscal 2015. The reserve has not dipped below 19.5% in the last seven years. Reserves are expected to increase due in part to a city council-adopted policy to raise the emergency reserve (a portion of the unrestricted general fund reserve) to 20% from 10% of appropriations. The city achieved a 15% level in fiscal 2015 and plans incremental increases going forward. 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 on a per capita basis at $6,780 and midrange relative to AV at 3.7%.

The debt burden includes approximately $415.8 million of general fund-backed debt that is supported by non-general fund revenue including hotel taxes and operating revenue of the conference center, Rose Bowl, and municipal parking system, providing some relief to the general fund. Debt service coverage from these sources is generally very thin, however, 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. Carrying charges on this debt are approximately $21.7 million in fiscal 2016 or roughly 9.75% of budgeted general fund spending.

The city also has an above-average degree of variable-rate debt, which exposes the city to the possibility of unexpected financial demands. Approximately 27% of outstanding debt is variable rate and synthetically fixed; an additional 4% is outstanding in a variable-rate mode and is unhedged. The city expects to discharge the unhedged portion of its debt in the next year or so with the sale of the parking facilities financed with that obligation.

SB 481 LITIGATION & FPRS

The city has benefitted from Senate Bill 481 (SB 481), passed in 1987, which permitted the use 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 generating a reserve of approximately $40 million for POB repayment.

The ability of the city to use the $40 million reserve to pay down a portion of the POBs is currently uncertain, however, following the state's decision that SB 481 payments do not qualify as 'enforceable obligations', thereby preventing the revenue from going to the city. Litigation between the city and the state most recently resulted in the state's successful appeal of an initial ruling in favor of the city. The city has since appealed that decision, and expects a resolution in 2016. The funds are currently being held by the county. If the city is ultimately unsuccessful, the tax will be distributed to the applicable participating agencies, including the city whose share is estimated at $8.4 million.

While Fitch views the accumulated funds under SB 481 as providing a potentially significant benefit to the city, an unfavorable court ruling would not be detrimental to 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 funded ratio of 81.6%. Contributions to CalPERs are expected to continue to increase over the near term and the increases are incorporated into the city's financial projections.

DIVERSE ECONOMY AND RESILIENT TAX BASE

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 population roughly doubles during the daytime 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 5.5% as of September 2015, is modestly below that of the state (5.9%) and above that of the nation (5.1%).

Positively, the city's primary industries tend to support higher-income jobs, which is 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 grew by 6.6% in fiscal 2016 from 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 current and planned 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 Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Applicable Criteria

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

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=993048

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Contacts

Fitch Ratings
Primary Analyst
Shannon Groff
Director
+1 415-732-5628
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
Marcy Block
Senior Director
+1 212-908-0239
or
Media Relations, New York
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Shannon Groff
Director
+1 415-732-5628
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
Marcy Block
Senior Director
+1 212-908-0239
or
Media Relations, New York
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com