Fitch Rates West Hollywood PFA, CA's LRBs 'AA+'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has rated the following West Hollywood Public Financing Authority (PFA), California's lease revenue bonds (LRBs):

--$84.7 million 2016 LRBs (West Hollywood Park Phase II; Werle Building; 2009B Refunding) at 'AA+'.

In addition, Fitch has affirmed the following ratings:

--$12.5 million 2009 LRBs series A (1998 COPs Refunding and Capital Improvement Projects) at 'AA+';

--$34.8 million 2009 taxable LRBs, series B (Capital Improvement Projects) (Federally Taxable - Build America Bonds - Direct Payment) at 'AA+';

--$18.7 million 2013 LRBs (City Hall Parking; Werle Building) at 'AA+';

--City of West Hollywood, California (the city) implied general obligation bonds (GOs) at 'AAA'.

The 2016 LRBs will be sold on a negotiated basis on April 27, 2016.

The 2016 LRBs are an advance crossover refunding of the 2009 LRBs series B, with a crossover date of Feb. 1, 2019. 2016 LRB proceeds will be transferred into an irrevocable escrow fund for 2009 LRB series B interest payment dates in fiscal years 2017-2019, capitalized interest, and prepayment of the outstanding bonds on Feb. 1, 2019.

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 large 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.

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: The tax base continues to grow 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. However, principal amortization is slow.

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 position 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 strong at 194%, 182% and 190% of county, state, and national averages, respectively. The January 2016 unemployment rate fell to 4.9% from 6.8% the year prior, placing it below the averages for the state (5.8%) and the nation (5.2%).

MATURE, RESILIENT TAX BASE

The local tax base exhibits some concentration, with the top 10 property taxpayers making up 13% of fiscal 2016 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 30.6% to end fiscal 2016 at an all-time high of $11.1 billion. The city is projecting a further 24% gain over the next five years. AV per capita is an impressive $309,000, reflective of high local wealth levels.

The prospects for further tax base growth are strong. Approximately $871 million in projects is due to be completed over the next couple of years, including three hotels, 795 residential units, and 353,000 square feet (sf) of new retail, restaurant, and office space. These new developments will augment not only property tax revenues, but also transient occupancy tax and sales tax revenues. A further $651 million worth of projects has been approved for construction which, upon completion, will result in a further 149 hotel rooms, 440 residential units, and 330,000 sf of retail, restaurant, and office space. Another $703 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 climbing steadily since the recession. Fiscal 2015 general fund operations produced a $13.5 million surplus, increasing the unrestricted general fund balance to an extremely high $106.7 million (134% of spending).

For fiscal 2016 year end, the city is projecting that it will maintain its current level of general fund balance primarily as a result of revenues which are coming in 5% above budget. These enhanced revenues will allow the city to maintain fund balance while also making $4 million in property and Proposition A (county transportation sales tax) fund purchases.

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, revenue growth projections related to new development and revenue-raising initiatives are so healthy that such a level of draw down is unlikely in the foreseeable future.

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 has multiyear agreements with its two largest bargaining units through fiscal 2020. These labor agreements provide for annual salary increases of between 1.75% and 3.25%, plus benefit increases projected to be 5% per year. These increases are considered affordable because of the city's strong revenue growth projections. The city's labor contracts are typically flexible as they permit reopeners on health care, allow for layoffs and furloughs, and do not require binding arbitration or mandatory consideration of regional compensation (except in the case of position reclassifications). Salary reopeners would require use of the meet and confer process.

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 financial operations forecasts over 20-year periods.

SATISFACTORY DEBT PROFILE

After issuance of the 2016 LRBs, the city's debt burden will remain moderate at 3.4% of AV but high at $10,731 per capita. The high per capita amount is due predominantly to a large amount of overlapping debt issued by the Los Angeles Unified School District (Fitch Issuer Default Rating of 'A+', Stable Outlook), which is expected to grow. Very high wealth levels mitigate concerns over the higher per capita debt levels. Principal amortization will become below-average with approximately 32% retired over 10 years when also taking into account the city successor agency's tax allocation bonds. No further new money bond issuances are planned for at least the next five years.

The city participates in CalPERS, with a 2015 funded ratio of 74% that drops to a weaker Fitch-estimated 70% after adjusting the assumed investment return rate to 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 $8 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 ($4.1 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 13.6% of fiscal 2015 governmental fund spending.

Additional information is available at 'www.fitchratings.com'.

Fitch recently published exposure drafts of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015 and

Exposure Draft: Incorporating Enhanced Recovery Prospects into U.S. Local Tax-Supported Ratings, dated Feb. 2, 2016). The drafts include a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published at the beginning of the second quarter of 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from CreditScope and Lumesis.

Applicable Criteria

Exposure Draft: Incorporating Enhanced Recovery Prospects into US Local Tax-Supported Ratings (pub. 02 Feb 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=875108

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=1001712

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Contacts

Fitch Ratings
Primary Analyst
Alan Gibson
Director
+1-415-732-7577
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Stephen Walsh
Director
+1-415-732-7573
or
Committee Chairperson
Steve Murray
Senior Director
+1-512-215-3729
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Alan Gibson
Director
+1-415-732-7577
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Stephen Walsh
Director
+1-415-732-7573
or
Committee Chairperson
Steve Murray
Senior Director
+1-512-215-3729
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com