Fitch Affirms Beverly Hills Public Finance Authority (CA)'s Lease Revs at 'AA+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the following Beverly Hills Public Financing Authority, California (the authority) obligations:

--$161.5 million lease revenue bonds, series 2009, 2010A-C, and 2012A at 'AA+'.

In addition, Fitch has affirmed the Issuer Default Rating for Beverly Hills, California (the city) at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The lease revenue bonds are payable from the city's lease rental payments to the authority for use of various facilities, subject to abatement. The city covenants to budget and appropriate the full annual lease rental payment amounts.

KEY RATING DRIVERS

The 'AAA' IDR reflects the city's strong operating performance, moderate long-term liability burden, moderate fixed costs, and robust reserves. The tax base and economic fundamentals supporting the city's strong revenue performance will likely continue to position the city well during the next economic downturn.

Economic Resource Base

The city is a mature, stable, and wealthy community covering less than six square miles. It is almost entirely developed, with limited potential for redevelopment. The major taxpayers are office, retail, high-end hotels, and residential property developers. While the resident population is approximately 35,000, workers and visitors raise the daytime population by more than 100,000, according to city officials. Income levels are very high.

Revenue Framework: 'aa' factor assessment

Despite limited independent legal ability to raise revenues, the city's tax structure successfully captures much of the economic activity generated by a strong and mature economic base that includes particularly prominent retail and hotel businesses.

Expenditure Framework: 'aaa' factor assessment

Future expenditure growth is expected to be in line with, or lower than, revenue growth, and the city enjoys solid expenditure flexibility.

Long-Term Liability Burden: 'aa' factor assessment

The long-term liability burden is moderate relative to the city's resource base.

Operating Performance: 'aaa' factor assessment

The city benefits from exceptionally strong gap-closing capacity, surplus operations, thorough financial management, and solid financial reserves that would offset moderate recessionary revenue decline.

RATING SENSITIVITIES

FUNDAMENTAL CREDIT QUALITY: The rating is sensitive to shifts in the city's strong financial performance, economy, and tax base.

CREDIT PROFILE

After a small TAV decline of less than 3% in fiscal 2011, there has been a cumulative 39% increase through fiscal 2017. Both the residential and commercial property markets perform well. Taxable value is exceptionally high at approximately $730,000 per capita in fiscal 2015. Ongoing residential and hotel development will add to the city's TAV. A new Waldof Astoria hotel is scheduled to open in 2017, followed by a major mixed use project in 2018. The city is forecasting annual TAV increases of between 2.8% and 3.5% during fiscal years 2018 - 2021.

Revenue Framework

City finances benefit from a diverse revenue stream with four particularly significant sources of support: sales, transient occupancy, property, and business taxes. Cumulatively, these represent 76% of fiscal 2015 general fund revenues. Because of the sensitivity of sales taxes and transient occupancy taxes to economic downturns, the city had to implement significant expenditure reductions during fiscal years 2010 - 2012 to ensure ongoing positive operations. However, the lagging nature of property tax revenues provide some downside projection during the early part of a recession while, conversely, the economically volatile revenue streams recover ahead of property tax revenues when the economy returns to growth.

The city's multiyear projections indicate growing general fund balances through fiscal 2021 based on ongoing revenue growth and maintenance of surplus operations.

State law requires voter approval for tax increases, limiting the city's ability to control its revenues. In particular, property tax growth is constrained by an annual limit on taxable AV increases absent a chance in ownership. Fees, charges for services, and fines can be raised only to recover the costs of providing related services. Consequently, the city's revenue raising ability is judged to be limited.

Expenditure Framework

General fund expenditures are dominated by public safety, which made up 56% of fiscal 2015 general fund spending, and culture and recreation (25%), reflecting residents' expectation of high service levels. While the city has granted 2% to 2.5% annual raises as part of its four year labor contracts for miscellaneous and fire personnel, these costs have been partially offset by decreased employer pension and health care contributions.

The city consistently does not spend its full general fund revenues. Based on past spending trends and the stable city population, Fitch expects general fund spending growth to be in alignment, or less than, general fund revenue growth. The city has focused on controlling costs through establishing a lower pension tier and phasing in employee pension cost-sharing, OPEB liability buy-outs, and health care plan changes.

The city continues to enjoy solid expenditure flexibility since its fixed debt, pension, and OPEB carrying costs are moderate. If the city had to reduce expenditures, it would look first to reducing internal service fund charges for replacing large capital items, decreasing capital spending, and slowing equipment replacement. The city also has the ability to reduce headcount or implement furloughs if necessary since its multiyear labor contracts are reasonably flexible.

Long-Term Liability Burden

As a result of its disproportionately productive commercial sector, small geographic size and population, and very high property values, the city's overall debt burden is moderate as a percentage of income (15%) but affordable relative to its TAV (3%). The slightly elevated debt level is largely a function of the high percentage of overlapping debt from other jurisdictions (74% of the total) and rapid amortization of the city's direct debt (76% in 10 years).

The city regularly makes its annual actuarially required pension contributions to CalPERS. The city's pension obligations are somewhat weakly funded, at approximately 71% using Fitch's more conservative 7% discount rate. The city has worked to limit its OPEB liabilities by setting aside $42 million in an internal service fund (not an irrevocable trust) to partially offset its $99 million unfunded actuarial liability.

Operating Performance

Although two of the city's main revenue sources, sales taxes and transient occupancy taxes, are particularly sensitive to economic downturns, the city has demonstrated successfully that it balances revenues and expenditures to ensure continued positive operations.

Fiscal 2015 ended with an unrestricted general fund balance of almost $134 million, or 69% of spending. The city projects that its fiscal 2016 unrestricted general fund balance will increase by almost $33 million to nearly $167 million. Thereafter, the city projects ongoing positive operations through fiscal 2021 which Fitch considers reasonable given that the city consistently does not spend its full general fund revenues each year. This is in spite of making cash contributions to its capital projects, subsidizing its storm water operations by more than $5 million annually, allocating $10 million to the Beverly Hills School District each year, and maintaining strong reserves. Both sales tax and transient occupancy tax revenues are projected to increase with the opening of new hotels in 2017 onwards. In addition to receiving 14% transient occupancy taxes from all hotels, the city also receives an additional 5% development fee from some hotels.

The city maintains sizable financial reserves. In addition to its very strong unrestricted general fund balance, the city could borrow from its $131 million unreserved internal service funds in an emergency (which includes the $42 million OPEB reserve).

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

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

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/site/re/879478

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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
Nancy Rocha
Director
+1-512-215-3741
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
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
Nancy Rocha
Director
+1-512-215-3741
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com