Fitch Rates Anaheim Pub Financing Auth, CA Lease Revs 'AA-'; Outlook Stable
SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned the following rating to Anaheim Public Financing Authority, CA's (the authority) obligations:
--$263.5 million lease revenue bonds (Anaheim Convention Center Expansion Project) 2014 series A and 2014 series B (taxable) at 'AA-'; Outlook Stable.
The bonds are expected to sell via a negotiated sale the week of March 24. Proceeds will be used to finance an expansion of the convention center; fund capitalized interest through fiscal year 2017; and fund a debt service reserve fund at 50% of maximum annual debt service (MADS) ($7.95 million). Proceeds will also refund $53.4 million in outstanding bonds, including certificates of participation (COPS) (1992 Convention Center Financing Project); COPs (1993 Land Acquisition Refinancing Project); lease revenue bonds (Anaheim Convention Center Project), 2002 series A; and lease revenue notes, series 2010.
Fitch affirms its ratings on the following authority obligations, and revises Rating Outlooks as indicated:
--$31.5 million lease revenue refunding bonds, series 2008 at 'AA';
Outlook revised to Stable from Negative;
--$245.2 million senior lease revenue refunding bonds, series 2007A & B at 'A+'; Outlook Stable;
--$37.5 million senior lease revenue bonds, series 1997A at 'A+'; Outlook Stable.
In addition, Fitch affirms the following Anaheim, CA obligations at 'AA+':
--$2.0 million general obligation (GO) refunding bonds, series 1993; Outlook revised to Stable from Negative.
The series 1993 GO bonds are secured by the city's unlimited ad valorem property tax pledge. The series 2014 and 2008 bonds are secured by lease payments to the authority for which the city covenants to budget and appropriate from any legally available funds. The lease payments are subject to abatement. Leased assets for the 2014 bonds include the Anaheim Convention Center, which Fitch considers non-essential, and, for the 2008 bonds include such essential assets as one police station, three fire stations, two youth centers, and a gymnasium.
The series 1997 and 2007 bonds are secured by lease payments, for which the city covenants to budget and appropriate to the authority solely from lease payment measurement revenues (LPMR), largely consisting of hotel and sales tax receipts. The bonds are also secured by an LPMR special reserve funded from excess LPMR; junior lien bonds (not rated by Fitch) also benefit from this reserve. The lease payments are subject to abatement. Leased assets include the Anaheim Convention Center and related parking structures, the Angel Stadium of Anaheim, maintenance facilities, three libraries, and a fire station.
KEY RATING DRIVERS
DEMONSTRATED FINANCIAL FLEXIBILITY: The Outlook revision to Stable from Negative reflects the city's demonstrated financial flexibility during the downturn. The city did draw on general fund reserves but was prudent in cost-cutting measures, continued pay-go capital spending, and consistent full funding of its actuarially required contribution for other post-employment benefits (OPEB) as well as compensated absences and self-insurance. Fitch views these collective efforts, in addition to maintenance of current reserve levels going forward, as adequate mitigants to the city's concentrated and volatile revenue structure.
LIQUIDITY BOOSTED BY INTERNAL SOURCES: General fund cash levels increased to healthy levels through the two years ending fiscal 2013 after a steep decline during the economic downturn. In addition, the general fund has access to significant internal sources of borrowing.
TOURISM-DEPENDENT ECONOMY: The economy is dominated by tourism activity, with The Walt Disney World Company (Disney; Fitch Issuer Default Rating [IDR] 'A'; Outlook Stable) comprising 12.8% of assessed value (AV)). The city has experienced three years of gains in hotel occupancy tax receipts and declines in unemployment as well as an uptick in AV after remarkably stable performance during the downturn.
MANAGEABLE LONG-TERM LIABILITIES: Debt levels are now on the high side of moderate with the 2014 convention center issuance, and amortization is slower than average. Carrying costs for debt service, pensions and OPEB are moderate and fairly stable.
COVENANT TO BUDGET AND APPROPRIATE: The 'AA' rating on the series 2008 lease revenue bonds reflects the city's covenant to budget and appropriate lease payments solely from any legally available funds as well as the essential nature of the specific leased assets. The 'AA-' rating on the series 2014 lease revenue bonds further reflects the less essential nature of the leased assets (the convention center).
SUFFICIENT COVERAGE; NARROW, CONCENTRATED REVENUES: The 'A+' rating and Stable Outlook on the series 1997 and 2007 bonds reflects adequate senior debt service coverage from recovering hotel and sales tax revenues concentrated in the Disney resort property, the pledge of non-essential assets and the city's covenant to budget and appropriate pledged revenues.
SHIFT IN FINANCIAL MANAGEMENT APPROACH: The rating is primarily sensitive to a shift in the financial management philosophy of the city. Fitch views the city's concentrated and inherently volatile revenue structure as the key credit risk, offset by a prudent approach to cost cutting, funding long-term liabilities and maintaining reserves at current levels relative to the budget.
REVENUE RECOVERY, COST CUTTING STABILIZES RESULTS
The city's general fund unreserved balance increased to 11.7% of spending and transfers at year-end fiscal 2013 following three years of revenue recovery and prudent expense management. The current and projected reserve levels are lower than historical levels and lower than Fitch medians at this rating category; however, the flexibility provided by the city's full funding of its OPEB ARC at about $9.8 million annually (3% of spending), along with about $24 million in long-term, general fund related funding of compensated absences and self-insurance liability provides additional cushion should economically sensitive revenues dip again.
General fund revenues are unusually concentrated in hotel taxes, accounting for 37% of operating revenues. Property and sales taxes make up 23% each. The city has posted three years of operating surpluses after revenue declines in fiscals 2009 and 2010 resulted in operating deficits (after transfers).
The general fund yielded a small surplus (equivalent to 0.2% of spending) in fiscal 2012 and an $11.8 million (4% of spending) surplus in 2013.
Both hotel and sales tax revenues exceeded budget in fiscal 2013. After gains of 7.1% and 9.4% in fiscals 2011 and 2012, respectively, hotel tax receipts for fiscal 2013 increased 13.9% to $102.9 million. In addition, sales tax revenues recovered from a 26.5% decline from fiscal 2007 through fiscal 2010, increasing by a total of 28% over the past three fiscal years.
AV declined only modestly through the downturn, and as such, property tax revenue has remained fairly flat through fiscal 2012 before increasing 9.2%, or 6.7% net of one-time revenue, in fiscal 2013.
The city made various spending cuts during the downturn, including the elimination of certain manager positions, labor concessions, attrition and park and library cuts. For fiscal 2013, the city negotiated some pension reforms, and restored a small amount of service cuts made during the downturn. Spending increased by 5% in fiscal 2013, largely due to increased police spending (up $4.4 million) and a general government increase of $1.5 million (city attorney).
RESERVES RECOVER AND STABILIZE
The city has consistently met its self-imposed policy minimum requiring available fund balance between 7%-10% of spending not including transfers. Fitch expects the general fund cushion to remain at current levels relative to the budget. The general fund unrestricted balance declined to just 7.8% of spending and transfers at fiscal year-end 2011, underscoring the city's vulnerability to economic cycles. The fiscal 2012 unrestricted balance grew marginally to 9.7% of spending and jumped to 11.7% in fiscal 2013.
The fiscal 2014 budget includes additional, though smaller, increases in revenues and $5.3 million in one-time spending, resulting in a $3.9 million operating deficit (after transfers). The city's general fund forecast through fiscal 2018 shows modest annual revenue and expenditure increases and modest surpluses, with no additional one-time expenditures and stable general fund balances.
General fund cash and investments increased to $29.4 million in fiscal 2013, covering liabilities (net of deferred revenues) by 1.9x, after bottoming out at $13.7 million in 2011. The prior four-year average was $33.6 million. The cash position is enhanced by the city's significant internal sources of liquidity. These include $83 million in borrowable balances from fully funded internal service funds, such as self-insurance and compensated absences.
TOURISM-BASED ECONOMY PERFORMING WELL
The city's economy is dependent upon tourism, largely driven by Disney, which accounts for 12.8% of fiscal 2014 AV. Disney recently completed over $1 billion in renovations to the California Adventure Park, including the opening of Cars Land in June 2012.
AV only declined 1.8% during the downturn and has since increased 5.9% though fiscal 2014. Zillow's home value index increased 19.4% year over year to $443,800 as of November 2013, but is still down 27% from its 2006 peak. The unemployment rate of 6.8% as of December 2013 is higher than the county average of 5.2%, but compares favorably with the state (7.9%) and is nearly even with the nation (6.5%).
MANAGEABLE DEBT BURDEN
The current offering for the convention center (maturing in 2047) increases the tax-supported debt burden by about 30% and further slows amortization to 38% in 10 years. Overall debt levels are at the high end of moderate at $4,847 per capita and 4.7% of AV. The city's large five-year capital plan totaling $613 million is primarily focused on utility projects and contains no projects financed from the general fund.
The city implemented several pension reforms, including a second-tier pension plan increasing the retirement age for public safety employees. In addition, police department employees began contributing a portion of the employee share of the annual required pension contribution, which miscellaneous employees already do. The city does not pay any of the employee contribution for fire. Finally, the city eliminated the inclusion of payments made by the city for the employee portion of pension contributions from final benefit calculations for public safety. Fitch expects these reforms to have a positive effect on the future pension liability.
The city's OPEB plan is closed. The city has prudently established an irrevocable trust with a balance of $67.7 million and consistently funds the ARC to address its liability. The funded ratio was 33.7% based on the most recent actuarial valuation data (June 30, 2011) using a 7.75% discount rate. Carrying costs for debt service, pensions and OPEB are sizable but in the moderate range and fairly stable at 21.5% of fiscal 2013 governmental spending.
SUFFICIENT COVERAGE FROM NARROW, CONCENTRATED REVENUE PLEDGE
The series 1997 and 2007 bonds are secured by LMPR, defined as amounts collected from: 3% transient occupancy tax (TOT) on all citywide hotels, excluding Disney properties; 100% of incremental TOT and sales tax revenues from all Disney properties over the 1995 base, adjusted each year by the consumer price index (CPI) with a minimum 2% annual increase; and 100% of the city's property tax revenues from Disney properties in excess of the 1995 base property tax amount, adjusted annually by 2%.
In fiscal 2013, debt service coverage was equal to the prior five-year average at 2.3x on a senior lien basis. After two years at just 1.0x, all-in coverage increased to 1.1x in fiscal 2012 and 1.25x in fiscal 2013. Fiscal 2013 coverage of MADS, which occurs in 2037, is 0.92x for the senior lien.
Coverage declined in fiscals 2009 and 2010 due to reduced revenues, as hotel and sales tax receipts were heavily pressured by the economic downturn. Since then revenues increased alongside escalating debt service payments, which kept coverage lower. However, 17.5% and 20.9% increases in revenues in fiscals 2012 and 2013, respectively, led to increased coverage.
LPMR revenues were as much as 27% below projections during the downturn and still 3% below in 2013. The city has budgeted for a 6.7% increase in the LPMR revenues in 2014, bringing them just over the original projections. Annual growth required to meet MADS is a reasonable 0.4% for senior but a more aggressive 4% for all-in obligations.
Pledged revenues are highly reliant upon Disney with approximately 55% of fiscal 2013 LMPR revenues generated by the Disney TOT and sales tax increment, 36% by the city-wide TOT, and 9% by the Disney property tax increment. Disney's recent investments in the property, along with a reported uptick in hotel occupancy rates, are expected to have a positive impact on TOT and sales receipts going forward at least in the near term.
The bonds are also secured by a supplemental reserve with an estimated balance of $37.1 million (after the Sept. 1, 2013 debt service payment of $25 million), which is equal to more than 100% of annual debt service on both senior and subordinate lien bonds.
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.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria