Fitch Rates Santa Monica, CA's LRBs 'AA+'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings assigns an 'AA+' rating to the following Santa Monica, California (the city) bonds:

--$27.1 million lease revenue refunding bonds (LRBs) series 2015 (Civic Center Parking Project) issued by the Santa Monica Public Financing Authority (the financing authority).

The proceeds will be used to refinance the city's series 2004 civic center parking project LRBs and to pay cost of issuance. The bonds are scheduled to sell via competitive sale on or about June 24.

In addition, Fitch affirms the following ratings:

--$82.9 million outstanding lease revenue bonds issued by the financing authority, series 2004 (to be refunded), 2009, 2011A and 2011B, and the Santa Monica Parking Authority, California, series 2002, at 'AA+';

--$11.2 million City of Santa Monica general obligation (GO) bonds, series 2012, at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The GO bonds are backed by an unlimited property tax levy on all taxable property within the city. The LRBs are payable from lease payments by the city for use of various assets, subject to abatement.

KEY RATING DRIVERS

VERY STRONG FINANCIAL OPERATIONS: The 'AAA' GO rating reflects the city's very strong financial position, exhibited by a robust financial cushion, structurally balanced operations excluding the transfer out of former redevelopment agency (RDA) assets, and excellent financial management practices.

SATISFACTORY LEASE STRUCTURE: The one notch distinction between the GO and lease revenue bond ratings reflect the city's sound lease structure, a covenant to budget and appropriate rental payments, standard insurance provisions, and leased assets that Fitch deem to be sufficiently essential.

ROBUST LOCAL ECONOMY: The city benefits from its mature and wealthy local economy, with healthy retail, commercial, and hospitality sectors. The tax base is diverse, growing and faced minimal assessed valuation (AV) losses during the recession.

LOW LONG-TERM LIABILITIES: The city's debt profile benefits from low debt levels, significant pay-as-you-go capital spending, and manageable capital needs. Total carrying costs of debt service, pensions and other post-employment benefits (OPEB) are low.

RATING SENSITIVITIES

The rating could come under downward pressure if the city's strong financial operations and economy weakened materially. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

Santa Monica is a coastal city in Los Angeles County with a population of about 92,000.

A STRONG AND GROWING LOCAL ECONOMY

The city benefits from its desirable location within the large and diverse Los Angeles employment market. The city's economy is reasonably diverse with the key tourism sector supplemented by significant commercial and retail businesses. Tourist activity is driven by the city's beaches, pier, high-end hotels, and a large retail sector. Economic activity is expected to benefit from the 2016 opening of a light rail station that will provide enhanced access between the city and downtown Los Angeles.

Demographic indicators are strong. Median household income is high at 139% of the national level. Educational attainment also well exceeds national rates with 65% of the population holding at least a bachelor's degree, more than twice the national rate. The individual poverty rate is low at 11.2%. The non-seasonally adjusted unemployment rate was somewhat above average at 6% in April 2015, versus a national rate of 5.3%.

A LARGE, RESILIENT TAX BASE

The city's tax base is large, mature, and resilient. The city's tax base declined by less than 1% during the housing-led recession and has enjoyed sound growth every year since. The tax base expanded a cumulative 21.9% from fiscal years 2011-2015, with a strong 5.8% gain in fiscal 2015. The gains reflect both new construction activity and rising home prices. The top 10 taxpayers account for a modest 10.3% of total AV.

VERY STRONG FINANCIAL OPERATIONS

City financial operations are very strong with structurally balance budgets and sound reserves. Recent financial statements have obscured underlying financial performance due to the dissolution of California redevelopment agencies and large capital projects. The city booked very large one-time revenue of $107.8 million in 2012 as it folded redevelopment assets into its general fund. The California Department of Finance (DOF) required repayment of $56.8 million of the funds. Adjusted for redevelopment dissolution and a $22.2 million capital project in 2013, the city has run consistent structural operating budget surpluses for many years. The city made its $28.4 million final redevelopment-related repayments in fiscal 2015. The city expects to post a surplus excluding redevelopment payments of about $10.2 million, or about 3% of spending, in 2015.

The city's unrestricted (committed, assigned and unassigned) general fund balance equaled a very high $331.4 million, or 97.9% of expenditures and transfers out at the end of fiscal 2014.

PRUDENT MANAGEMENT PRACTICES

The city's financial operations benefit from prudent financial policies and recent actions to reduce pension costs. The city has a solid financial reserve policy, requiring a 15% general fund operating contingency reserve. The city additionally requires general fund reserves for compensated absences. Fitch views positively the City Council's new pension funding practices described above.

SOUND DEBT PROFILE

The city's debt profile is healthy with moderately low debt ratios, an uncomplicated debt structure and average amortization. The direct and overlapping debt burden is just 2.3% of AV. Principal amortization is average with 52% of debt repaid in 10 years. The city's fiscal 2015-16 to 2018-19 capital improvement plan is sizeable at $349 million but will be financed largely with pay-as-you-go spending. The plan would require a modest spend-down of general fund reserves. The city may issue as much as $85 million of debt in 2017 to fund a fire station and city services building, but the bond sales are unlikely to add enough to the debt burden to change the debt profile meaningfully.

AFFORDABLE RETIREMENT LIABILITIES

Retirement costs are manageable, and the city has taken unusual and proactive steps to improve pension funded ratios. The city participates in three pension plans administered by CalPERS that collectively are adequately funded at 76% on a Fitch-adjusted basis that assumes a 7% discount rate (CalPERS assumes a 7.5% discount rate). Santa Monica has contributed more than its actuarially required contribution (ARC) rate to improve pension funded ratios in recent years.

In 2014 the City Council approved a policy requiring annual general fund contributions of at least $1 million in excess of the ARC, in addition to proportionate contributions from other city funds. Management actions will mitigate anticipated pension contribution rate increases resulting from recent actuarial modifications imposed by CalPERS and will improve funded ratios.

The city's OPEB plan is limited to a small group of employees and the related liability is relatively small and manageable. The total carrying cost of debt service, pension and OPEB payments was low at 12.9% of governmental spending in 2014 and still low at 14.3% including pension payments above ARC.

STANDARD LEGAL PROVISIONS

The city's lease revenue bonds are subject to standard lease arrangements with sound legal provisions, including a covenant to budget and appropriate lease payments, subject to abatement. Fitch deems the various leased assets to be of a sufficiently essential nature. The current deal refunds bonds issued to finance construction of the city's Civic Center parking project. The bonds are rated a single notch from the city's GO bond rating. Fitch believes the city has substantial incentive to appropriate for the project due to the high need for parking in its downtown and the fact that the city's parking enterprise (accounted for in the general fund) generated significant net revenues (about $18 million in 2014) that help support other general fund programs.

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

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=986587

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=986587

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Andrew Ward
Director
+1-415-732-5617
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
or
Secondary Analyst
Karen Ribble
Senior Director
+1-415-732-5611
or
Committee Chairperson
Mike Rinaldi
Senior Director
+1-212-908-0833
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Andrew Ward
Director
+1-415-732-5617
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
or
Secondary Analyst
Karen Ribble
Senior Director
+1-415-732-5611
or
Committee Chairperson
Mike Rinaldi
Senior Director
+1-212-908-0833
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com