OREANDA-NEWS. Fitch Ratings affirms the following obligations issued by Anaheim, CA (the city) and by Anaheim Public Financing Authority, CA (the authority) on behalf of the city:

--$0.7 million city general obligation (GO) refunding bonds, series 1993 at 'AA+';

--$21.9 million authority lease revenue refunding bonds, series 2008 at 'AA';

--$236.2 million authority senior lease revenue refunding bonds, series 2007A & B at 'A+';

--$37.5 million authority senior lease revenue bonds, series 1997A at 'A+';

--Issuer Default Rating (IDR) at 'AA+'.

In addition, Fitch upgrades the following obligation issued by the authority due to application of Fitch's revised tax-supported criteria:

--$255 million authority lease revenue bonds (Anaheim Convention Center Expansion Project) 2014 series A and 2014 series B (taxable) to 'AA' from 'AA-'.

The Rating Outlook on all obligations is Stable.

SECURITY

The series 1993 unlimited general obligation (ULTGO) bonds are payable from the city's unlimited ad valorem property tax pledge.

The series 2014 bonds are payable from lease rental payments made by the city for use an occupancy of the convention center, subject to abatement. The bonds are also secured by a cash-funded debt service reserve fund sized at 50% of maximum annual debt service (MADS). The upgrade reflects Fitch's revised criteria, released April 18, 2016, which include more focused consideration of project factors in ratings for appropriation-backed debt. The series 2014 bonds do not carry any of the additional risk features that Fitch identifies for rating more than one notch below the IDR.

The 2008 bonds are payable from lease rental payments from the city for use and occupancy of essential governmental assets, subject to abatement.

The series 1997 and 2007 bonds are payable from lease rental payments made by the city for use and occupancy of various convention center-related assets as well as essential governmental assets, subject to abatement. The lease rental payments are payable solely from lease payment measurement revenues (LPMR), defined as amounts collected from: 3% transient occupancy tax (TOT) on hotels citywide but excluding Disney properties; 100% of incremental TOT and sales tax revenues from all Disney properties over the fiscal 1995 base which is adjusted each year by the consumer price index (CPI) with a minimum 2% annual increase; and 100% of property tax revenues from Disney properties in excess of the 1995 base property tax amount, which is adjusted annually by 2%. No additional bonds are permitted under the indenture. The bonds are also payable from an LPMR special reserve with an estimated balance of $60 million funded from excess LPMR; junior lien bonds (not rated by Fitch) also benefit from this reserve.

KEY RATING DRIVERS

The 'AA+' IDR incorporates the city's strong financial resilience evidenced through its adequate reserves, demonstrated ability to control key spending, and moderate overall liability levels. It further reflects the expectation that revenues will continue to perform at or better than the overall U. S. economy despite the city's very limited independent ability to raise revenues.

The 'AA' rating on the series 2008 and 2014 lease revenue bonds reflects the city's covenant to budget and appropriate lease payments. Proceeds of the bonds were used to fund the seventh expansion of the Anaheim Convention Center, established in 1967 and the largest exhibit space on the Western coast.

The 'A+' rating on the series 1997 and 2007 bonds reflects adequate debt service coverage (DSC) from a narrow but rapidly growing revenue stream of hotel and sales tax revenues concentrated in the Disney resort property, and the city's covenant to budget and appropriate pledged revenues. The revenue stream will need to continue to grow at a rapid 3.4% per year in order to meet maximum annual debt service on both the senior and junior debt service at maturity in fiscal 2037. While this is lower than the 10-year compound annual growth rate (CAGR) through fiscal 2014 of 4.8%, it is above inflationary expectations.

Economic Resource Base

The city's economy is dominated by tourism activity, with The Walt Disney World Company (IDR 'A'/ Outlook Stable) comprising 12% of assessed value (AV). The city has experienced six years of gains in hotel occupancy tax receipts and a nearly 16% increase in AV after remarkably stable performance during the downturn.

Revenue Framework: 'a' factor assessment

Fitch believes revenue growth will continue to be in line with or above the U. S. economy. However, the city has limited ability to independently raise revenues given taxation limitations imposed by the state.

Expenditure Framework: 'aa' factor assessment

Spending is expected to grow at about the same as, or modestly higher than, revenue growth going forward. Carrying costs, including some self-supporting debt in addition to direct debt, pension, and OPEB costs, are moderate at about 20% of spending.

Long-Term Liability Burden: 'aa' factor assessment

Debt and pensions are moderate relative to personal income. The city participates in CalPERs and has a relatively large unfunded liability related to its closed OPEB plan despite prefunding.

Operating Performance: 'aaa' factor assessment

The city performed well during the most recent downturn and maintains strong financial management practices including reserve levels above the city's policy of 7 to 10% of expenditures. In addition, the city fully funds its compensated absences and self-insurance liabilities. It has also established an irrevocable trust for other post-employment benefits and funds the annual required contribution.

RATING SENSITIVITIES

Shift in Financial Performance: The rating is primarily sensitive to a shift in the city's financial management practices. The city's limited revenue raising ability is offset by a prudent approach to cost cutting, funding long-term liabilities and maintaining satisfactory reserves relative to the budget.

CREDIT PROFILE

The tourism-driven economy is dominated by Disney. Disney recently completed over $1 billion in renovations to the California Adventure Park, including the opening of Cars Land in June 2012, and is expected to invest a comparable amount in building Star Wars land over the next several years. In addition, the Anaheim Convention Center expansion is expected to be completed in fiscal 2018. AV declined only 1.8% during the downturn and has since increased nearly 16% though fiscal 2016.

Revenue Framework

The city's general fund revenues are primarily generated by transient occupancy taxes (38.3%), property tax receipts (21.6%), and sales tax receipts (23%).

General fund revenues increased 4% annually over the decade ending in fiscal 2014, which is above both U. S. GDP and above U. S. CPI. The city expects fiscal 2016 general fund revenues to come in about 2% over the amended budget and the fiscal 2017 budget assumes an additional 5% increase followed by 4% increases through fiscal 2021. Both hotel and sales tax revenues exceeded budget the last several years. Property tax revenue remained fairly flat throughout the downturn before increasing 16% through fiscal 2016.

The city has limited capacity to independently raise revenues under state law, particularly Proposition 13 which allows for a maximum increase of 2% per year in tax assessments other than sales/re-sales, and Proposition 218 which requires voter approval for tax increases. TOT rates are currently at the maximum of 15%.

Expenditure Framework

Spending is focused on public safety, accounting for 54% of general fund expenditures including transfers.

The pace of spending growth is likely to be in line with to marginally above the pace of revenue changes over time in the absence of policy actions.

The city's fixed cost burden is moderate with carrying costs for debt, pensions, and other post-employment benefits (OPEBs) healthcare accounting for 20% of governmental spending. This figure includes the full actuarial payment related to OPEB, which the city has funded for a number of years. The city could suspend budgeting OPEB prefunding if needed and save the prefunding portion of the annual payment, equal to approximately $12 million (3.6% of total governmental spending). In addition, some of the pension and OPEB costs are paid by the city's sizeable enterprise funds.

The city has two-year contracts with fire units and four-year contracts with police include modest annual increases that are offset to some extent by increases to the portion of retirement contributions paid for by employees. The city is currently in negotiations with its general labor groups and assumes additional modest annual increases. Contracts do not contain reopeners and do not allow strikes. The firefighters' contract is subject to binding arbitration related to compensation.

Long-Term Liability Burden

The city's overall debt and pension liabilities are moderate at 16.6% of personal income. The overall pension assets to liability ratio based on a Fitch adjusted 7% return assumption is 71.7% and the unfunded liability related to the closed OPEB plan is $163 million, equal to 1.1% of personal income. The city has accumulated approximately $70 million in an irrevocable trust to address its OPEB liability. Amortization of direct debt is very slow at just 25% retired in 10 years.

Operating Performance

The city performed well during the most recent economic downturn primarily by exercising strong expense management during the most recent downturn, including labor concessions, attrition and some outsourcing. The current and projected reserve levels do not include over $28 million in long-term, general fund related funding of compensated absences and self-insurance liability. These equal about 9% of spending, bringing total general fund reserves to 21%, and provide additional cushion should revenues dip again.

The city's prudent spending restraint has continued during the period of economic recovery. The strong financial management is evidenced in the city's maintenance of a five-year general fund projection. It fully budgets for every position although there is typically a 5% vacancy rate, which equals approximately $10 million. It also builds in 10% annual increases in health care costs, which are typically lower. In addition, the city fully funds its OPEB annual required contribution; if needed it could temporarily suspend the prefunding portion.

The city expects a $7.3 million surplus for fiscal 2016 that will be budgeted for one-time projects in fiscal 2017. Its five year plan through fiscal 2021 indicates continued structural balance including ongoing service enhancements of $3-6 million per year.