OREANDA-NEWS. Fitch Ratings has affirmed the following Lodi Public Finance Authority, California (PFA; the authority) rating:

-- $19.1 million refunding lease revenue bonds (LRBs) series 2012 at 'AA-'.

Fitch also affirmed the Issuer Default Rating (IDR) for the city of Lodi, CA at 'AA'.

The Rating Outlook is Stable.

SECURITY

The LRBs are payable by lease payments from the city to the authority for the use of various essential assets. The city of Lodi has covenanted to budget and appropriate lease payments, subject to abatement, and payments can be made from any available funds of the city. The bonds do not include a debt service reserve.

KEY RATING DRIVERS

The 'AA' IDR reflects the city's solid expenditure control, low long-term liabilities, strong reserves and gap-closing capacity. Revenue performance has steadily increased in recent years, but the city's limited legal ability to raise revenues presents an ongoing challenge.

Economic Resource Base

The city of Lodi comprises an area of 13.98 square miles and serves a population of 63,719 in the San Joaquin Valley, about 35 miles south of Sacramento. The local economy is moderately concentrated in agriculture and food processing, although it also has large employers in the packaging, plastics manufacturing, and service industries. The area also benefits as a regional tourist destination, with over 80 wineries within 10 miles of downtown.

Revenue Framework: 'bbb' factor assessment

The city's 10-year historical revenue performance trailed both U. S. GDP growth and inflation, although the pace of revenue gains has accelerated recently. Fitch expects growth prospects will continue to improve, due to the city's economic recovery and broadening tax base. The city's legal ability to raise revenues remains constrained by Proposition 13, which requires voter approval for tax increases.

Expenditure Framework: 'aa' factor assessment

The city's natural pace of spending growth is likely to be in line with revenue trends over time. Some upward expenditure pressure from increasing pension contributions is expected; however, the city has demonstrated a solid ability to manage spending during recessionary periods.

Long-Term Liability Burden: 'aaa' factor assessment

The city's overall debt and unfunded pension liability are low relative to its resource base (9.2% of personal income), and are expected to remain moderate over the medium term. The city does not anticipate any borrowing needs in the near future.

Operating Performance: 'aaa' factor assessment

Management has made consistent efforts to maintain financial flexibility in the wake of the most recent recession. Fitch expects the city to utilize its strong reserves and expenditure flexibility, including its demonstrated ability to negotiate labor concessions, to address periods of revenue uncertainty.

RATING SENSITIVITIES

IDR SENSITIVE TO FINANCIAL PERFORMANCE: The 'AA' IDR could come under downward pressure if the city fails to maintain satisfactory financial flexibility, including reserves sufficient to address periodic economic volatility.

CREDIT PROFILE

The city continues to diversify its economic resource base. Residential construction is expanding, as evidenced by the development of a combined 700 single - and multifamily housing units and a 300-unit senior apartment complex. Two new hotels totaling 150 to 200 new rooms also are being constructed, and five national retail chain stores are set to open locations in Lodi.

Revenue Framework

Property and sales and use taxes comprise the majority of city revenues. Property tax revenue growth has been modest historically, but is expected to register gains given development activity underway and planned. Although sales taxes have proven more volatile, expected additional commercial activity should boost these revenues in the next few years. Total general fund revenue growth has just kept pace with inflation over the past 10 years.

State law requires voter approval of tax increases, limiting the ability of the city to control revenues. Property tax growth is also constrained by an annual limit on assessed value increases on taxable property (absent a change in ownership).

In November 2016 city council will present voters with separate 1/4-cent and 1/8-cent sales tax increases for additional public safety staffing and parks department maintenance and repairs, respectively. If the voters pass the sales tax increases by a two-thirds vote, they will go into effect in January 2017 and boost revenue performance.

Expenditure Framework

The city provides a broad range of municipal services, with public safety accounting for the majority of general fund expenditures.

The rate of spending growth is expected to be in line with, to marginally above, expected revenue gains in the absence of policy action. Some upward expenditure pressure will be generated by increasing pension system contributions; however, the city is expected to maintain ample overall expenditure flexibility given its low carrying costs and favorable workforce environment.

The city has a demonstrated history of reducing personnel costs via labor concessions or changes to headcount when necessary. Management successfully reduced spending through employee layoffs, benefit cuts, and furloughs during the last recession, and would likely return to such strategies if needed to address new revenue declines.

Long-Term Liability Burden

Long-term liabilities are less than 10% of the city's personal income, and direct debt levels are minimal relative to its substantial resource base. The city participates in an adequately funded state pension plan, CalPERS.

The city eliminated other post-employment benefits in the 1990s. The total current OPEB liability to the city is approximately $17 million and the liability is capped. The city has set aside $1 million in a fund specifically intended for OPEB costs.

Operating Performance

Ample reserves and inherent budget flexibility contribute to the city's expected strong financial resilience through an economic downturn.

The city has a history of maintaining healthy reserves significantly higher than its 16% internal policy. The Capital Outlay, Library, Community Development, Workers Compensation (surplus), and OPEB funds (totalling approximately $7 million) are monies available for the transfer into the general fund in the event of unanticipated revenue loss. Fitch's expectation is that the city would use a combination of its strong budget flexibility and ample reserves to offset any recessionary revenue declines.