OREANDA-NEWS. Fitch Ratings affirms the following Santa Monica, CA ratings:

--Issuer Default Rating (IDR) at 'AAA';

--$8.9 million general obligation (GO) bonds at 'AAA';

--$72.6 million lease revenue bonds (LRBs) issued by the Santa Monica Public Financing Authority (the financing authority) at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The GO bonds are payable from an unlimited property tax on all of the city's taxable properties. The LRBs are payable from lease payments from the city to the trustee for use of various governmental assets, subject to abatement. Lease provisions are standard with a covenant to budget and appropriate for use and occupancy of a variety of governmental assets, including the Civic Center parking garage and various public safety assets. The assets are subject to abatement and carry standard insurance coverage but not earthquake insurance. The lease revenue bonds are rated one notch below the city's IDR, reflecting the slightly higher degree of optionality associated with payment of appropriation debt.

KEY RATING DRIVERS

The 'AAA' IDR is driven by exceptional resilience to economic downturns, a moderate debt burden and a solid revenue framework in the context of a very strong economic resource base.

Economic Resource Base

Santa Monica is an affluent coastal enclave bordering Los Angeles with about 93,200 residents and a very strong economic resource base. The city is well situated within a broad and diverse metropolitan area economy, and it has a significant local service sector economy with major technology, health care, research, governmental, and retail employers supplementing a large high-end lodging sector. Median household income is about 150% of the national level. Both the individual poverty rate and unemployment rate run lower than national averages.

Revenue Framework: 'aa' factor assessment

Santa Monica benefits from a strong revenue base that consistently provides growth above the level of national economic growth. Revenue flexibility is limited, but satisfactory relative to very limited revenue volatility.

Expenditure Framework: 'aaa' factor assessment

Expenditure growth is expected to be below the pace of revenue gains. Expenditure flexibility is solid with moderate fixed costs of debt and retiree liabilities, a reasonably flexible labor negotiating framework, and significant flexibility to adjust the timing of the city's significant on-going pay-go capital investments.

Long-Term Liability Burden: 'aa' factor assessment

Debt and unfunded pension liabilities are moderate relative to the city's wealthy economic base.

Operating Performance: 'aaa' factor assessment

Financial resilience through downturns is exceptionally strong. The city maintains very robust reserves safety margin to offset limited revenue volatility and has adequate ability to adjust budgets to maintain balance via spending adjustments. Budget management in times of recovery is very strong with consistent attention to long-term fiscal sustainability.

RATING SENSITIVITIES

SUSTAINED WEAKENING OF FINANCES: The rating could come under downward pressure if financial performance weakened on a sustained basis. Fitch believes the risk of rating transition is low given the exceptionally high level of reserves, many years of strong financial management and solid economic growth prospects.

CREDIT PROFILE

Revenue Framework

The city's revenue structure is unusually diverse with five significant sources of tax revenues (property, sales, transient occupancy, utility use and business license taxes) providing about two-thirds of revenues. No single source dominates with sales, property and lodging taxes each providing about 15% of general fund revenues. Even with several cyclical components, the diversity of tax revenues yields overall tax revenues that are not particularly cyclical and do a good job of capturing growing economic activity over time.

Revenue growth is expected to remain strong. The compound annual growth rate of general fund revenues was significantly in excess of inflation and national economic growth at 6.2% over the decade through 2014. Revenue outperformance reflects both strong growth in the economic base and the revenue structure's ability to capture economic activity.

The city has satisfactory independent legal ability to raise revenues relative to its limited revenue volatility. State tax limitations prohibit increases in the operating property tax levy, and other taxes can only be increased with a vote of the people. Policymakers' independent revenue raising flexibility is limited to fees and fines that make up a moderate proportion of total general fund revenues. Fee increases are likely to be adequate to offset typical cyclical variations in revenues because revenue volatility is low, not because revenue flexibility is particularly strong. While the city lacks the independent ability to raise tax revenues, local voters have proven willing to approve additional taxes as needed to provide a high level of government services.

Expenditure Framework

Santa Monica is a full service city providing fire, police, library, parks and recreation and other typical municipal services. Public safety is the largest individual category of expenditure, but it does not predominate the way it does in other California communities with narrower service offerings.

The city faces limited expenditure growth pressures with pension, workers compensation and healthcare costs rising faster than inflation and overall spending. However, the city's overall pace of spending growth is likely to be less than the rate of revenue growth, which is unusually high and obviates the need to make ongoing service reductions to make room for rising costs.

Expenditure flexibility is solid. Fixed carrying costs of debt, pensions and other post-employment benefits were moderate at 13.4% of spending in 2015. The labor negotiating framework is typical for California with requirement to meet and confer with the public employee unions, but the City Council retains the right to impose terms in the rare instances where the sides cannot reach an agreement. Current contract terms appear manageable and do not create out-year obligations that appear likely to stress the city's finances. The city also benefits from significant spending flexibility related to its ongoing pay-go capital program, which can expand and contract with the availability of funds.

Long-Term Liability Burden

The long-term liability burden is moderate relative to the city's significant economic resource base, with unfunded pension liabilities, direct debt and overlapping debt totaling about 12% of personal income. The city's direct debt burden is relatively small ($84 million) and composed largely of fully amortizing, fixed-rate lease revenue bonds, but its estimated pension liabilities are significant at about $450 million. Overlapping debt makes up more than half of the liability burden.

Operating Performance

The city has exceptionally strong gap closing capacity with reserves equal to about one year of spending and very high relative to revenue volatility. The Fitch Analytical Sensitivity Tool (FAST) suggests the city may experience very modest revenue losses in a moderate recession scenario of a 1% decline in U. S. GDP. Current reserves are more than sufficient to offset such a revenue loss even if policymakers took no action to adjust spending. The city is likely to draw down reserves from the current level to fund capital projects and one-time expenditures over time, but is likely to maintain substantial reserves across business cycles. In a typical downturn, Fitch expects the city to enact modest spending reductions and to spend manageable amounts of reserves, but fundamental financial flexibility and reserves are likely to remain well above the level that Fitch believes is consistent with a 'aaa' financial resilience assessment even in a severe downturn.

Budget management in times of recovery is very strong. The city makes consistent efforts to maintain structural budget balance through use of conservative long-range financial forecasts. It regularly updates its capital improvement plans and provides cash funding to priority projects. The city has also begun to address unfunded pension liabilities and should improve funded ratios gradually over time.