Fitch Rates Pasadena, CA's Lease Revs 'AA'; Outlook Stable
--$36.8 million lease revenue refunding bonds (Rose Bowl Renovation Project), series 2016A.
The bonds are expected to sell via negotiation the week of Sept. 19. Proceeds will be used to advance refund a portion of the Pasadena Public Financing Authority lease revenue bonds (Rose Bowl Renovation Project), series 2010A.
In addition, Fitch has affirmed the following ratings:
--the city's Issuer Default Rating (IDR) at 'AA+';
--$119.5 million taxable pension obligation bonds (POBs), series 2015A & B at 'AA';
--$159 million lease revenue bonds, series 2010A, 2010B, 2010C, 2010D, issued by the authority at 'AA';
--$166.8 million certificates of participation (COPs), series 1993, series 2006A, series 2008A & B & C, series 2015A at 'AA'.
Furthermore, Fitch has upgraded to 'AA' from 'AA-' the ratings on $25.3 million taxable lease revenue refunding bonds (Paseo Colorado parking facilities) series 2008 and associated bank bonds due to application of Fitch's revised tax-supported criteria for appropriation-backed debt.
The Rating Outlook is Stable.
SECURITY
The lease revenue bonds and COPs are secured by lease payments made by the city from all legally available funds for the use and occupancy of a variety of leased assets. The city covenants to budget and appropriate annually for debt service, subject to abatement if the facilities are not available for full use and occupancy. The bonds are also covered by standard rental interruption insurance.
The POBs are unconditional obligations of the city. The bonds are not secured by the city's taxing authority.
KEY RATING DRIVERS
The 'AA+' IDR reflects the city's superior financial resilience with ample reserves and solid ability to cut spending. Revenue growth is expected to continue to be moderate and the city has some revenue raising flexibility related to its utility transfer. The overall liability burden including debt and pensions is moderate and the city has no additional borrowing plans.
The appropriation-backed bonds are rated one notch below the IDR, reflecting the slightly higher degree of optionality associated with the appropriation. The upgrade of the series 2008 lease revenue refunding bonds (Paseo Colorado parking facilities) reflects application of Fitch's revised criteria for U. S. state and local governments, which was released on April 18. While the bonds were formerly rated two notches below the city's general credit rating, the revised criteria include more focused consideration of project factors in ratings for appropriation-backed debt. The series 2008 bonds do not carry any of the additional risk features that Fitch identifies for rating more than one notch below the IDR.
Economic Resource Base
Pasadena is a mature, built-out community with a population of approximately 140,000. It covers about 23 square miles 10 miles northeast of Los Angeles. Pasadena's diversified local economy, which has an educated workforce, above-average wealth levels, and growing tax base, is a key credit strength. Significant commercial and residential development activity is on-going and planned for the city, which should support additional growth in assessed values (AV) over the near term.
Revenue Framework: 'aa' factor assessment
Revenue growth has been in line with inflation and below U. S. economic performance, a trend that Fitch expects to continue. The city is legally able to raise revenues through an electric utility transfer, though it does not expect to do so.
Expenditure Framework: 'aa' factor assessment
The city has adequate ability to control spending and the natural pace of spending growth is expected to be in line with to moderately above that of revenues.
Long-Term Liability Burden: 'aa' factor assessment
The burden that the city's long-term liabilities place on its resource base is at the low end of the moderate range.
Operating Performance: 'aaa' factor assessment
The city's financial resilience and budget management are superior as demonstrated by high reserve levels relative to revenue cyclicality that Fitch expects to be maintained at solid levels.
RATING SENSITIVITIES
Maintenance of Reserves; Management of Costs: The rating assumes maintenance of solid reserve levels throughout the economic cycle and continued sound management of moderately high fixed costs for debt service and pensions.
CREDIT PROFILE
The city benefits from the presence of several colleges and universities, above-average education levels, and a diversified employment base representing several industries, including high tech, finance, research, tourism, and education.
City management estimates that Pasadena's population roughly doubles during the daytime as the city serves as a regional employment center. This positive credit characteristic supports revenue growth for the city as well as employment opportunities for its residents. Over the past couple of years, the city has benefitted from above-average employment and labor force growth. The unemployment rate is modestly below that of the state and the nation.
Positively, the city's primary industries tend to support higher-income jobs, which is reflected in the city's socioeconomic indicators. City residents exhibit above-average wealth levels with per capita and median household income at 146% and 132%, respectively, of the national average.
Revenue Framework
The city has a relatively diverse revenue base with taxes comprising about two-thirds of total general fund revenues. Taxes are comprised of property taxes (about 23% of total general fund revenues), sales tax (17%) and utility users tax (15%). In addition, the city benefits from transfers in from the city-owned power fund, which contributes $18 million, or approximately 7% of fiscal 2015 total general fund revenues.
After adjusting for the utility transfers as well as the loss of pass-through tax increment revenues in 2014 under state Senate Bill 481, the city's general fund revenues increased at a compound annual growth rate of approximately 3% over the decade through fiscal 2014. This is above inflation but below U. S. economic performance. Fitch expects future performance to be similar.
California's constitution requires voter approval of tax increases, limiting the ability of the city to control revenues. Property tax growth is constrained by a fixed tax rate and an annual limit on AV increases on taxable property absent a change in ownership. However, the city charter allows city council to increase the power transfer from the current level of 10% of gross revenues up to 16%, which would raise an additional $10 million annually. Fitch considers this to be independent legal revenue raising flexibility for the city, although management indicates city council has no intention of making such a change.
The city has reduced its annual water fund transfer in response to a Proposition 218 lawsuit challenging the charter-authorized transfer. The city undertook a cost of service study in 2014 that determined that approximately $1.5 million of general fund costs were incurred for the benefit of the water fund and could be so allocated. This compares with a fiscal 2014 transfer of $3.3 million. As part of the resolution of the lawsuit, the city agreed to transfer $7.2 million from the general fund to the water fund (completed in fiscal 2015) and limit the annual water fund transfer to the amount justified by the cost of service. In conjunction with the decreased water transfer, City Council increased the power transfer from 8% of gross revenues to 10%.
Expenditure Framework
The city provides a broad range of municipal services with public safety comprising over half of general fund spending.
Based upon the city's current spending mix, its costs are likely to grow in line with to moderately above expected revenue growth.
The city has an adequate degree of expenditure flexibility based upon somewhat elevated but still moderate carrying costs for debt service and retiree benefits (about 23% of total governmental expenditures) and the ability to adjust headcount. The city was able to cut 20% of staff during the economic downturn, including vacant positions. It has since added back some staff, but does not expect to add any to public safety, its largest area of spending, in fiscal 2017. In addition, the city shifted the employee-portion of pension obligations, which had previously been covered by the city, to employees and eliminated previously negotiated salary increases for employee bargaining groups. The city generally negotiates two-year labor agreements and includes cost of living adjustments. In order to address recruitment and retention issues with police officers, the city recently increased officer compensation and instituted a signing bonus.
Long-Term Liability Burden
The city's overall liability burden is relatively low with overall debt and pension liabilities equal to 10% of personal income. The city participates in two statewide pension systems, CalPERs and the Fire and Police Retirement System (FPRS), with a combined ratio of assets to liability of 74.3% adjusted to reflect a 7% rate of return. The city's other post-employment benefits (OPEB) liability is modest at just 0.3% of personal income.
The city has an above-average degree of variable-rate debt with 27% of outstanding direct debt variable rate and synthetically fixed and 4% variable rate unhedged; the city's solid reserve levels and low level of direct debt mitigate associated risks. The city expects to discharge the unhedged portion of its debt in the next year with the sale of the parking facilities financed with that obligation. Amortization of direct debt is slow.
Approximately two-thirds ($400 million) of general fund-backed debt is supported by non-general fund revenue sources including hotel taxes and operating revenue of the conference center, Rose Bowl, and municipal parking system.
Operating Performance
The city has a high degree of reserves relative to its limited revenue volatility and inherent budget flexibility in the form of revenue raising ability and spending flexibility. This positions the city very well to manage through a moderate recessionary event.
The city maintains a five-year financial forecast that reflects the expectation of positive operating results through fiscal 2021. Projections include reasonable expectations for revenue growth not including potential new revenue sources. The city estimates a $6.4 million surplus, or about 3% of budget, for fiscal 2016. The fiscal 2017 budget is balanced and includes a conservative 2.5% increase in AV assumption versus a projected 5%. Reserves are expected to increase due in part to a city council-adopted policy to raise the emergency reserve (a portion of the unrestricted general fund reserve) to 20% from 10% of appropriations. The city achieved a 15% level in fiscal 2015, plans incremental increases going forward and expects to reach 20% by fiscal 2020.
The city had been projecting deficits in the out years, but is now projecting mostly balance as it expects to retain a greater share of transient occupancy taxes (TOT) revenues as part of a recently renegotiated agreement with Pasadena Center Operating Company (PCOC), which manages the Pasadena Convention Center, and has lower labor costs than forecast as a result of recently negotiated contracts with bargaining units.
The city's general fund borrowed from its internal services funds during the economic downturn, but has since been making lump sum contributions towards full funding and increased the contribution rate from all funds pay into it.
The city has benefited from Senate Bill 481 (SB481), passed in 1987, which permitted to use of annual tax increment revenue from the city's Downtown Project Area to support the FPRS through Dec. 31, 2014. SB 481 funds were sufficient to make supplemental payments to the pension system and pay the annual debt service on outstanding POBs, along with generating a reserve of approximately $40 million for POB repayment.
The ability of the city to use the reserve to pay down a portion of the POBs is currently subject to litigation following the state's dissolution of redevelopment agencies. The city expects a resolution in 2016 and the funds are currently being held by the county. If the city is unsuccessful, the reserve will be distributed to the applicable participating agencies, including the city whose share is estimated at $8.4 million. Notably, the city does not include any of the funds in its projections and thus Fitch views the funds as providing a potentially significant benefit to the city.
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