Fitch Rates Long Beach Bond Finance Auth's, CA Lease Rev Bonds 'AA-';
SAN FRANCISCO -- November 09, 2012
Fitch Ratings assigns its 'AA-' rating on the following series of Long Beach
Finance Authority, CA's lease revenue bonds:
--$56.1 million lease revenue refunding bonds, series 2012A;
--$15 million taxable lease revenue refunding bonds, series 2012B.
Purpose of Current Debt Issue: The series 2012A and 2012B bonds will refund
various series of outstanding lease revenue bonds and pay the costs of
issuance. The bonds will be sold via negotiation on November 29.
Final Maturity: Aug. 1, 2031.
In addition, Fitch affirms the 'AA-' rating on the following series of lease
--Long Beach Bond Finance Authority, series 1998B (Temple and Willow
--Southeast Resource Recovery Facility Authority, series 2003A and B.
Fitch also affirms the following rating for Long Beach, CA:
--Implied general obligation rating affirmed at 'AA'.
The Rating Outlook is revised to Negative from Stable.
The series 2012A and 2012B lease revenue bonds are secured by lease payments
from the city to the Long Beach Bond Finance Authority, subject to annual
appropriation and abatement. The payments are secured by various essential
assets and a parking facility.
KEY RATING DRIVERS
CHANGE IN BUDGETARY PRACTICE: The Negative Outlook reflects Fitch's concern
that the city may be unwilling to maintain a structurally balanced budget
after nearly a decade of significant spending cuts. The adopted fiscal 2013
budget relies more heavily on one-time funds and less conservative revenue
SOLID FINANCIAL PERFORMANCE: Financial performance and reserves remain
satisfactory, which along with a diverse revenue base, partially balance
Fitch's concerns regarding growing negative fund balances in the city's
internal service fund and the city's strained relationship with its largest
MODERATE DEBT BURDEN; HIGH PENSION COSTS: The city's overall debt burden
should remain moderate given no additional new money debt issuances planned
over the next few years. However, pension costs were about 15% of spending in
DIVERSE ECONOMY; PRESSURED RECOVERY: The city's economy is diverse and
supported by the large port, local airport, and participation in the broad Los
Angeles regional economy. High unemployment rates and slow job growth have
limited the economic recovery so far and additional employment pressures may
arise over the near term with the potential reduction of Boeing's presence in
2014 and other top employers' exposure to state and federal budget reductions.
POTENTIALLY STABILIZING TAX BASE: The city's taxable assessed value (AV) grew
by 2.6% in fiscal 2012 after two consecutive years of declines aggregating
WHAT COULD TRIGGER A RATING ACTION
DIMINISHED FINANCIAL FLEXIBILITY: A reversal of the structural imbalance and
maintenance of reserve levels is fundamental to maintaining the current rating
given Fitch's concerns about the slow economic recovery reflected in above
average unemployment and poverty rates.
IMBALANCED FISCAL 2013 BUDGET
The Negative Outlook reflects Fitch's concern, based on the adopted fiscal
2013 budget, that the city's financial flexibility may be diminishing as
additional expenditure reductions impact service levels. The adopted budget
relies on the limited use of one-time funds ($4.3 million) for expenses that
Fitch generally views as on-going, a practice the city did not use previously.
The adopted budget also increased the assumed structural price of oil to $70
from the fiscal 2012 price of $55. The price remains below recent levels (the
fiscal 2012 average was $106 per barrel, according to management); however,
the greater reliance on potentially volatile oil revenue raises the risk
profile of the city's revenue base. The higher assumed price also reduces the
potential growth in reserves generated when actual oil prices exceed budgetary
ADDITIONAL REVENUES EXPECTED IN FISCAL 2013
The city expects to receive additional revenues in fiscal 2013 that are not
included in the adopted budget. These additional revenues may offset some of
Fitch's rating concerns depending on how the city council decides to
The city expects to receive approximately $8 million in additional, on-going
property tax revenues due to the dissolution of redevelopment agencies (RDAs).
In addition, the city anticipates meeting the AB 1484 requirements to
reinstated RDA assets that were transferred out of the general fund in fiscal
2011. Management expects that the reinstatement of assets will generate
approximately $12 million in one-time unrestricted funds. Fitch would view a
return to the city's conservative financial practices positively.
FUTURE FINANCIAL CHALLENGES
Future budgetary challenges are expected with the city projecting deficits of
$10.9 million and $6.4 million in fiscal years 2014 and 2015, respectively.
The projected deficits are largely driven by still weak revenue levels and
rising labor and benefit expenses, especially pension costs. The city has
significantly reduced spending over the past several years, but future
financial flexibility may be limited by strained labor relations, a reduced
willingness to make expenditure reductions that affect service levels, and
growing financial commitments to internal service funds.
The city obtained concessions from all but the largest labor group regarding
pension reforms that will require employees to pay their own share of the
employee pension contribution in exchange for a one time increase in base
salary. Separately, the city lost and appealed a lawsuit filed by the same
labor group regarding city-imposed furlough days in fiscal 2010. Fitch views
the potential financial exposure from the lawsuit as manageable, but sees the
strained labor relations as cause for concern as the inability to negotiate
savings could further restrict the city's options for closing its structural
Future budgetary pressure may also result from the city's internal service
funds related to Insurance that ended fiscal 2011 with negative fund balance
of $85 million. Additional deficit spending in this fund will increase the
likelihood of higher future contribution requirements from the general fund
and other city funds, thereby reducing the city's financial flexibility.
SATISFACTORY RESERVES AND SOLID FINANCIAL PERFORMANCE
The city's recent financial performance has been solid and its revenue base is
diverse with no single revenue source contributing more than 30% of fiscal
2011 general fund revenues. The city's unrestricted general fund balance
(combined committed, assigned, and unassigned balances from the previously
separate general fund and Upland Oil fund) increased by $15.6 million in
fiscal 2011 and is projected to increase by $2.5 million in fiscal 2012,
leaving the projected ending balance at $66.8 million or 17.4% of projected
MODERATE DEBT PROFILE; HIGH PENSION COSTS
The city's debt profile, largely driven by overlapping issuances, is moderate
at $3,311 per capita and 3.6% of fiscal 2012 AV. The city does not plan on
issuing additional debt in the near term.
The city regularly makes its full actuarially required pension contribution.
Pension reform negotiated with most of the city's labor groups are likely to
somewhat offset expected future pension cost increases. In fiscal 2011, the
city's share of the total pension contribution was $75 million or high 14.9%
of fiscal 2011 general fund spending. Adding OPEB paygo brings carrying costs
to an above average 15.7% of general fund spending.
SLOW ECONOMIC RECOVERY
The City of Long Beach is California's seventh largest city with a relatively
stable population of approximately 465,000. The city is largely built out and
covers 52 square miles along the coast in south Los Angeles County. The city's
economy is diverse and supported by the Port of Long Beach, the Long Beach
Airport, and its participation in the broad Los Angeles regional economy.
The economic recovery has been slow with unemployment rates remaining
stubbornly high at 12.3% (August 2012). The job market is characterized by
very limited employment growth and a contracting labor force. Additional
employment pressures are possible in the near term with several of the city's
largest employers exposed to potential federal, state, and local budget cuts.
In addition, Boeing, the largest private employer in the city, may reduce its
significant presence in late 2014 unless additional C-17 orders are received
to support continued operations at its production facility.
The city's AV recorded modest growth in fiscal 2012 after experiencing
declines in the two previous years. In fiscal 2012, AV increased by 2.6%
bringing the city's cumulative loss to 3.2% from fiscal 2009 to fiscal 2012.
The city's tax base is diverse with the top ten taxpayers comprising 4.2% of
fiscal 2011 AV.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Tax-Supported
Rating Criteria, this action was additionally informed by information from
Creditscope, University Financial Associates, S&P/Case-Shiller Home Price
Index, IHS Global Insight, National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
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Matthew Reilly, +1-415-732-7572
650 California Street
San Francisco, CA 94108
Karen Ribble, +1-415-732-5611
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