July 15, 2016 - 3:29 PM EDT
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Fitch Rates Finance Authority of Long Beach, CA Lease Revs 'AA-'; Outlook Stable

Fitch Ratings has assigned a 'AA-' rating to the following Finance Authority of Long Beach (FALB), CA lease revenue bonds:

--$19.1 million lease revenue bonds series 2016B (Rainbow Harbor Refinancing Project).

The bonds are expected to be sold via negotiation during the week of July 25. Proceeds will refund outstanding debt for interest savings.

In addition, Fitch affirms the 'AA-' rating on the following bonds:

--$13.1 million FALB lease revenue bonds series 2016A (courthouse demolition project).

--$54.6 million Long Beach Bond Finance Authority (LBBFA) lease revenue refunding bonds series 2012A;

--$8.1 million LBBFA taxable lease revenue refunding bonds series 2012B;

--$40.3 million Southeast Resource Recovery Facility Authority series 2003A and B.

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

The Rating Outlook is Stable.

SECURITY

The bonds are supported by lease payments from the city to the Finance Authority of Long Beach, Long Beach Bond Finance Authority and Southeast Resource Recovery Facility Authority, subject to annual appropriation and abatement. The payments are secured by various essential assets and parking facilities.

KEY RATING DRIVERS

The 'AA' IDR reflects the city's strong operating performance, solid expenditure control, and moderate long-term liability burden. Recent revenue performance has been somewhat challenged and is constrained by legal limitations, but the city has also been successful in increasing revenues with the support of local voters.

Economic Resource Base

The city's economy is diverse and supported by a large port, local airport, oil and gas production and participation in the broad southern California regional economy. Recent employment gains have lagged behind the state and nation following downsizing at Boeing, and low oil prices have contributed to reduced funding for the city's capital needs.

Revenue Framework: 'a' factor assessment

Revenue growth has exceeded inflation over the past 10 years but was slightly below U.S. economic performance. The city's legal ability to raise revenues is constrained by state constitutional provisions that require voter approval for tax increases.

Expenditure Framework: 'aa' factor assessment

The city has a manageable fixed cost burden and has demonstrated a solid ability to manage spending at times of economic and revenue decline. On average, growth in spending is likely to be in line with revenue growth over time.

Long-Term Liability Burden: 'aa' factor assessment

The city participates in an adequately funded state pension plan and funds many capital needs from current resources, resulting in a long-term liability total that is moderate relative to its substantial resource base.

Operating Performance: 'aaa' factor assessment

The city's gap closing ability is strong, and Fitch considers reserve levels sufficient to withstand a moderate economic downturn. Budget management is robust, and the city has consistently sought to maintain financial flexibility.

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 is largely built out and covers 52 square miles along the coast in south Los Angeles County. It is the seventh largest city in California, with a relatively stable population of approximately 474,000.

Revenue Framework

Taxes and franchise fees provide more than two-thirds of general fund revenues, with property taxes accounting for more than one-third of general fund support.

Overall general fund revenue performance has lagged behind U.S. economic growth over the past 10 years but has exceeded inflation. Recent revenue performance has also been impacted by low oil prices, but the city's conservative budget estimates of future oil revenues has positioned it well for potential price gains.

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 assessed value increases on taxable property absent a change in ownership.

The city has historically relied on revenues related to oil and gas production to support capital spending, but recent price declines have reduced such funding. City voters approved a 10-year sales tax increase in June 2016 that will help offset revenue declines and address ongoing capital needs. The city sales tax will increase by 1% for the first six years of the measure, dropping to one-half of one percent for the following four years. Management estimates that the tax will raise $48 million in fiscal 2018, which represents 11.5% of fiscal 2015 general fund revenues. A companion measure, also approved by voters, dedicates one percent of the new revenues to the city's budget stabilization fund.

Expenditure Framework

The city provides a broad range of municipal services with public safety accounting for two-thirds of general fund expenditures.

Based on the city's current spending profile, such costs are likely to be in line with to moderately above expected revenue growth.

The city's ability to reduce expenditures is somewhat constrained by its high share of costs for public safety. Management negotiated concessions with most bargaining units to reduce operating costs during the last recession, but public demand for services presents an obstacle to the reduction of headcount and overall expenditures. Ongoing funding of capital needs from current resources may provide an alternate source of expenditure flexibility during future downturns.

Long-Term Liability Burden

Long-term liabilities, including pension liabilities and overall debt, are moderate relative to the city's resource base. The city participates in two state-sponsored pension plans in addition to a legacy city plan and funding levels are adequate.

The city recently entered into a long-term public-private partnership for the development of a new downtown civic center, including a new city hall, main library, park revitalization and related amenities. Management estimates that the project will increase operating costs for these facilities by $5.5 million per year by 2022, with the difference declining by $1 million upon project completion in 2027. Fitch has included amounts borrowed by private entities on behalf of this project in overall debt calculations on the basis that such costs will ultimately be borne by local taxpayers.

Operating Performance

The city's reserves appear sufficient to withstand a moderate economic recession. In addition, the city retains substantial flexibility to redirect capital funding in the event of a revenue shortfall, which further strengthens its operating position.

Reserves increased following the last recession, and Fitch expects balances to remain above the city's policy target of 16.7% of spending. In addition, as noted above, the city responded quickly to the recent drop in oil prices with a temporary sales tax measure approved by voters in June.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1009015

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009015

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings
Primary Analyst
Stephen Walsh
Director
+1-415-732-7573
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Shannon Groff
Director
+1-415-732-5628
or
Committee Chairperson
Karen Ribble
Senior Director
+1-415-732-5611
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
[email protected]


Source: Business Wire (July 15, 2016 - 3:29 PM EDT)

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