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
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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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