FITCH DOWNGRADES VARIOUS PASADENA, CA RATINGS; OUTLOOK STABLE
Fitch Ratings-San Francisco-24 May 2013: Fitch Ratings takes the following action on Pasadena,
CA's outstanding bond ratings:
--Implied general obligations (GO) downgraded to 'AA+' from 'AAA';
--$114.6 million in pension obligation bonds, series 1999A, 1999B, and 2012 downgraded to 'AA' from 'AA+';
--$156.3 million lease revenue bonds, series 2010A, 2010B, 2010C, 2010D, issued by the Pasadena Public Financing Authority, downgraded to 'AA' from 'AA+';
--$177.6 million in outstanding certificates of participation, series 1993, series 2006A, series 2008A & B & C downgraded to 'AA' from 'AA+';
--$27.5 million taxable lease revenue refunding bonds (Paseo Colorado parking facilities) series 2008 downgraded to 'AA-' from 'AA+'.
The Rating Outlook is Stable.
The pension obligation bonds (POBs) are unconditional obligations of the city. The bonds are not secured by the city's taxing authority.
The lease revenue bonds and certificates of participation 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.
KEY RATING DRIVERS
WEAK DEBT PROFILE: The downgrade largely reflects the slow weakening of the city's debt profile over time, most recently reflected in a debt restructuring with extended maturities related to the Rose Bowl project. Other indicators include high debt per capita and above-average variable-rate exposure and interest rate swaps that exacerbate an already elevated debt service burden on the budget. Together, these factors are inconsistent with an 'AAA' rating.
RESILIENT ECONOMY: A key credit strength remains Pasadena's diversified local economy, educated workforce, above-average wealth levels, and stable tax base. Development activity, including both residential and commercial projects, returned in fiscal 2012 with additional projects underway in fiscal 2013.
IMPROVED FINANCIAL PERFORMANCE: The city continues to execute its five-year fiscal recovery plan and returned to operating surplus in fiscal 2012, aided by budgetary relief as a result of pension bond issuance. The city's projections for operating surpluses to continue through the medium term appear reasonable assuming continued tax revenue recovery and expenditures controls.
SOUND RESERVES: The city maintains a healthy financial cushion. The unrestricted general fund balance was $45.4 million or a healthy 21.5% of spending at the end of fiscal 2012. Liquidity levels remain solid.
SECURITY CHARACTERISTICS: The additional notch downgrade of the taxable lease revenue refunding bonds, series 2008, reflects the non-essential characteristics of the leased assets, which include various parking related facilities.
INCREASED DEBT SERVICE BURDEN: The city remains exposed to increased carrying costs for debt service if revenues dedicated to repayment of certain bonds underperform. While Fitch believes the likelihood of full general fund support for projects is unlikely, an increase in debt service burden could weaken financial performance and, consequently, overall credit quality.
DEBT PROFILE RISKS
The downgrade reflects Fitch's view that the city's debt profile has increasingly assumed a higher level of risk inconsistent with the 'AAA' implied GO rating.
Overall debt metrics remain high at $7,255 per capita and 4.6% of assessed value (AV). Direct debt, consisting entirely of general fund obligations, is elevated at $4,717 per capita and 3.0% of AV.
The debt burden includes approximately $420 million of general fund-backed debt supported by non-general fund revenue including hotel taxes and operating revenue of the conference center, Rose Bowl, and municipal parking system. Carrying charges on this debt is approximately $22 million in fiscal 2013 or roughly 10.3% of fiscal 2012 spending. Debt service coverage from these sources is generally very thin. An unexpected decrease in those revenue streams could pressure the general fund budget given the city's relatively limited ability to increase traditional general fund revenue sources.
Fitch notes that in fiscal 2013 the city issued approximately $30 million in new debt to address a funding gap for the Rose Bowl renovation project. The city also refinanced approximately $28 million of series 2006 Rose Bowl renovation project lease revenue bonds, significantly extending the final maturity date to 2043 from 2023, which Fitch believes adds pressure to the city's long-term debt position.
The city also has a high degree of variable-rate debt exposure, which exposes the city to the possibility of unexpected financial demands. At the end of fiscal 2012, approximately 9.4% of outstanding general fund-backed debt was unhedged, variable rate. About half of this amount (4.4% of total debt) is attributed to outstanding POBs that the city plans to refinance to fixed-rate following their mandatory tender in 2015.
OPERATING SURPLUS IN 2012
The city recorded an operating surplus in fiscal 2012 after several years of planned operating deficits as accumulated reserves were used to soften the impact of significant structural reforms. The surplus, which amounted to $3.9 million or 1.8% of spending, was driven by a 4.2% decrease in expenditures and a mild rebound in tax revenues.
The POB issuance provided near-term budgetary relief in fiscal 2012 by including the city's required supplemental contribution, and is expected to reduce future contributions by increasing the plan's funded ratio to approximately 78%. Fitch views the additional debt load and legacy pension plan as credit negatives. Year-to-date investment returns are outperforming the plan's assumed 6% rate, although Fitch notes that historical underperformance led to funding shortfalls, triggering increased supplemental contributions. Future supplemental contributions exceeding current projections may pressure the general fund's financial performance, which could result in negative rating action.
SOUND RESERVES AND LIQUIDITY
The city's unrestricted reserves remain sound at $45.4 million or 21.5% of spending in fiscal 2012. Likewise, liquidity levels were sufficient with general fund cash at approximately $29 million at the end of fiscal 2012.
PROJECTED SURPLUSES FISCAL 2013
Based on information through March the general fund is projected to end fiscal 2013 with a modest surplus of $2.1 million. The projected outperformance compared to the budgeted surplus of approximately $152,000 is partly due to one-time funds. However, Fitch notes that the city's financial operations appear to be structurally balanced as a result of multiyear expenditure reductions, including workforce reductions and reduced benefit payments.
SB 481 LITIGATION
The city benefits from Senate Bill 481 (SB 481), passed in 1987, which permits the usage of annual tax increment revenue from the city's Downtown Project Area to support the Fire and Police Retirement System (FPRS) through Dec. 31, 2014. SB 481 funds have been sufficient to make supplemental payments and pay the annual debt service on outstanding POBs, and generate a reserve that equals approximately $35 million.
The state recently ruled that SB 481 payments do not qualify as 'enforceable obligations', thereby preventing the revenue from going to the city. The city sued the state and won in court, although the state appealed the decision in March 2013. The timeframe for reaching a final resolution is uncertain.
While Fitch views SB 481 as providing a significant benefit to the city, an unfavorable court ruling is not expected to affect the rating as already accumulated funds are sufficient to pay estimated debt service for the POBs until the mandatory tender date and the potentially larger refinancing in fiscal 2015 would not materially impact the city's already elevated debt levels.
SOLID ECONOMY AND RESILIENT TAX BASE
Pasadena is a mature, built-out community with a population of 138,101. The city benefits from the presence of several colleges and universities, above-average education levels, and a diversified employment base representing several industries including tourism, finance, research, and education. The city's unemployment rate remained elevated at 8.3% in January 2013, but compared favorably to the state (10.4%). City residents exhibit above-average wealth levels with per capita and median household income at 143% and 129%, respectively, of the national average.
The tax base benefits from its diversity and resiliency. AV grew modestly in each of the last three years, including a 1.9% increase in fiscal 2013. Several proposed development projects, including a new hotel and other commercial developments, should support stable to positive tax base performance in the near term.
Fitch Ratings, Inc.
650 California St
San Francisco, CA 94133
Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: firstname.lastname@example.org.
Additional information is available at www.fitchratings.com.
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, Zillow.com.
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
See PDF copy of Fitch news release: Fitch Ratings News Release