Fitch Affirms Los Angeles County Public Works Fin Auth, CA $51MM Park Bonds at 'AAA'; Outlook Stable
--$50.6 million refunding revenue bonds, series 2005A and 2007A at 'AAA'.
The Rating Outlook is Stable.
The bonds are payable by payments made by the district to the authority. The payments are a first lien on the 80%-85% share of special benefit assessments, levied on nearly all properties in the Los Angeles County, CA (the county), that are restricted for capital use.
The 'AAA' rating reflects the security's strong resiliency through economic declines and no plans for future issuance. By state law, no less than 80% of the collected assessment is restricted to funding the capital costs and debt service payments for building and improving beaches, parks, recreation facilities, and open spaces with the remainder. The district does not fund daily operations.
KEY RATING DRIVERS
Resilient Revenue Stream: Pledged benefit assessments have proven exceptionally resilient to cyclical declines. Benefit assessments are calculated as a very modest flat fee and immune to assessed value fluctuations. The incentive to pay is high given that assessments and property taxes are collected simultaneously and have a parity lien on the property.
No Further Leverage Planned: The district does not intend to issue additional debt secured by the current benefit assessment, which expires in fiscal 2020.
Legally Separate Entity: Fitch believes the voter-established district is sufficiently distinct and separate from the county that the district rating is not limited by the county's.
Vibrant Economic Base: The district is coterminous with Los Angeles County's and the huge, diversified economy represents approximately a quarter of California's total economy. Taxable AV proved resilient during the recession and has since grown consistently.
NO IDR: The district does not have material exposure to operating risk. As such, Fitch has not assigned an Issuer Default Rating (IDR).
REDUCED COVERAGE: Sharp and sustained declines in pledged revenues could lead to downward pressure on the rating.
The district was established by a voter-approved proposition in 1992 that levied a flat rate benefit assessment based on property use and size. A second voter-approved proposition was passed in 1996 that levied an additional benefit assessment based on the same criteria as the first proposition. All county properties except large, vacant land are assessed. Each assessment will remain in place for 22 years after the first year it was levied, with the first assessment expiring in fiscal 2016 and the second in fiscal 2020.
The district is charged with building, maintaining, and improving beaches, parks, recreational facilities, and open spaces. By state law, no less than 80% and no more than 85% of the assessment is restricted for capital projects, including debt service.
Fitch believes the voter-established district is sufficiently distinct and separate from the county that the district rating is not limited by the county's IDR of 'AA'/Outlook Stable. The district's financial operations are reported separately from the county, and the district was established as a distinct entity under the voter-approved propositions.
CONSISTENT AND RESILIANT COLLECTIONS
Benefit assessments are calculated as a very modest flat fee and immune to assessed value fluctuations. Assessments and property taxes are collected simultaneously with a parity lien on the property, while the total tax bill has a low ratio comparison to the total tax bill. Fitch believes that the low property tax and assessment amounts relative to home values provide continued incentive for property owners to make annual payments.
Management has set the benefit assessment over the past decade to yield consistent coverage of annual debt service, ranging from 1.7x to 1.9x, when pledged revenues are calculated at an 85% share of the benefit assessments. The size and use of each parcel and the resulting benefit serves as the basis for the level of each assessment, which is designated a benefit point. Each parcel's assessment equals an annual rate, subject to a maximum amount, multiplied by the number of benefit points assigned to each parcel. The fiscal 2016 average annual assessment is $7.32 for a single family home, a decline from $20.86 in fiscal 2015, reflecting the sharp drop in debt service that coincides with the expiration of the first benefit assessment. Historically solid coverage and a high collection rate mitigate potential risk attributable to the county not participating in the Teeter Plan.
Fiscal 2015 revenues have risen for the fourth consecutive year and pledged assessments, calculated at 85% of collections, cover MADS by 1.9x, while preliminarily, fiscal 2016 revenues will equal 1.7x MADS.
SECURITY STRUCTURE RESILIENT THROUGH DOWNTURNS
Fitch evaluates the revenue stream's sensitivity to economic downturns by considering both the estimated reduction in pledged assessment revenues under a 1% contraction in national GDP and the largest consecutive decline in actual collected revenues since fiscal 2002. Revenues withstand the model's stresses at high levels. Assuming a 1% GDP decline and a 1.6% revenue loss based on historical performance, the current debt structure could tolerate a 47% drop in revenues with a cushion equal to over 29x the historical revenue loss. The greatest historical decline equaled approximately 2.3% from 2005 - 2007; were this to reoccur, the model indicates that the structure would have a notable cushion of over 20x the historical revenue decrease. Fitch projects a similarly strong cushion based on available data for fiscal 2016 collections.
Management represented that they do not intend to further leverage the rated security, which Fitch views as realistic given that the final benefit assessment expires in fiscal 2020. The district's additional bonds test requires pledged assessments in the most recent fiscal year to provide 1.15x coverage of MADS inclusive of the proposed issue. Fitch anticipates that were the district to issue to the ABT, both cushions would remain sufficiently strong to support the 'AAA' rating.
To ensure continued funding for its mandates after the expiration of the final benefit assessment, the district has placed on the November ballot Measure A. If it passes, the measure would implement an annual parcel tax of 1.5 cents per square foot of development, resulting in an estimated tax of $22.50 for a single family home and $94 million in annual collections. The revenues would fund projects identified in the capital needs assessment (77.8%), maintenance of grant-funded projects (15%), and program implementation and oversight (7.2%). If approved, the new debt will be secured by a revenue stream independent of the current benefit assessment.
The district does not have material operations. Therefore, Fitch does not believe the assignment of an IDR is relevant to its analysis.
MAJOR ECONOMIC CENTER
With a population exceeding 10 million, it is more populous than most U. S. states. Taxable AV has grown strongly in the past four years to an all-time high of $1.3 trillion, after very small recessionary declines, reflecting the county's highly developed and mature nature and large Proposition 13 cushion. A further 5% TAV increase is expected in fiscal 2017. While the county's median house price has yet to return to its prior peak (2007), house prices and numbers of residential building permits have been rising, while notices of default are at a 10-year low.
Despite these strong economic and tax base characteristics, the unemployment rate is typically higher than the nation's. Wealth indicators are below the state and mixed relative to the nation, reflecting some highly urbanized and low income areas.