Fitch Affirms Beverly Hills (CA) Pub Fin Auth Lease Revs at 'AA+'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the following Beverly Hills Public Financing Authority, California (the authority) obligations:
--$100.2 million lease revenue bonds, series 2009, 2010A-C, and 2012A at 'AA+'.
In addition, Fitch has affirmed the following Beverly Hills, California (the city) rating:
--Implied general obligation (GO) rating at 'AAA'.
The Rating Outlook is Stable.
The lease revenue bonds are payable from the city's lease rental payments to the authority for use of various facilities, subject to abatement. The city covenants to budget and appropriate the full annual lease rental payment amounts.
KEY RATING DRIVERS
STRONG ECONOMIC FUNDAMENTALS: The city's tax structure successfully captures much of the economic activity generated by a strong and mature economic base that includes particularly prominent retail and hotel businesses.
SOLID FINANCIAL OPERATIONS: The city's financial position is characterized by thorough financial management, solid financial reserves, and an affordable debt burden.
SOME REVENUE EXPOSURE: Although two of the city's main revenue sources, sales and transient occupancy taxes (i.e. hotels), are particularly sensitive to economic downturns, the city has demonstrated successfully that it balances revenues and expenditures to ensure continued positive operations.
STRONG TAX BASE: Although there are significant constraints on new development within the largely built-out city, taxable assessed valuation (TAV) is growing well and new development is underway.
FAVORABLE LEASE-RATING FACTORS: The 'AA+' lease rating reflects the factors above as well as all lease transactions' strong legal structures. Lease features include the city's covenant to budget and appropriate sufficiently for lease rental payments, and a requirement for rental interruption insurance.
CHANGE IN FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial performance, economy, and tax base.
STRONG ECONOMIC FUNDAMENTALS
The city is a mature, stable, and wealthy community covering a small 5.7 square miles. It is almost entirely developed, with limited potential for redevelopment. The major taxpayers are office, retail, high-end hotels, and residential property developers. While the resident population is approximately 35,000, workers and visitors raise the daytime population by more than 100,000. Income levels are very high with a median household income 1.6x that of the nation's and per capita money income 2.7x. The city's unemployment rate declined to 4.8% in November 2015 from 5.5% a year prior.
After a small taxable assessed valuation (TAV) decline of 2.6% in fiscal 2011, there has been a cumulative 32% increase through fiscal 2016. Taxable value is exceptionally high, at approximately $798,000 per capita in fiscal 2016. Two major developments currently underway will add to the city's TAV: the Waldorf Astoria at the Beverly Hilton (180 rooms due to open in early 2017) and the mixed-use residential, retail, and hotel 9900 Project (due to open in late 2017 or early 2018).
SOLID FINANCIAL OPERATIONS
City finances benefit from a diverse revenue stream with four particularly significant sources of operating support: sales, hotel, property, and business taxes (cumulatively 77% of budgeted fiscal 2016 general fund revenues). Because of sales and hotel taxes' sensitivity to economic downturns, the city had to implement significant expenditure reductions during fiscal years 2010-2012. As a result, the city was able to consistently maintain positive operations throughout the recession.
The city ended fiscal 2014 with a high total general fund balance of $128.4 million (66.8% of spending) and a very strong unrestricted general fund balance of $109.4 million (56.9% of spending). The city projects that its fiscal 2015 general fund results will be even stronger, benefiting from improving revenues. The city's multiyear projections indicate growing general fund balance results through fiscal 2020. The city is well positioned to absorb the $2.2 million annual cost of the four-year civilian and fire labor contracts current awaiting council approval. Police and police management labor contracts will be negotiated in 2016. The city continues to enjoy considerable expenditure flexibility, particularly with regard to equipment replacement and capital maintenance.
The city maintains sizable financial reserves. In addition to its very strong unrestricted general fund balance, the city could borrow from the majority of the $250 million in its internal service and enterprise funds in an emergency. The general fund no longer needs to support parking operations, although it continues to support parking capital projects. However, the general fund does have to continue subsidizing the clean water enterprise both operationally ($5.5 million annually) and for capital projects ($3.5 million is currently being set aside annually for a major regional stormwater project).
AFFORDABLE DEBT BURDEN
Beverly Hills' overall debt burden is high as a per capita dollar amount ($14,856), but affordable relative to its TAV (1.9%), reflecting its disproportionately productive commercial sector, small geographic size and population, and very high property values. Debt amortization is swift at approximately 82% in 10 years.
The city regularly makes its annual actuarially required pension contributions to CalPERS. The city's total pension obligations are funded at 71.4%, or an estimated 67.7% when using Fitch's more conservative 7% discount rate. Following labor negotiations and subsequent California Public Employees' Pension Reform Act of 2013 reforms, the city has two additional pension tiers providing less expensive benefits and employees share more of the pension system's costs. The city has worked to limit its OPEB liabilities to the point where $35.5 million has been set aside for its $49 million unfunded actuarial unfunded liability, although not in an irrevocable trust.
The city's fiscal 2014 debt service, actuarially required pension contribution, and OPEB pay-as-you-go costs represented a very manageable 13.1% of its total governmental spending that year.