OREANDA-NEWS. Fitch Ratings has affirmed Pittsburg, California's (the city) bonds as follows:

--$33.8 million pension obligation bonds (POBs) series 2006 at 'A+';
--Implied general obligation (GO) bonds at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The POBs are an absolute and unconditional obligation of the city imposed by law.

KEY RATING DRIVERS

SOLID FINANCIAL POSITION: The city's financial position is solid, as exhibited by high fund balances, voter approval of a new sales tax, prudent cost control, and a manageable path to structural balance.

ECONOMY IN RECOVERY: The city's economy is benefitting from an employment and housing market recovery. Despite being very hard-hit by the housing-led recession and still lagging the MSA, the city's overall economic indicators now outperform the state.

BELOW-AVERAGE DEBT PROFILE: Overall debt levels are high, largely reflective of substantial redevelopment borrowing. The city's pension liability is also increasing while the combined funded ratio is trending lower.

STRONG FINANCIAL MANAGEMENT: Seasoned financial management and policymakers have a record of prudent fiscal actions. Institutionalized financial practices are impressive, including a high minimum fund balance policy, OPEB pre-funding requirements, multi-year forecasting, and a budget stabilization reserve requirement.

RATING SENSITIVITIES

FINANCIAL DECLINES WOULD BE NEGATIVE: An unexpected and material deterioration of the city's fiscal position or reversal of strong management practices could lead to a downgrade.

UPWARD MOVEMENT LIMITED: Fitch views the implied GO rating as currently capped at 'AA-' due to the city's debt and economic profile weaknesses.

CREDIT PROFILE

Pittsburg, with a population of about 68,000, is located in the eastern portion of the San Francisco Bay Area in Contra Costa County. The city benefits from a deepwater port and major rail lines that have supported the longstanding presence of heavy industry, which continues to dominate the local economy.

IMPROVING ECONOMY

The city's economy was very hard-hit during the housing-led recession, with unemployment peaking above 17% and severe peak-to-trough home value declines of 66%, according to Zillow.

Home prices more than doubled since late 2011, but are still 29% below the pre-recession peak. The recovering housing market resulted in the city's first assessed value (AV) gains in several years, with a 9.6% increase for fiscal 2015 and 10.7% for fiscal 2016.

The city's economy is dominated by heavy industrial enterprises, resulting in high tax base concentration. The top 10 taxpayers equal 30% of AV and the top taxpayer (a natural gas power plant) makes up about 11%.

Although lagging the MSA, the city's employment gains outpaced the state in most years since the recession, resulting in a sharp decline in its unemployment rate to 5.4% as of December 2015, compared with 5.8% statewide and 3.9% for the MSA. Per capita income levels are low at 52% and 75% of MSA and state levels, respectively. Household incomes are higher, reflecting large household sizes, but still lag the MSA.

SOLID FINANCIAL POSITION

The city ended fiscal 2015 with a $2.6 million deficit after transfers, $1.9 million of which was a one-time refund to the state Board of Equalization (BOE) for BOE's overpayment of sales tax revenue in prior years. The ending unrestricted general fund balance was still a solid $15.2 million, or 39% of spending.

The city's fiscal 2016 budget includes a $1.3 million deficit, as the city continues to contribute to its irrevocable OPEB trust fund (roughly $500,000). If realized, the unrestricted general fund balance will be reduced to $13.8 million or a still healthy 35% at the end of fiscal 2016.

The city is in year five of a seven-year plan to structurally balance its operations. The city has mostly outperformed projections since initiation of the plan, and projects structural balance beginning in fiscal 2019. Out-performance has stemmed from several factors, including forecasting conservatism, voter approval of a new sales tax, and strong revenue performance.

The seven-year plan also includes a cumulative $4.9 million draw from the city's budget stabilization reserve (part of the general fund reserve). The reserve is currently projected to be $6.6 million by the end of fiscal 2016, outperforming the original target at $4.8 million.

SALES TAX RENEWAL

The Measure P sales tax was approved by a wide margin (74% of voters) in November 2012. The measure authorizes a one-half-cent sales tax for five years, dropping to one-quarter-cent through year 10 and then expiring. The tax raised $4.1 million in fiscal 2015, or 12.5% of general fund revenue.

The city council will place an extension of the city's current half-cent sales tax on the June 2016 ballot, one year before the original step-down date. If approved by voters, the levy will remain at the current half-cent level until fiscal 2035. Management expects strong public support for the measure, but is also prepared to reduce expenditures and look for alternative funding sources should the city lose half of this revenue stream in fiscal 2018.

LARGE DEBT BURDEN, INCREASING CARRYING COSTS

The city's overall debt burden is very high at 12.8% of AV ($11,011 per capita), due in large part to substantial debt issuances by the city's former redevelopment agency. Fiscal 2015 carrying costs (pension, OPEB, and debt service over total governmental spending) are affordable at 14% but are likely to head higher over the next several years due to climbing pension costs, OPEB pre-funding, and an ascending debt service profile. Debt amortization is moderate without inclusion of CAB accretions treated as principal. Including accretions, amortization slows significantly.

The city offers two CalPERS pension plans (miscellaneous and public safety). The combined funded ratios were initially boosted due to the issuance of POBs, but have since declined to 64% as of fiscal 2014, using Fitch's more conservative 7% investment return assumption. Capital needs are moderate, consisting mostly of road maintenance, and the city currently has no plans for additional debt issuance.

STRONG FINANCIAL MANAGEMENT, INSTITUTIONALIZED POLICIES

The city employs a seasoned team of finance administrators and policymakers who acted conservatively during the recession to maintain the city's strong financial position by cutting costs, raising revenues, and instituting conservative policies.

In 2013 city council prudently approved a fiscal sustainability ordinance that created or enhanced a number of conservative financial management policies. These include the doubling of the city's former minimum unappropriated reserve to 30% of operating expenses, establishment of a budget stabilization reserve with a balance ranging between 5% - 25% of operating expenses, minimum OPEB pre-funding levels, and a supermajority council vote requirement to appropriate reserves. The policy also directs certain excess revenues to additional OPEB pre-funding and capital repairs.