Fitch Rates Huntington Beach Public Financing Authority, CA Lease Revs 'AA+'; Outlook Stable

SAN FRANCISCO--(BUSINESS WIRE)--

Fitch Ratings has assigned the following rating to Huntington Beach Public Financing Authority (the authority), California bonds:

--$15.1 million lease revenue bonds, 2014 series A (senior center project) at 'AA+'.

The bonds will be sold via negotiation on Oct. 28, 2014. Proceeds will be used to finance the construction of a new senior center.

In addition, Fitch assigns the following rating to Huntington Beach (the city), California:

--Implied general obligation (GO) bond rating of 'AAA'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by lease rental payments which the city covenants to budget and appropriate, subject to abatement. The bonds are a senior obligation on parity with the authority's lease revenue refunding bonds, 2011 series A ($28.2 million par amount outstanding; not rated by Fitch) and 2010 series A ($11.2 million par amount outstanding; not rated by Fitch). Both the 2011 and 2014 bond series are secured by the city's lease from the authority of the civic center complex. Additional security is provided by debt service reserve fund sized at maximum annual debt service (MADS).

KEY RATING DRIVERS

STRONG TAX BASE AND SOCIOECONOMIC CHARACTERISTICS: The city's coastal location and focus on economic development should continue to bolster its diverse economy, strong tax base, and above-average socioeconomic profile.

STRONG FINANCIAL OPERATIONS: The city's general fund is well positioned to benefit from ongoing economic growth, while maintaining sufficient financial flexibility to cope with any emerging recessionary trends.

MODERATE DEBT BURDEN: The city's carrying costs (debt service and retiree costs) are affordable but will likely start to rise due to the new series 2014 bond issuance, rising CalPERS pension contributions, and the city's prepayment of its pension and other post-employment benefit (OPEB) liabilities. However, Fitch expects that carrying costs will remain manageable.

LONG-TERM LIABILITY REDUCTION: The city is implementing strategies to improve its currently low pension plan funded ratios and relatively well-funded OPEB liability.

ASSET ESSENTIALITY: The one notch distinction for the lease revenue bonds recognizes that appropriation risk is somewhat offset by the leased civic center complex's essentiality and high value.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics including the city's ability to manage its moderate but rising carrying costs.

CREDIT PROFILE

The city is located in coastal Orange County, 40 miles southeast of Los Angeles. Beach tourism is a lynchpin for the local economy with more than 11 million visitors annually. However, the local economy is diverse and also includes aerospace, technology, petroleum, manufacturing, financial and business services, automobile services, and a broad-based retail sector.

STRONG TAX BASE AND SOCIOECONOMIC CHARACTERISTICS

The city's tax base was very resilient throughout the recession. This is attributable to both significant new residential and mixed use development and existing properties' price increases. There have been no assessed valuation (AV) declines in at least the past 12 years, and AV has grown 30.2% between fiscal years 2008-2015. The city also stands to benefit from several major new developments currently in the planning, permitting, and construction pipeline, particularly in terms of increased property and sales tax revenues.

The city is a wealthy community, with high educational attainment and a diverse range of employers and property taxpayers. Its unemployment rate was well-below average at 4% in May 2014 (down from 4.8% a year prior), compared to 7.1% statewide, and 6.1% nationwide.

STRONG FINANCIAL OPERATIONS

The city ended fiscal 2013 with a strong unrestricted general fund balance of $48.6 million or 25% of spending. This held steady from fiscal 2012 and is projected to grow slightly in fiscal 2014 (year ending Sept. 30, 2014) to approximately $51.6 million. The city anticipates that the unrestricted general fund balance will hold at that level through fiscal 2015.

During the recession, the city constrained labor costs by having employees pick up a greater share of their pension and health care costs, freezing negotiated raises, suspending or eliminating paid time-off benefits, capping leave accruals, and implementing furloughs. Several employee bargaining groups went without raises or COLAs for multiple years. In response to an improved financial environment, the fiscal 2015 budget absorbs $7.5 million in labor cost increases.

The city maintains strong general fund reserves which totaled $43.2 million at fiscal year-end 2013. These include the city's general fund economic uncertainties reserve which totaled $24 million, up from $19 million in fiscal 2011. The current and budget years both project stable to increased general fund reserves.

MODERATE DEBT BURDEN

The city's overall debt burden is moderate at $3,058 per capita or 2% of market valuation. Debt amortization is also moderate at 64% in 10 years. At this time, the city has no plans to issue further debt.

In fiscal 2013, the city's debt repayment, actuarially required annual pension contributions, and pay-as-you-go OPEB contributions were an affordable 20.9% of total governmental spending. The city's carrying costs will grow due to the series 2014 bond issuance, CalPERS' increased contribution requirements (an estimated $3 million extra annually from fiscal 2016 onwards), and the city's prepayment of its pension and OPEB liabilities. However, Fitch expects that the city's carrying costs will remain manageable given likely revenue growth and the city's history of budget flexibility and expenditure control.

LONG-TERM LIABILITY REDUCTION

In fiscal 2012, the city's CalPERS plan had an estimated funded ratio of 76.6% using Fitch's more conservative 7% discount rate. In order to boost this funded ratio, the city council is currently considering a plan to annually prepay a portion of its $205.3 million unfunded accrued actuarial liability (UAAL) for both its safety and miscellaneous plans.

Evidencing its ability to implement these policies, the city has already implemented two liability reduction plans. For the city's closed supplemental retirement plan for employees hired before 1997, the city has implemented a plan designed to eliminate the $36.7 million UAAL in 10 years through prepayments. For OPEBs, the city has implemented a plan designed to eliminate its $10.6 million UAAL in 10 years through prepayments. Fitch considers these policies to prepay liabilities as prudent and evidence of a productive political environment.

ASSET ESSENTIALITY; GOOD BONDHOLDER PROTECTIONS

The 2014 bonds are secured by the city's lease rental payments to the authority for use and occupancy of the civic center complex which houses the city's administrative, police/public safety, emergency operations, municipal development, and city council functions. The city values the complex, which houses essential city services, at $63.7 million, considerably more than the combined $43.3 million value of the outstanding 2011 bonds ($28.2 million) and the new 2014 bonds ($15.1 million).

Further bondholder protections include a debt service reserve fund sized according to the standard, lesser of, three-prong test (in this case, MADS is the prong being met). Required insurance coverage includes fire and extended coverage, title, and 24 months of rental interruption insurance. While the extended coverage requirement excludes earthquake insurance, the property currently has it. No acceleration of rental payments is permitted.

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, and National Association of Realtors.

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=855856

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