For Immediate Release
Thomas R. Lorenz, Director of Communications & Community Relations
Tamar Sadd, Community Outreach Assistant
Fitch Ratings affirms Glendale Financing Authority at ‘AA’
Glendale, CA - Fitch Ratings affirms Glendale Financing Authority, CA's $38.4 million variable-rate certificates of participation (COPs) at 'AA'.
In addition, Fitch affirms the 'AA+' implied general obligation (GO) rating for Glendale, CA. The city does not have GO bonds outstanding.
The Rating Outlook is Stable.
The certificates are payable from city lease payments in amounts sufficient to pay debt service. The city covenants to budget and appropriate annually for the lease payments, subject to the availability and use of the leased facility police building.
KEY RATING DRIVERS
SOLID FINANCIAL PROFILE: The rating reflects the city's strong reserve levels, good liquidity, positive financial performance, and prudent financial policies and budgeting practices.
MANAGEABLE BUDGETARY PRESSURES: Rising pension contributions, increased charges to internal service funds, and uncertainty regarding the status of loan repayments from the city's former redevelopment agency (RDA) will pressure the city's budget over the near term. However, Fitch expects that the city's history of generally balanced financial performance will continue due to its demonstrated ability to constrain expenditure growth.
LOW DEBT BURDEN: The city's overall debt burden is projected to remain low with no additional debt issuances planned over the next few years.
DIVERSE ECONOMY: The local economy benefits from a diverse range of employment sectors and its participation in the broad labor market of the greater Los Angeles area. The unemployment rate remains elevated relative to the nation's but below corresponding county and state averages.
STABLE TAX BASE: The city's tax base continues to grow with a rising real estate market and new commercial and residential developments driving an 11.1% assessed value (AV) increase from fiscal 2014 to fiscal 2016. Continued development and positive economic trends in the area are expected to drive additional gains over the near term.
SIGNIFICANT DECLINE IN FINANCIAL CUSHION: An unexpected and persistent decline in either the city's strong reserves or financial performance could result in negative pressure on the rating.
Glendale is the fourth largest city in economically diverse Los Angeles County. The city covers approximately 30.6 square miles and is located between Pasadena and Burbank on the eastern side of the county. The city's population was an estimated 200,167 in 2014.
SOLID FINANCIAL PROFILE
Glendale benefits from strong reserve levels comprised of the city's unrestricted general fund balance, a restricted charter reserve that is maintained to provide for liquidity needs, and a separate fund dedicated to repayment of the outstanding COPs. At the end of fiscal 2014, these three reserves provided a significant financial cushion that amounted to a cumulative $89.9 million or 52.8% of spending.
The city recorded operating surpluses (after transfers) in fiscals 2013 and 2014 and is projected to do so again in fiscal 2015. A growing economy that is seeing increased real estate and sales transactions, new development, and rising property values has led to revenue gains of 5% and 3.3% (projected) in fiscals 2014 and 2015, respectively, outpacing expenditure growth. In fiscal 2014, the city's net surplus was $5.8 million (3.4% of spending). Projections for fiscal 2015 show a modest surplus of approximately $570,550 (0.3%). The lower surplus is due, in part, to an increase in one-time capital spending.
MANAGEABLE BUDGETARY PRESSURES
The city's adopted budget for fiscal 2016 shows a projected operating surplus of $2.8 million and does not rely on the use of reserves to meet on-going spending. However, the budget does reflect increased financial pressure from rising pension costs, efforts to better fund internal service funds, and the uncertainty surrounding RDA loan repayments. Pension contributions are expected to increase by $4 million in fiscal 2016 and then continue increasing through fiscal 2022. Internal service fund contributions are expected to rise by $3.3 million in fiscal 2016 and also continue increasing through fiscal 2022.
The city is currently in litigation with the state Department of Finance (DOF) regarding loan repayments from the city's former RDA. After receiving a Finding of Completion for the wind-down of the RDA, the loans to the RDA were approved as enforceable obligations and the city received an initial repayment in fiscal 2014 of $1.5 million. However, since the first payment, the DOF has denied the loan repayments. The city initiated lawsuits against the DOF regarding both of the denied payments. The city prevailed in its initial lawsuit against the DOF, although that case has been appealed and the payment has not been made. The second lawsuit remains in early stages.
The denial of the repayments, which the city expects to amount to approximately $3.1 million in fiscal 2016, plus the rising pension and internal service fund costs could result in weaker financial performance over the next few years unless the city takes action to reduce its spending. However, Fitch views the magnitude of the potential operating deficits as relatively modest and projected reserve levels as ample. In addition, the city has demonstrated a willingness and ability to reduce spending to balance its budget in the past and Fitch expects that the city would take similar action again, if necessary.
LITIGATION AGAINST TRANSFER
The city is involved in a lawsuit seeking to invalidate three years' worth of transfers from its electric and water utilities to the general fund. Management estimates that the lawsuit affects approximately $60 million received from the electric fund and $1.4 million from the water fund. Fitch expects that the lawsuit, if successful, could eventually result in a cessation of on-going transfers from the electric fund that amounted to $20.6 million in fiscal 2014 (12.1% of spending). The lawsuit remains in early stages and the timeframe and ultimate outcome of the case is uncertain.
LOW DEBT BURDEN
The city's low debt burden remains a credit positive. Overall debt metrics are low at 1.4% of AV and $1,824 per capita. City officials stated that they have no plans for any additional debt issuances over the next few years.
Fitch views the city's carrying costs as moderate at 15% of governmental spending in fiscal 2014. The most significant component of the costs is related to the city's annual required pension contribution, which totaled $25.3 million or approximately 8% of governmental spending in fiscal 2014. The city's pension contributions are supported by a relatively uncommon agreement whereby labor groups pay a limited portion of the city's required contribution in addition to their own required contribution. Nevertheless, as noted above, pension contributions are expected to increase over the near term, likely raising carrying costs to still manageable levels.
DIVERSE ECONOMY & STABLE TAX BASE
The city's tax base is diverse with the top 10 taxpayers comprising 8.2% of fiscal 2014 AV. The city's AV continued to grow a cumulative increase of 11.1% from fiscal 2014 through fiscal 2016. The AV gains reflect a combination of on-going development of commercial, retail, and residential buildings along with a rising real estate market. Additional gains are expected as development activities continue.
The city's economy benefits from its participation in the diverse labor market of the greater Los Angeles area and a diverse group of local employment sectors, including the large presence of entertainment and health care. The city's unemployment rate remains elevated at 7.1% in June 2015, although employment gains have been above average over the past couple of years.
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.