Pasadena’s Pension Obligation Bonds Earn “AA+” Rating

Fitch Ratings has assigned an ‘AA+’ rating to the following the City of Pasadena $47. 4 million pension obligation bonds (POBs) on sale this week.

Bond proceeds will fund the city’s Fire and Police Retirement System (FPRS), raising the actuarially determined funded ratio to approximately 85%.

In addition, Fitch affirmes the following ratings for the following City of Pasadena issuances:

•  Implied general obligation rating at ‘AAA’;
•  $103.9 million in pension obligation bonds, series 1999A and 1999B at ‘AA+’;
•  $266.8 million in outstanding certificates of participation, series 1993, series 2006A, series 2008A & B & C at ‘AA+’;
•  $27.5 million taxable lease revenue refunding bonds (Paseo Colorado parking facilities) series 2008 at ‘AA+’.

Fitch also affirms the following ratings on bonds issued by the Pasadena Public Financing Authority:

•  $156.2 million lease revenue bonds, series 2010A, 2010B, 2010C, 2010D at ‘AA+’.

The pension obligation bonds are unconditional obligations of the city. The bonds are not secured by the city’s taxing authority.

The lease revenue bonds and certificates of participation are secured by lease payments made by the city from all legally available funds for the use and occupancy of a variety of leased assets. The city covenants to budget and appropriate annually for debt service, subject to abatement if the facilities are not available for full use and occupancy. The bonds are also covered by standard rental interruption insurance.

Established by city charter in 1919, the city’s pension system was closed to new employees in July, 1977. The plan features an uncapped annual cost of living adjustment (COLA), a result of a charter amendment in 1960. The city attempted to scale back the COLA benefit through a voter-approved ballot measure in 1981, but lost a legal challenge which restored the full uncapped benefit. FPRS has 275 participants and the last active member retired in June 2009.

The city has entered into several contribution agreements with FPRS to increase the plan’s funded ratio, resulting in POB issuances of approximately $100 million in 1999 and $40 million in 2004. Under the agreements, the city is required to increase the actuarially determined funded ratio by 1/2% annually until its reaches 80% in fiscal 2021. The city is required to make supplemental contributions according to a specified formula in each year that the plan is below its annual funding target. In fiscal 2012, the funding target of 75.5% is well above the actuarially funded ratio of 59%. The difference results in a supplemental contribution of approximately $9 million for fiscal 2012, an amount that city officials estimate they would generally be required to pay annually for several additional years without the current POB issuance. Proceeds from the 2012 bonds will raise the funded ratio to approximately 85% and eliminate the need for a separate supplemental payment in fiscal 2012. Fitch notes that supplemental payments of a lower amount than $9 million remain likely in future years.

The city benefits from Senate Bill 481 (SB 481), passed in 1987, which permits the usage of approximately $22 million in annual tax increment revenue from the city’s Downtown Project Area to be used to support FPRS. The city, as the successor agency for the recently dissolved redevelopment agency, has included SB 481 tax increment revenue as an ‘enforceable obligation’ as required under recently upheld legislation (AB1x 26).

SB 481 funds have been sufficient to make supplemental payments and pay the annual debt service on all outstanding POBs, and generate a reserve which the city currently estimates at $38.5 million. SB 481 expires on Dec. 31, 2014, at which point the city projects the reserve will have grown to approximately $61 million given the reduced amount used for supplemental contributions to FPRS. The city intends to use the SB 481 reserve to pay down a portion of the estimated $125 million in POBs tendered in fiscal 2015 and to refinance the remainder with long-term debt.

Fitch says the city’s overall debt levels are above average at $6,443 per capita and 4.2% of fiscal 2012 assessed value (AV). Direct debt, consisting entirely of general fund obligations, stands at $4,260 per capita and 2.8% of AV. While the overall net debt figure is above average, it is offset to some degree by the city’s larger daytime population as a net importer of jobs and residents’ above-average wealth levels. If the general fund was required to make the full annual debt service payment on bonds currently repaid from other sources, total annual debt service payments would increase from approximately 6.3% of general fund spending (as of fiscal 2012) to 12.3%. While Fitch views this scenario as unlikely, its occurrence would pressure the rating unless offset by significant expenditure reductions in other areas.

Besides the refinancing of POBs in fiscal 2015, the city does not anticipate issuing any additional general fund supported debt over the next several years. The city’s five-year capital improvement program is currently estimated at $956 million, largely consisting of water, sewer, and electric system improvements. The projects will be financed with dedicated revenue sources with limited impact on the general fund.

Fitch believes the city’s overall financial position remains satisfactory for the rating and benefits from sound reserves, a diverse revenue base, a demonstrated willingness to reduce spending, and prudent financial policies and practices. Property, sales, utility, and other taxes comprise approximately 51% of general fund revenues. The city also receives annual transfers from the city-owned power and water utilities; in fiscal 2011, the combined transfer was approximately $17 million or 7.6% of general fund revenue and transfers in. The city’s unrestricted general fund balance remains at sound levels with the fiscal 2011 committed, assigned, and unassigned balances equal to $46.5 million or 20.3% of spending, down from $58.8 million or 26.5% of spending in fiscal 2008.

In 2009, the city implemented a five-year plan to correct its structural imbalance by fiscal 2014. To date, management has generally followed the plan by reducing its workforce, holding down salaries, negotiating increased employee pension contributions, and making other reductions. Management recently decided to accelerate the plan, further reducing expenditures in fiscal 2012 with the goal of reaching balanced performance in fiscal 2013. Fitch’s affirmation of the ‘AAA’ implied GO rating and Stable Rating Outlook assumes accomplishment of this goal.

Pasadena is a mature, built-out community with a population of 137,122. The city benefits from the presence of several colleges and universities, above average education levels, and a diversified employment base representing several industries including tourism, finance, research, and education. The city’s unemployment rate remained elevated at 8.8% in November 2011, but compared favorably to the 10.7% unemployment rate of the greater Los Angeles area. Despite a sizeable student population, city residents enjoy above average wealth levels with per capita and median household income at 141% and 121%, respectively, of the national average.

The tax base benefits from its diversity and resiliency. The only recent year to record an AV decline was fiscal 2010 when it dipped by a very modest 0.2% before growing 1.1% and 2.2% in fiscals 2011 and 2012, respectively. Several proposed development projects, including a new hotel and the significant expansion of a commercial development, should support stable to positive tax base performance in the near term.

Additional information is available at ‘ www.fitchratings.com ‘. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

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 Zillow.com, National Association of Realtors, Underwriter, Bond Counsel.