Fitch Rates Anaheim Pub Financing Auth, CA's $260MM Lease Revs 'AA-'; Outlook Stable

Fitch Ratings has assigned the following rating to Anaheim Public Financing Authority, CA's (the authority) obligations:

--$260 million lease revenue bonds (Anaheim Convention Center Expansion Project) 2014 series A and 2014 series B (taxable) at 'AA-'; Outlook Stable.

The bonds are expected to sell via a negotiated sale the week of Nov. 3. Proceeds will be used to finance an expansion of the city's convention center and to refund $47.8 million in outstanding obligations, including 1992 and 1993 certificates of participation (COPS), 2002 series A lease revenue bonds and 2010 lease revenue notes, all of which were originally issued to finance convention center-related projects. The bonds were originally expected to sell in March 2014, but were delayed due to litigation discussed below.

In addition, Fitch affirms its ratings on the following obligations:

--$1.4 million city of Anaheim (city) general obligation (GO) refunding bonds, series 1993 at 'AA+';

--$26.8 million authority lease revenue refunding bonds, series 2008 at 'AA';

--$240.9 million authority senior lease revenue refunding bonds, series 2007A & B at 'A+';

--$37.5 million authority senior lease revenue bonds, series 1997A at 'A+'.

The Rating Outlook on all obligations is Stable.

SECURITY

The series 2014 bonds are payable from lease rental payments made by the city for use an occupancy of the convention center, subject to abatement. The bonds are also secured by a cash-funded debt service reserve fund sized at 50% of maximum annual debt service (MADS).

The 2008 bonds are payable from lease rental payments from the city for use and occupancy of essential governmental assets subject to abatement.

The series 1993 GO bonds are payable from the city's unlimited ad valorem property tax pledge.

The series 1997 and 2007 bonds are payable from lease rental payments made by the city for use and occupancy of various convention center-related assets as well as essential governmental assets, subject to abatement. The lease rental payments are payable solely from lease payment measurement revenues (LPMR), largely consisting of hotel and sales tax receipts. The bonds are also payable from an LPMR special reserve funded from excess LPMR; junior lien bonds (not rated by Fitch) also benefit from this reserve.

KEY RATING DRIVERS

DEMONSTRATED FINANCIAL FLEXIBILITY: Fitch views the city's demonstrated cost-cutting ability as well as maintenance of current liquidity and reserve levels going forward, as adequate mitigants to its concentrated and volatile revenue structure.

SOUND LIQUIDITY: General fund cash levels increased to healthy levels through the two years ending fiscal 2013 after a steep decline during the economic downturn. In addition, the general fund has access to significant internal sources of borrowing.

TOURISM-DEPENDENT ECONOMY: The economy is dominated by tourism activity, with The Walt Disney World Company (Disney; Fitch Issuer Default Rating 'A'; Outlook Stable) comprising 12.8% of assessed value (AV). The city has experienced four years of gains in hotel occupancy tax receipts and declines in unemployment as well as a nearly 12% increase in AV after remarkably stable performance during the downturn.

MANAGEABLE LONG-TERM LIABILITIES: Including the current issuance, debt levels are on the high side of moderate, and amortization is slower than average. Carrying costs for debt service, pensions and OPEB are moderate and fairly stable.

COVENANT TO BUDGET AND APPROPRIATE: The 'AA' rating on the series 2008 lease revenue bonds reflects the city's covenant to budget and appropriate lease payments as well as the essential nature of the specific leased assets (one police station, three fire stations, two youth centers and a gymnasium). The 'AA-' rating on the series 2014 lease revenue bonds further reflects the less essential nature of the leased asset (the convention center) and bondholders' lack of a leasehold interest in the leased asset.

SUFFICIENT COVERAGE; NARROW, CONCENTRATED REVENUES: The 'A+' rating on the series 1997 and 2007 bonds reflects adequate senior debt service coverage (DSC) from recovering hotel and sales tax revenues concentrated in the Disney resort property, the pledge of non-essential assets, the lack of a leasehold interest in the leased assets and the city's covenant to budget and appropriate pledged revenues.

RATING SENSITIVITIES

SHIFT IN FINANCIAL MANAGEMENT: The rating is primarily sensitive to a shift in the city's financial management practices. Fitch views the city's concentrated and inherently volatile revenue structure as the key credit risk, offset by a prudent approach to cost cutting, funding long-term liabilities and maintaining reserves at current levels relative to the budget.

CREDIT PROFILE

REVENUE RECOVERY, COST CUTTING STABILIZES RESULTS

The city's general fund unreserved balance increased to 11.7% of spending and transfers at year-end fiscal 2013 following three years of revenue recovery and prudent expense management. Cost cutting included labor concessions, attrition and some outsourcing.

The current and projected reserve levels are lower than historical levels and lower than Fitch medians at this rating category; however, the flexibility provided by the city's full funding of its OPEB ARC at about $9.8 million annually (3% of spending), along with about $23.5 million in long-term, general fund related funding of compensated absences and self-insurance liability provides additional cushion should economically sensitive revenues dip again.

General fund revenues are unusually concentrated in hotel taxes, accounting for about 38% of operating revenues. Property and sales taxes make up about 23% each. The city posted four years of operating surpluses through fiscal 2014 after revenue declines in fiscals 2009 and 2010 resulted in operating deficits (after transfers).The general fund yielded a small surplus (equivalent to 0.2% of spending) in fiscal 2012 and an $11.8 million (4% of spending) surplus in 2013. Fiscal 2014 ended with a $3.6 million surplus after transfers versus a budgeted $1.4 million draw.

Both hotel and sales tax revenues exceeded budget in fiscal 2013 and again in unaudited fiscal 2014. After gains of 7.1%, 9.4%, and 13.9% in fiscals 2011, 2012, and 2013 respectively, hotel tax receipts for fiscal 2014 increased another 7% to $110 million. In addition, sales tax revenues recovered from a 26.5% decline from fiscal 2007 through fiscal 2010, increasing by a total of 40% over the past four fiscal years.

AV declined only modestly through the downturn, and as such, property tax revenue remained fairly flat through fiscal 2012 before increasing 12.7% through fiscal 2014.

RESERVES RECOVER AND STABILIZE

The city has consistently met its policy minimum requiring available fund balance between 7%-10% of spending not including transfers. Fitch expects the general fund cushion to remain at current levels relative to the budget. The general fund unrestricted balance declined to just 7.8% of spending and transfers at fiscal year-end 2011, underscoring the city's vulnerability to economic cycles. After two more years of recovering revenues and cost controls, the fiscal 2013 unrestricted balance jumped to $34.5 million, or 11.7% in fiscal 2013. Fiscal 2014 produced a $3.6 million surplus, though the unrestricted balance remains flat due to reclassification of some funds to restricted.

The fiscal 2015 budget includes additional increases in revenues and a $1.4 million deficit due to $3 million in one-time spending, including spending on new firefighter training, purchase of fire equipment, and rehabilitation of libraries and parks. The city's general fund forecast through fiscal 2018, which Fitch views as reasonable, shows modest annual revenue and expenditure increases and modest surpluses, with no additional one-time expenditures and stable general fund balances.

HEALTHY LIQUIDITY

General fund cash and investments increased to $29.4 million in fiscal 2013, covering liabilities (net of deferred revenues) by 1.9x, after bottoming out at $13.7 million in 2011. The prior four-year average was $33.6 million. The city's cash position is enhanced by its significant internal sources of liquidity. These include $82.5 million in borrowable balances from fully funded internal service funds, such as self-insurance and compensated absences.

TOURISM-BASED ECONOMY PERFORMING WELL

The city's economy is dependent upon tourism, largely driven by Disney, which accounts for 12.8% of fiscal 2014 AV. Disney recently completed over $1 billion in renovations to the California Adventure Park, including the opening of Cars Land in June 2012.

AV only declined 1.8% during the downturn and has since increased 11.7% though fiscal 2015. Zillow's home value index increased 10.5% year over year to $480,100 as of August 2014, but is still down 21% from its 2006 peak. The unemployment rate of 7% as of August 2014 is higher than the county and national averages of 5.4% and 6.3%, respectively, but is about even with the state (7.4%).

MANAGEABLE LONG-TERM LIABILITIES

The current offering for the convention center (maturing in 2047) increases the tax-supported debt burden by about 30% and further slows amortization to 38% in 10 years. Overall debt levels are at the high end of moderate at $4,847 per capita and 4.7% of AV. The city's large five-year capital plan totaling $613 million is primarily focused on utility projects and contains no projects financed from the general fund.

The city implemented several pension reforms, including a second-tier pension plan increasing the retirement age for fire employees. In addition, miscellaneous and police department employees began contributing a portion of the employee share of the annual required pension contribution. The city does not pay any of the employee contribution for firefighters. Finally, the city eliminated the inclusion of payments made by the city for the employee portion of pension contributions from final benefit calculations for miscellaneous and police department employees. Fitch expects these reforms to have a positive effect on the future pension liability.

The city's OPEB plan is closed. The city has prudently established an irrevocable trust with a balance of $74 million and consistently funds the ARC to address its liability. The funded ratio was 31.2% based on the most recent actuarial valuation data (June 30, 2013) using a 7.6% discount rate. Carrying costs for debt service, pensions and OPEB are in the moderate range and fairly stable at 21.5% of fiscal 2013 governmental spending.

SUFFICIENT COVERAGE FROM NARROW, CONCENTRATED REVENUE PLEDGE

The series 1997 and 2007 lease payments are payable from LMPR, defined as amounts collected from: 3% transient occupancy tax (TOT) on hotels citywide but excluding Disney properties; 100% of incremental TOT and sales tax revenues from all Disney properties over the fiscal 1995 base which is adjusted each year by the consumer price index (CPI) with a minimum 2% annual increase; and 100% of property tax revenues from Disney properties in excess of the 1995 base property tax amount, adjusted annually by 2%.

In unaudited fiscal 2014, senior lien debt service coverage (DSC) from funds available for lease payments was equal to a six-year high of 2.6 times (x). All-in DSC continued an upward trajectory increasing to 1.1x in fiscal 2012 and 1.35x in fiscal 2014 after falling to just 1.0x several years ago. Given escalating debt service, fiscal 2014 coverage of senior lien MADS, which occurs in 2037, is 1.02x and just 0.43x on an all-in basis.

DSC had declined in fiscals 2009 and 2010 as hotel and sales tax receipts were heavily pressured by the economic downturn. LPMR revenue increases of 17.5%, 20.9%, and 11% in fiscals 2012, 2013, and 2014 respectively, resulted in coverage more consistent with the original projections for the bonds.

LPMR revenues that were as much as 27% below projections during the downturn have finally recovered and are 5% above projections in unaudited 2014. The city has budgeted for just a 1% increase in the LPMR revenues in 2015, keeping them just over the original projections. Revenues are currently slightly above senior MADs, while annual growth required to meet all-in MADS is a somewhat aggressive 3.8%.

LPMR revenues are highly reliant upon Disney with approximately 57% of fiscal 2014 LMPR revenues generated by the Disney TOT and sales tax increment, 35% by the city-wide TOT, and 8% by the Disney property tax increment. Disney's recent investments in the property, along with a reported uptick in hotel occupancy rates, are expected to have a positive impact on TOT and sales receipts going forward at least in the near term.

The bonds also benefit from a special reserve with an estimated balance of $47.6 million (after the Sept. 1, 2014 debt service payment of $26.7 million), which is equal to more than 100% of fiscal 2014 debt service on both senior and subordinate lien bonds though just 34% of all-in MADS.

Given the low all-in MADS DSC due to escalating debt service and that the special reserve is funded from surplus revenues after junior lien lease payments, Fitch does not view the special reserve, which is available for both senior and junior bonds, as providing material enhancement to the senior lien bonds.

POTENTIAL LITIGATION ASSOCIATED WITH BONDS

The sale on the 2014 series of bonds was delayed about seven months due to the filing of a lawsuit that sought to invalidate the 2014 bonds. The court recently issued a decision in favor of the city. Fitch has spoken with the city's outside bond counsel who believes that the allegations against the city are without merit. Bond counsel's opinion is based on the 1998 California supreme court decision upholding that abatement leases do not violate the constitutional debt limit and do not violate provisions of the state constitution or city charters that require a public vote for city-issued debt.

The court's decision is subject to appeal by the plaintiffs and, if a future decision is not in its favor, the city would intend to appeal to the California supreme court. If the California supreme court were to rule in the plaintiff's favor, the 2014 bonds, indenture, and lease would be invalid. Under that scenario, Fitch believes that although a settlement would likely be reached whereby the city would return the unspent bond proceeds since the city would not be obligated to make, and may be precluded from making, lease payments under the lease, the bondholders would most likely still suffer a material loss.

The city estimates additional construction costs resulting from the delayed sale at approximately $10 million which have been incorporated into the par amount of the bonds. According to management, it has not lost any convention center bookings due to the delay thus far.

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.

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=906274

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