SAN FRANCISCO - (Business Wire) Fitch Ratings assigns an 'A' rating to Los Angeles County Capital Asset Leasing Corp., California's $24,695,000 lease revenue bonds, 2009 series A (LAC-CAL Equipment Program). The bonds will be sold competitively on Nov. 16, 2009. Also, Fitch affirms its 'A' rating on various issues secured by county lease rental payments and 'A-' rating on other issues secured by Los Angeles County's lease payments but issued by other entities, as detailed below. The Rating Outlook for all issues is Stable. The county's ratings reflect its diverse and mature economy, sound financial reserves, prudent management efforts to achieve fiscal balance, and low debt burden balanced by ongoing and sizable financial pressures. These pressures stem from a heavy social service spending burden coupled with lower state funding, the continued fiscal imbalance in the county's Department of Health Services (DHS), and a costly retiree medical program. Nonetheless, the county's reserve levels, while reduced, remain above average and provide a needed financial cushion. DHS pressures could be exacerbated by the outcome of negotiations to continue a federal waiver and resistance to efforts to streamline service delivery. Economic indicators show the recession's impact, including high unemployment. Housing market indicators show moderate weakness and vulnerability through exposure to sub-prime and negative amortization mortgages. Assessed value showed a relatively small 0.5% decline for fiscal 2010.
After years of general fund operating surpluses, building up a sizable fund balance, the county had a moderate operating deficit for fiscal 2009, based on estimated results. Nonetheless, reserves remained high. The total general fund balance is estimated to be $3 billion, well above average at 18.5% of the budgeted $16.3 billion in spending. The unreserved portion is reduced to an estimated $1.4 billion, still high at 8.5% of spending. The unreserved balance is net of $108.8 million set-aside as a Rainy Day Fund, which the county hopes to grow to 10% of locally generated revenue, or about $475 million. While the county states a desire for annual contributions, Fitch believes current fiscal circumstances will preclude meaningful contributions in the near-term.
The fiscal 2010 budget shows a very small increase in spending, with unavoidable increases mostly offset by position reductions and labor groups settling for no cost of living adjustment in exchange for a less expensive increase in county health benefits funding. The budget does not back-fill state funding reductions and utilizes available federal stimulus funds; the latter results in budget gaps to be addressed in future years. The general fund budget is balanced using the full available fund balance ($1.7 billion) although a substantial share is set aside in funds that require additional approval by the Board of Supervisors to be spent. Fitch notes that the county has a strong history of outperforming its budget plan and retaining high reserves.
While acknowledging the county's considerable efforts and progress in achieving fiscal balance in its health delivery system, Fitch remains concerned about projected rising operating deficits. Near-term balance is achieved this year using hospital provider fee revenue, a new source that was enacted into law earlier this month and is awaiting federal approval. Other budget balancing measures include some one-time sources, including federal stimulus funds. DHS' five-year forecast shows the annual operating deficit rising to $1.85 billion by fiscal 2013, although the projection does not consider the new hospital provider fee revenue, which the county estimates at $205-$308 million in fiscals 2010 and 2011. The five-year forecast includes assumptions regarding state and federal funding that have a high degree of inherent uncertainty. Fitch believes the rising gap will need to be filled by general fund resources or savings through restructuring and efficiencies. Fitch also notes that historically actions taken to achieve savings have been opposed by some citizens and groups, often through litigation, and that the county has had difficulty estimating and achieving expected cost reductions.
Along with the DHS imbalance described above, the county's other sizable financial challenge is its $20.9 billion liability for other-post employment benefits (OPEB), which the county is beginning to address. The board supports establishing an OPEB trust, using about $470 million in excess pension fund earnings and $17 million set aside in fiscal 2007. With the actuarially required contribution estimated at $1.6 billion, more than four times the current pay-as-you-go expense, Fitch acknowledges the OPEB funding effort as important in the county's long-term fiscal stability.
The bonds are secured by county lease payments made for use of numerous pieces of equipment by several departments. Lease features are sound and the county's equipment lease financing program has a strong history. The leased equipment is essential to service delivery and all equipment currently is in use. Lease features are strong and typical of California lease transactions.
Fitch has affirmed the following ratings at 'A':
--County of Los Angeles, certificates of participation series 1993 Disney Parking Project;
--Los Angeles County Capital Asset Leasing Corp., Edmund D. Edelman Children's Court lease revenue bonds series 2002A and lease revenue bonds series 2006A and 2008A;
--Los Angeles County Public Works Financing Authority, lease revenue bonds series 2005 (Calabasas Landfill Project).
Fitch has affirmed the following ratings at 'A-':
--The City of Los Angeles, California's (Exposition Park West Asset Leasing Corporation) certificates of participation, series 1999A and 1999B (Department of Public Social Services Facility);
--Sonnenblick-Del Rio El Monte Asset Leasing Corporation, Calif.'s senior certificates of participation, series 1999 (Department of Public Social Services Facility);
--Sonnenblick-Del Rio El Monte Asset Leasing Corporation, California's senior certificates of participation, Sseries 2001 (Department of Public Social Services Facility-Phase II);
--Sonnenblick-Del Rio West Los Angeles Leasing Corporation, California's senior certificates of participation, series 2000 (Department of Public Social Services Facility).
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Fitch Ratings
Amy S. Doppelt, +1-415-732-5612
Alan Gibson, +1-415-732-7577 (San Francisco)
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