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TEXT - Fitch affirms California's W. Hollywood Public Financing Auth
January 11, 2013 / 7:21 PM / in 5 years

TEXT - Fitch affirms California's W. Hollywood Public Financing Auth

(The following statement was released by the rating agency)
    Jan 11 - Fitch Ratings has affirmed West Hollywood Public Financing
Authority, California's (PFA, or the authority) bonds as follows:

--$52.4 million lease revenue bonds (LRBs) series 2009 A & B at 'AA+'.

In addition, Fitch affirms the city of West Hollywood, California's (the city) 
bonds as follows: 

--Implied general obligation bonds (GOs) at 'AAA'.

The Rating Outlook is Stable.

SECURITY 

The LRBs are secured by lease payments from the city to the authority for use of
a variety of mostly essential leased assets, subject to abatement. 

KEY RATING DRIVERS

STRONG FINANCIAL OPERATIONS: The 'AAA' implied GO rating reflects the city's 
very strong financial position, marked by prudent management practices, an 
extremely high financial cushion, and good expenditure flexibility. 

STRONG LEASE PROVISIONS: The 'AA+' LRB rating additionally reflects strong legal
covenants, the essentiality of the leased assets, and a sizeable equity 
contribution to the project financed by the lease revenue bonds.

SOLID, UPSCALE LOCAL ECONOMY: The city is well-situated within the diversified 
Los Angeles regional employment market and the local economy has unique 
strengths with a high-end, niche-oriented commercial sector that is fairly 
tourism-reliant. 

MATURE, RESILIENT TAX BASE: The moderately diversified tax base has held up 
well, with just one year of modest decline during the housing-led recession, 
followed by two consecutive years of growth. This resilience reflects the 
maturity of the tax base and a strong local housing market.

SATISFACTORY DEBT PROFILE: The city's net debt levels are moderately high due to
overlapping debt but affordable. The city's record of significant pay-as-you-go 
financing is a credit strength. Capital needs are manageable but amortization is
slow. The city participates in CalPERS and related pension and OPEB liabilities 
are currently manageable; Fitch expects recent state-wide pension reforms will 
lower out-year pension cost growth rates.

CREDIT PROFILE

The city of West Hollywood serves about 35,000 residents in a 1.9 square mile 
area of Los Angeles County. Located nine miles northwest of downtown Los 
Angeles, the city benefits from its location between Beverly Hills and Hollywood
and within the highly diversified Los Angeles region. 

ECONOMY BENEFITS FROM HIGH INCOMES, NICHE TOURISM DRAW

The local economy is fairly concentrated in tourism-related sectors, with a 
significant amount of upscale hotels, restaurants, nightclubs, and boutique 
retailers. Other major employment sectors include entertainment, arts, and 
design. Economic indicators are good overall.

Per capita income levels are very strong at 188%, 176% and 188% of county, 
state, and national averages, respectively. September unemployment fell 
significantly to a somewhat elevated 8.6% from 10.6% the year prior. However, 
the improvement was due to a drop in the workforce participation rate, as the 
employment base contracted by a slight 0.2% during the same period.

The local tax base is not concentrated, with the top 10 payers making up 11.4% 
of assessed value (AV). Due to the maturity and strength of the local housing 
market, the city's AV has performed well. AV fell in just one year during the 
housing-led recession by a modest 3% in fiscal 2011 before returning to growth 
the following year. For fiscal 2013, AV is up 3.1% to an all-time high of $7.6 
billion. AV per capita is an impressive $221,000, reflective of high local 
wealth levels.

STRONG FINANCIAL OPERATIONS

The city's financial profile is very strong. General fund revenues are 
well-diversified by source and reached an all-time high in fiscal 2012, though a
significant portion of revenues are economically cyclical. Fiscal 2011 general 
fund operations (the last year for which an audit is available) produced a solid
$6.6 million surplus, after transfers, raising the total and unrestricted 
general fund balances to extremely high levels of $75 million (121% of 
expenditures and transfers out) and $74.4 million (119.7%), respectively. 
Unaudited data for fiscal 2012 points to a surplus of $1.2 million, and the 
city's fiscal 2013 budget is balanced. Fitch believes the city may outperform 
its budget given management's history of conservative revenue budgeting, and 
strong year-to-date revenue performance.

The city expects the general fund balance to be drawn down over time to fund 
one-time capital projects. In previous years management had expected a draw-down
to a still impressive $50 million (70.5%). However, capital project costs have 
been running well below the city's prior estimates, so fund balances may 
stabilize above the former target. 

GOOD EXPENDITURE FLEXIBILITY AND PRUDENT MANAGEMENT PRACTICES

The city enjoys a good degree of legal expenditure flexibility, should it be 
needed. The city has achieved good operating results without the use of layoffs 
or furlough days to date. Public safety is contracted through the county 
sheriff's office, and could be scaled back by the city's request, and the city 
spends an atypically high amount on various social services that are not legally
required. However, there could be political impediments to cutting back on 
either social services or public safety. Finally, the city spends a significant 
amount on pay-as-you-go capital projects that could be scaled back, deferred, or
cancelled.

The city's financial management practices are impressive. These practices 
require enterprises to be self-supporting, a 25% minimum fund balance, and that 
unappropriated fund balances be used only for one-time expenditures, such as 
capital projects. The latter rule had been adhered to for some time, except in 
fiscal 2010 when the general fund ran a slight structural deficit that was 
subsequently corrected. The city produces two-year budgets with mid-year 
corrections, five-year capital improvement plans, and forecasts financial 
operations over 20-year periods.

SATISFACTORY DEBT PROFILE

The city's overall debt burden is moderately high at $8,135 per capita (3.7%) 
due to a large amount of overlapping debt related to Los Angeles Unified School 
District. Fitch views the debt as affordable given the city's high wealth 
levels. The city's direct burden is much lower but principal amortization is 
slow, with just 36% of debt retired over 10 years. 

The city is building a $16 million parking structure, to be completed in Fall 
2014. Management has not yet determined the proportion of debt to pay-as-you-go 
financing, and Fitch views the size of the project as quite manageable within 
the scope of the city's resources. The city additionally has $70 million-$150 
million of various capital projects that could be moved forward. This capital 
projects list is sizeable yet manageable due to the flexibility of the projects,
the city's significant historical use of pay-as-you-go capital financing, and 
management's intent to move forward with projects only as new significant 
revenue generators come online to finance them, such as new upscale hotels and 
other venues.

The city participates in CalPERS, and related pension payments have been 
manageable. Recent state-wide pension reforms likely will have minimal 
short-term benefits, though out-year pension cost hikes will be subdued 
somewhat. The city offers a small OPEB benefit to retirees, with a small and 
quite manageable unfunded liability. The city currently pays for OPEB on a 
pay-as-you-go basis.

 (Caryn Trokie, New York Ratings Unit)

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