Loading...
HomeMy WebLinkAboutMoodys Credit Opinion_Azusa, CA 10.19.18U.S. PUBLIC FINANCE CREDIT OPINION 19 October 2018 Contacts Kirstyn Lee +1.415.274.1715 Associate Analyst kirstyn.lee@moodys.com Eric Hoffmann +1.415.274.1702 Senior Vice President/Manager eric.hoffmann@moodys.com Alexandra J. Cimmiyotti +1.415.274.1754 VP-Senior Analyst alexandra.cimmiyotti@moodys.com CLIENT SERVICES Americas 1-212-553-1653 Asia Pacific 852-3551-3077 Japan 81-3-5408-4100 EMEA 44-20-7772-5454 Azusa (City of) CA Update following upgrade of Issuer Rating to A3 Summary Azusa (City of) CA’s (A3 Stable) credit profile is characterized by the city's well-sized and growing tax base favorably located within the greater Los Angeles metropolitan area, average socioeconomic profile, low debt, and elevated pension burden. The city's financial position has improved in recent years, as demonstrated by sustained strengthening to unrestricted general fund reserves and liquidity. While the improved financial position is not a pure positive, as it is primarily attributable to one-time cash proceeds from the sale of city owned properties, we expect reserves and liquidity to remain stable going forward, supported by management's improved fiscal prudence and commitment to a formal reserve policy. On October 17, 2018 Moody's upgraded the city's Issuer Rating to A3 from Baa1 and COP rating to Baa1 from Baa3. The outlook remains stable. Credit strengths »Well-sized tax base favorably located within greater Los Angeles metro area »Improving economic trends »Low debt burden Credit challenges »Growing pension costs limit financial flexibility »Ongoing expenditures outpacing revenues, absent one-time cash proceeds of property sale Rating outlook The stable outlook reflects the city’s improved financial position, positive economic trends, and management’s improved fiscal prudence. The outlook also reflects our expectation that management will maintain reserves within the city’s formal reserve policy and develop a comprehensive plan of expenditure controls and revenue enhancements to ensure the city’s long run fiscal health. Factors that could lead to an upgrade »Return to structural balance and sustained strengthening in reserves and liquidity »Material increase in city’s assessed valuation »Substantial improvement in resident wealth measures MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE Factors that could lead to a downgrade »Deterioration of financial position, including reserves and liquidity »Inability to manage growing pension costs »Protracted, material tax base decline Key indicators Exhibit 1 Azusa (City of) CA 2013 2014 2015 2016 2017 Economy/Tax Base Total Full Value ($000)$3,242,248 $3,429,068 $3,680,260 $3,973,500 $4,227,276 Population 48,385 48,405 49,485 49,762 49,628 Full Value Per Capita $67,009 $70,841 $74,371 $79,850 $85,179 Median Family Income (% of US Median)88.8%87.3% 88.3% 91.4% 91.4% Finances Operating Revenue ($000)$33,666 $36,184 $48,395 $39,239 $40,763 Fund Balance ($000)($2,812) ($27) $3,235 $6,322 $10,916 Cash Balance ($000)$661 $3,034 $6,908 $9,554 $13,120 Fund Balance as a % of Revenues -8.4% -0.1% 6.7% 16.1% 26.8% Cash Balance as a % of Revenues 2.0%8.4%14.3% 24.3% 32.2% Debt/Pensions Net Direct Debt ($000)$7,640 $6,615 $5,490 $7,830 $6,410 3-Year Average of Moody's ANPL ($000)$76,279 $91,571 $103,934 $113,690 $141,833 Net Direct Debt / Operating Revenues (x)0.2x 0.2x 0.1x 0.2x 0.2x Net Direct Debt / Full Value (%)0.2% 0.2% 0.1% 0.2% 0.2% Moody's - adjusted Net Pension Liability (3-yr average) to Revenues (x) 2.3x 2.5x 2.1x 2.9x 3.5x Moody's - adjusted Net Pension Liability (3-yr average) to Full Value (%)2.4%2.7% 2.8% 2.9% 3.4% For purpose of our analysis, operating funds include the general fund and debt service fund. Source: Moody's Investors Service; City of Azusa, CA Profile The City of Azusa, with an estimated population of 49,600 residents is located in Los Angeles County (Aa1 Stable) about 25 miles north east of the City of Los Angeles (Aa2 Stable). Incorporated as a general law city in 1898, Azusa is governed by a mayor and city council, consisting of five members, with a city manager responsible for day-to-day operations. Detailed credit considerations Economy and tax base: moderate sized tax base favorably located within greater Los Angeles Metro area The city of Azusa is favorably located within the diverse Los Angeles metro area and has a well-sized tax base poised for continued growth. The city’s assessed value (AV) totaled $4.5 billion in fiscal 2018, which far exceeds the national median for A3-rated cities ($0.4 billion) and exceeds the city’s pre-recession peak of $3.5 billion in 2010. During the Great recession, AV contracted a cumulative 8.7%. Supported by an improving housing market, AV has demonstrated solid growth over the past five fiscal years ending in 2018, averaging a 6.7% increase per year. Several housing, retail, commercial and industrial developments under various stages of development within the city will likely support continued healthy AV growth. Azusa’s tax base is a mix of residential (72.8% of AV) and industrial (14.5%) and shows ample diversity. The top ten taxpayers represent only 8.1% of fiscal 2018 AV, consisting primarily of manufacturing, distribution and shopping center companies. On a per capita basis, This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history. 2 19 October 2018 Azusa (City of) CA: Update following upgrade of Issuer Rating to A3 MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE AV is approximately $90,100 as of 2018, which is above average when compared to the national median for A3-rated cities (about $56,300), a positive factor. Local employment primarily includes higher education, local government, aerospace defense and retail jobs, evidenced by the city’s top employers including Azusa Unified School District, Azusa Pacific University, and Northrop Grumman, a defense contractor. Socioeconomic measures remain below the US median with median family income 91.4% of the US and per capita income 65.1% of the US as of 2016. However, benefiting from ties to the greater Los Angeles economy, the city’s unemployment rate (3.8% as of May 2018) continues to recover from recession peak of 13.7% in 2010. Finances and reserves: improved financial position expected to remain stable supported by management’s improved fiscal prudence and commitment to a formal reserve policy Recent operating surpluses have strengthened the city's financial position and we expect reserves and liquidity to remain stable going forward, supported by management's improved fiscal prudence and commitment to a formal reserve policy (15% of general fund expenditures). In fiscal 2016 and 2017, the city generated sizeable surpluses ($3.1 million and $1.8 million respectively) which increased available general fund reserves to $10.4 million (24.6% of revenue). While the improved position is not a pure positive, as it primarily attributable to one-time cash proceeds from city owned property sales, this is a considerable improvement from fiscal 2012 when the available general fund balance was negative $5.8 million (-16.9%). Current projections indicate the city will end fiscal 2018 with a $3.3 million deficit, due to significant one-time payments (about $3.5 million) which impacted year-end results. The one-time payouts are due to unanticipated compensated leave payouts due to retirements, a special assessment by city's former insurance provider, and a lawsuit settlement for changes to overtime calculations related to cash-in-lieu of medical payments. Despite this deficit, available reserves will remain satisfactory for the rating level at about $7.5 million (18.5%) and fiscal 2018 will mark a fourth consecutive year of sustained positive available balance. Based on the recent adopted budget, the city expects to generate a $1.9 million general fund surplus in fiscal 2019, primarily due to $2.9 million one-time property sale proceeds. Absent one-time proceeds, the city is faced with an operating deficit in fiscal 2019 of approximately $900,000 due to increasing pension costs. Going forward, we expect reserve will stabilize as the city works to align ongoing expenditures with ongoing revenues, absent further one-time proceeds from property sale. Management has identified a preliminary “budget stabilization plan” inclusive of potential revenue enhancement strategies and expenditure control measures, and expects to bring forth a comprehensive plan to council at the fiscal 2019 mid-year budget study session. While we believe the city's ability to ensure long-run financial stability is within management's control, successful implementation of identified revenue enhancements and expenditure reductions will be a key credit consideration moving forward. Exhibit 2 The city's financial position has improved, evidenced by a fourth consecutive year of positive available general fund balance. We expect reserves to remain within formal reserve policy going forward. -20% -10% 0% 10% 20% 30% 40% -$8,000 -$4,000 $0 $4,000 $8,000 $12,000 $16,000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 (estimated) Available General Fund Balance ($0000)Available Fund Balance as % of Revenue Reserve Policy as of Fiscal 2015: 15% For purpose of our analysis, available reserves exclude restricted and nonspendable balances. Source: Moody's Investors Service; City of Azusa, CA 3 19 October 2018 Azusa (City of) CA: Update following upgrade of Issuer Rating to A3 MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE LIQUIDITY The city’s unrestricted cash as of fiscal 2017 is $12.6 million (29.9%), which is a considerable improvement from fiscal 2014 year-end, when the city’s total net cash was $2.5 million and the unrestricted portion was zero. During fiscal 2014, the city entered into a $4 million loan agreement with the water enterprise, due to the narrow liquidity position, with repayment expected to begin once the city’s general fund reached 10% reserve. The city began repayment of loan principal in fiscal 2018 and expects to repay the loan by fiscal 2024. As of fiscal 2018 the outstanding balance is $3.5 million. The city has not borrowed funds from the water enterprise since fiscal 2014. Exhibit 3 Azusa's net cash position has improved, despite an outstanding loan from the water enterprise 0% 5% 10% 15% 20% 25% 30% 35% 40% $0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 (estimated) 2019 (budgeted) General Fund Net Cash ($0000)General Fund Net Cash as % of Revenue Source: Moody's Investors Service; City of Azusa, CA Debt and pensions: low debt burden; elevated pension burden with growing costs The city benefits from a low debt burden, a credit positive, that will remain low given our expectation of continued AV growth and management’s current capital plans. Management does not currently expect to issue governmental debt in the near term. As of fiscal 2017 direct debt totaled $6.4 million, equaling just 0.2% of AV or $129 per capita. This favorably relative to the medians for A3-rated cities nationally (2.2% and $1,218 respectively). Including overlapping debt, Azusa’s total debt burden increases to 2.0%, although this too remains below similarly rated peers. DEBT STRUCTURE All of the city’s debt is fixed rate with final maturity in 2039. DEBT-RELATED DERIVATIVES The city has no debt-related derivatives. PENSIONS AND OPEB Azusa employees participates in the California Public Employee Retirement System (CalPERS) defined benefit plan run by the state of California. Moody's three-year average adjusted net pension liability (ANPL) for the city, under our methodology for adjusting reported pension data, is 3.4% of AV or 3.5 times operating revenues as of fiscal 2017. This is elevated when compared to the medians of A3- rated cities nationally (3.0% or 1.6 times). Moody's ANPL reflects certain adjustments we make to improve comparability of reported pension liabilities. The adjustments are not intended to replace the city’s reported liability information, but to improve comparability with other rated entities. Similar to most California cities, pension costs will become an increasing budget pressure as rates increase over the next several years. The city has taken measures to address an increasing pension burden through successfully negotiated contracts with its seven bargaining units, where all units agreed to paid their full 7.0% and 9.0% of the employer's portion of CalPERS pension contributions. Further, with the adoption of the fiscal 2019 budget, council expanded the city’s reserve policy to further set aside $1.5 million in a retiree benefits reserve to mitigate rising retiree benefits costs and to reduce long-term liabilities for these benefits. Management expects to bring forth a recommendation to use the initial $1.5 million reserve to fund a pension trust and OPEB trust. 4 19 October 2018 Azusa (City of) CA: Update following upgrade of Issuer Rating to A3 MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE The city currently funds its other post-employment benefits (OPEB) on a pay-as-you-go basis, and in fiscal 2017 the city contributed $588,634, or 1.4% of general fund revenues. The city has historically offered lifetime medial benefits for employees and spouses and the OPEB liability as of fiscal 2017 is $39.0 million. During fiscal 2018, in an effort to manage the city's growing liability for retiree heath benefits, the city discontinued this life time benefit. Going forward, providing minimum only coverage to new members is estimated to provide savings of approximately $8.7 million for the total liability over five years. Management and governance INSTITUTIONAL FRAMEWORK California cities have an Institutional Framework score of A, which is moderate compared to the nation. Institutional Framework scores measure a sector's legal ability to increase revenues and decrease expenditures. California cities' major revenue sources can only be raised with voter approval, or, in the case of ad valorem property taxes, cannot be raised except to meet GO bond payments. Ad valorem property tax rates cannot be increased above 1% except to meet GO bond payments, and assessed valuation growth is also generally limited to 2% annually unless a property changes ownership. Unpredictable revenue fluctuations tend to be moderate, or between 5-10% annually. Across the sector, fixed and mandated costs are generally less than 25% of expenditures. However, California has strong public sector unions, which can limit the ability to cut expenditures. Unpredictable expenditure fluctuations tend to be moderate, between 5-10% annually. OPERATING HISTORY The city’s five-year average ratio of operating revenues to expenditures is 1.01 times as of fiscal 2017, reflecting surplus operations on average. 5 19 October 2018 Azusa (City of) CA: Update following upgrade of Issuer Rating to A3 MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE © 2018 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES (“MIS”) ARE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MOODY’S PUBLICATIONS MAY INCLUDE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY’S OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. CREDIT RATINGS AND MOODY’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY’S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE. MOODY’S CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY’S CREDIT RATINGS OR MOODY’S PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT. CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT INTENDED FOR USE BY ANY PERSON AS A BENCHMARK AS THAT TERM IS DEFINED FOR REGULATORY PURPOSES AND MUST NOT BE USED IN ANY WAY THAT COULD RESULT IN THEM BEING CONSIDERED A BENCHMARK. All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY’S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing the Moody’s publications. To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY’S. To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER. Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any rating, agreed to pay to Moody’s Investors Service, Inc. for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.” Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors. It would be reckless and inappropriate for retail investors to use MOODY’S credit ratings or publications when making an investment decision. If in doubt you should contact your financial or other professional adviser. Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively. MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it fees ranging from JPY200,000 to approximately JPY350,000,000. MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements. REPORT NUMBER 1146056 6 19 October 2018 Azusa (City of) CA: Update following upgrade of Issuer Rating to A3 MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE CLIENT SERVICES Americas 1-212-553-1653 Asia Pacific 852-3551-3077 Japan 81-3-5408-4100 EMEA 44-20-7772-5454 7 19 October 2018 Azusa (City of) CA: Update following upgrade of Issuer Rating to A3