In a publicly available release issued Friday (Nov. 9), Fitch Ratings states:
CHANGE IN BUDGETARY PRACTICE: The Negative Outlook reflects Fitch's concern that the city may be unwilling to maintain a structurally balanced budget after nearly a decade of significant spending cuts. The adopted fiscal 2013 budget relies more heavily on one-time funds and less conservative revenue budgeting.
SOLID FINANCIAL PERFORMANCE: Financial performance and reserves remain satisfactory, which along with a diverse revenue base, partially balance Fitch's concerns regarding growing negative fund balances in the city's internal service fund and the city's strained relationship with its largest union.
MODERATE DEBT BURDEN; HIGH PENSION COSTS: The city's overall debt burden should remain moderate given no additional new money debt issuances planned over the next few years. However, pension costs were about 15% of spending in fiscal 2011.
DIVERSE ECONOMY; PRESSURED RECOVERY: The city's economy is diverse and supported by the large port, local airport, and participation in the broad Los Angeles regional economy. High unemployment rates and slow job growth have limited the economic recovery so far and additional employment pressures may arise over the near term with the potential reduction of Boeing's presence in 2014 and other top employers' exposure to state and federal budget reductions.
POTENTIALLY STABILIZING TAX BASE: The city's taxable assessed value (AV) grew by 2.6% in fiscal 2012 after two consecutive years of declines aggregating 5.6%.
WHAT COULD TRIGGER A RATING ACTION
DIMINISHED FINANCIAL FLEXIBILITY: A reversal of the structural imbalance and maintenance of reserve levels is fundamental to maintaining the current rating given Fitch's concerns about the slow economic recovery reflected in above average unemployment and poverty rates.
CREDIT PROFILE
IMBALANCED FISCAL 2013 BUDGET
The Negative Outlook reflects Fitch's concern, based on the adopted fiscal 2013 budget, that the city's financial flexibility may be diminishing as additional expenditure reductions impact service levels. The adopted budget relies on the limited use of one-time funds ($4.3 million) for expenses that Fitch generally views as on-going, a practice the city did not use previously.
The adopted budget also increased the assumed structural price of oil to $70 from the fiscal 2012 price of $55. The price remains below recent levels (the fiscal 2012 average was $106 per barrel, according to management); however, the greater reliance on potentially volatile oil revenue raises the risk profile of the city's revenue base. The higher assumed price also reduces the potential growth in reserves generated when actual oil prices exceed budgetary expectations.
ADDITIONAL REVENUES EXPECTED IN FISCAL 2013
The city expects to receive additional revenues in fiscal 2013 that are not included in the adopted budget. These additional revenues may offset some of Fitch's rating concerns depending on how the city council decides to appropriate.
The city expects to receive approximately $8 million in additional, on-going property tax revenues due to the dissolution of redevelopment agencies (RDAs). In addition, the city anticipates meeting the AB 1484 requirements to reinstated RDA assets that were transferred out of the general fund in fiscal 2011. Management expects that the reinstatement of assets will generate approximately $12 million in one-time unrestricted funds. Fitch would view a return to the city's conservative financial practices positively.
FUTURE FINANCIAL CHALLENGES
Future budgetary challenges are expected with the city projecting deficits of $10.9 million and $6.4 million in fiscal years 2014 and 2015, respectively. The projected deficits are largely driven by still weak revenue levels and rising labor and benefit expenses, especially pension costs. The city has significantly reduced spending over the past several years, but future financial flexibility may be limited by strained labor relations, a reduced willingness to make expenditure reductions that affect service levels, and growing financial commitments to internal service funds.
The city obtained concessions from all but the largest labor group regarding pension reforms that will require employees to pay their own share of the employee pension contribution in exchange for a one time increase in base salary. Separately, the city lost and appealed a lawsuit filed by the same labor group regarding city-imposed furlough days in fiscal 2010. Fitch views the potential financial exposure from the lawsuit as manageable, but sees the strained labor relations as cause for concern as the inability to negotiate savings could further restrict the city's options for closing its structural budget gap.
Future budgetary pressure may also result from the city's internal service funds related to Insurance that ended fiscal 2011 with negative fund balance of $85 million. Additional deficit spending in this fund will increase the likelihood of higher future contribution requirements from the general fund and other city funds, thereby reducing the city's financial flexibility.
SATISFACTORY RESERVES AND SOLID FINANCIAL PERFORMANCE
The city's recent financial performance has been solid and its revenue base is diverse with no single revenue source contributing more than 30% of fiscal 2011 general fund revenues. The city's unrestricted general fund balance (combined committed, assigned, and unassigned balances from the previously separate general fund and Upland Oil fund) increased by $15.6 million in fiscal 2011 and is projected to increase by $2.5 million in fiscal 2012, leaving the projected ending balance at $66.8 million or 17.4% of projected spending.
MODERATE DEBT PROFILE; HIGH PENSION COSTS
The city's debt profile, largely driven by overlapping issuances, is moderate at $3,311 per capita and 3.6% of fiscal 2012 AV. The city does not plan on issuing additional debt in the near term.
The city regularly makes its full actuarially required pension contribution. Pension reform negotiated with most of the city's labor groups are likely to somewhat offset expected future pension cost increases. In fiscal 2011, the city's share of the total pension contribution was $75 million or high 14.9% of fiscal 2011 general fund spending. Adding OPEB paygo brings carrying costs to an above average 15.7% of general fund spending.
SLOW ECONOMIC RECOVERY
The City of Long Beach is California's seventh largest city with a relatively stable population of approximately 465,000. The city is largely built out and covers 52 square miles along the coast in south Los Angeles County. The city's economy is diverse and supported by the Port of Long Beach, the Long Beach Airport, and its participation in the broad Los Angeles regional economy.
The economic recovery has been slow with unemployment rates remaining stubbornly high at 12.3% (August 2012). The job market is characterized by very limited employment growth and a contracting labor force. Additional employment pressures are possible in the near term with several of the city's largest employers exposed to potential federal, state, and local budget cuts. In addition, Boeing, the largest private employer in the city, may reduce its significant presence in late 2014 unless additional C-17 orders are received to support continued operations at its production facility.
The city's AV recorded modest growth in fiscal 2012 after experiencing declines in the two previous years. In fiscal 2012, AV increased by 2.6% bringing the city's cumulative loss to 3.2% from fiscal 2009 to fiscal 2012. The city's tax base is diverse with the top ten taxpayers comprising 4.2% of fiscal 2011 AV.
Fitch also assigned a 'AA-' rating to two series of Long Beach Finance Authority lease revenue bonds scheduled to be sold via negotiation on Nov. 29.
In response, City Manager Pat West sent a memo to all City Hall elected officials (Mayor, Council, City Attorney, City Prosecutor, City Auditor) this afternoon (Nov. 12) on the matter, saying that Fitch's change in its rating outlook (from "Stable" to "Negative") "indicates a potential downgrade could occur in the next year or two unless circumstances improve" and continues:
