A leading bond rating firm has given the City of West Hollywood high marks for financial management in an analysis of its upcoming issuance of bonds to pay for an automated parking garage behind City Hall.
Fitch Ratings has assigned an AA+ rating to the $19.1 million in bonds, which will go on sale the week of Aug. 19. Proceeds from the bonds, which are secured by the proposed garage, the City Hall building and a city-owned maintenance lot, will be used to build a 200-space structure on a lot behind City Hall that now contains 68 spaces. The rating, which is used by bond buyers to evaluate the security of their investment, means the city likely will have to pay a relatively low interest rate on the money it borrows.
Some West Hollywood residents opposed the city council’s authorization of the garage last July when they learned that the city is considering building a new City Hall on the southeast corner of Santa Monica and San Vicente boulevards. The council authorized the project, arguing that the city needs more parking.
The five-story garage will include a system built by Unitronics, an Israeli firm specializing in automated parking structures, in which cars are automatically parked in available spaces without human intervention.
In its evaluation, Fitch said 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.”
Fitch also noted that the city’s financial profile is strong. “General fund revenues are well diversified by source and surpassed pre-recessionary peak levels in fiscal 2012, though a significant portion of revenues are economically cyclical,” Fitch said, alluding to the city’s dependence on tourism. “Fiscal 2012 general fund operations produced a $1.2 million surplus, raising the total and unrestricted balances to extremely high levels of $76 million (107% of expenditures and transfers out). The city estimates that fiscal 2013 ended with a solid $5 million surplus, which would raise the total fund balance to $80.8 million (114%). The surplus well exceeded the city’s budgeted balanced operations due to conservative budgeting practices and strong revenue performance. Major revenue categories include property, sales, and transient occupancy taxes, which were estimated to exceed their budgeted amounts by 7%, 6%, and 11%, respectively.
“The fiscal 2014 budget points to a $2.8 million general fund deficit caused by a one-time retroactive health insurance liability payment related to a change in premium-setting methodology. The city participates in an insurance joint power authority. Excluding the payment, the budget is roughly balanced. The city’s history of budgeting conservatism suggests that actual general fund results for fiscal 2014 could significantly outperform the budget.”
The Fitch analysis noted that the city’s relatively high level of spending on social services and the fact that it contracts for legal services rather than maintaining its own police department give it the flexibility to cut spending, if need be, although it noted that such cuts might be politically difficult. It also noted that the city has flexibility to postpone the $70-$150 million of capital projects under consideration that would be paid for from its general fund.
“In previous years management had expected a draw-down to a still impressive $50 million,” the report said. “However, capital project costs have been running well below the city’s prior estimates, so fund balances may stabilize above the former target.
The city’s labor contracts, which cover 90% of employees and run through 2015, call for annual 0 to 3.5% pay increases that are tied to inflation. Fitch noted that the contracts “prudently include salary re-openers should revenues decline by over 5%.”
Fitch said the city has a relatively high per capita debt burden of $8,441 largely because of overlapping debt issued by the Los Angeles Unified School District, over with the city has no control. “The city’s very high wealth levels mitigate concerns over the higher per capita debt levels,” Fitch said.
Fitch said the city has been slow at paying off its long term debt. “Principal amortization is slow with just 33.6% retired over 10 years,” it noted. “Slow amortization derives from the fact that all of the city’s outstanding long-term general fund debt has been issued in the past four years. These rates are mitigated by the city’s high level of financial flexibility, manageable capital needs, and significant use of pay-as-you-go capital financing. Also, the city’s carrying costs … are quite affordable at less than 10% of governmental fund spending (net of capital projects).