OREANDA-NEWS. Fitch Ratings has assigned an 'A+' rating to the following Municipal Improvement Corporation of Los Angeles (MICLA), CA lease revenue bonds:

--$126.3 million lease revenue refunding bonds, series 2016-A (capital equipment);
--$676.3 million lease revenue refunding bonds, series 2016-B (real property).

The bonds are scheduled to sell via negotiation around May 17, 2016.

Fitch has affirmed the Issuer Default Rating (IDR) of the city of Los Angeles (CA) at 'AA-'.

In addition, Fitch has affirmed the following ratings:

--$1.610 billion outstanding MICLA lease revenue bonds, series 2006-A, 2007-B1, 2007-B2, 2008-A, 2008-B, 2009-A, 2009-B, 2009-C, 2009-D, 2009-E, 2010-A, 2010-B, 2010-C, 2012-A, 2012-B, 2012-C, 2014-A, 2014-B, and 2015-A at 'A+';
--$790.4 million outstanding Los Angeles general obligation bonds, series 2001-A, 2005-A, 2005-B, 2006-A, 2008-A, 2009-A, 2009-B, 2011-A, 2011-B, and 2012-A at 'AA-';
--$37.5 million outstanding Los Angeles judgment obligations bonds, series 2009-A and 2010-A at 'A+'.

The MICLA lease revenue refunding bonds, series 2016-A and 2016-B will fully refund or redeem on the closing date the following outstanding MICLA lease revenue bonds: series 2006-A, 2007-B1, 2007-B2, 2008-A, 2008-B, 2009-B, and 2009-E.

SECURITY
MICLA's lease revenue bonds are payable solely from the city's lease rental payments for use and occupancy of various facilities and equipment. The city covenants to budget and appropriate sufficient annual debt and interest repayments from any available source of funds. Rental payments are subject to abatement (addressed by 24-month rental interruption insurance). MICLA assigns to a trustee its rights under the leases, including the right to receive lease rental payments. There are no debt service reserve fund (DSRF) requirements. The bonds are rated one notch below the city's IDR.

General obligation bonds are payable from ad valorem property taxes levied without limitation on rate or amount upon taxable properties within the city.

Judgment obligation bonds are secured by the city's absolute and unconditional obligation to pay principal and interest to refund an obligation imposed by law.

KEY RATING DRIVERS

The city's 'AA-' IDR reflects solid revenue growth, satisfactory expenditure control, a moderate debt burden, and exceptionally strong gap-closing capacity, supported by strengthened general fund liquidity and reserves. The city faces ongoing challenges arising from its limited ability to independently raise revenues, the contentious labor environment, multiyear remuneration increases, increasing pension system and other post-employment benefits (OPEB) employer contributions, judicial impediments to benefits reform, and growing service pressures. The 'A+' lease revenue bonds rating reflects appropriation and abatement risks.

Economic Resource Base
The city is the commercial and cultural center of a very large, diverse economy that is benefitting from revenue, employment, and property market improvements. The city's socioeconomic characteristics remain somewhat mixed, as would be expected for such a large urban area. The city is projecting continued slow, steady economic and tax base growth.

Revenue Framework: 'aa' factor assessment
Solid revenue growth has been, and is expected to remain, in line with national GDP growth. This reflects the city's ability to capture revenues from across its wide range of economic activity. However, the city's independent ability to raise revenues is limited by state law.

Expenditure Framework: 'a' factor assessment
Over time, expenditure growth is expected to be roughly in line with revenue growth given rising employee costs and growing service pressures. Labor contract flexibility is counterbalanced by a contentious labor environment, judicial impediments to benefits reform, and a competitive environment for sworn personnel. The fixed-cost burden for debt service, pensions, and OPEB is manageable.

Long-Term Liability Burden: 'aa' factor assessment
The long-term liability burden is moderate relative to personal income. However, mixed pension and OPEB funding ratios, plus revised investment return assumptions, will necessitate increased city contributions over time to maintain actuarial funding.

Operating Performance: 'aa' factor assessment
Los Angeles has exceptionally strong gap-closing capacity. Reserves in combination with the city's inherent budget flexibility leave it well positioned to address future downturns. The city has made consistent efforts to retain financial flexibility, but remains reliant on one-time funding to achieve annual budgetary balance even at a time of economic recovery.

RATING SENSITIVITIES
Fitch expects that the city will continue to exercise sound budget management and maintain solid liquidity and reserves through the economic cycle.

CREDIT PROFILE
The city is currently benefitting from economic expansion characterized by a healthy level of new business registration, increased technology sector investment, strong tourism growth, and numerous new construction projects, particularly downtown. However, the city is also part of a Southern California housing market that, while still growing, has slowed in growth for the second consecutive year. Low wage growth, limited housing inventory, housing affordability barriers, rising mortgage rates, and tight credit are likely contributing to this slowdown. Local economists are predicting modest gains in property sales volume and prices in fiscal 2017.

Revenue Framework
A variety of taxes enables the city to translate its active economy into revenue, capitalizing on the city's size and economic diversity. General fund revenues were relatively resilient (particularly property taxes) during the recent recession, with solid post-recessionary growth. The city's multiyear projections indicate ongoing revenue growth.

Historically, the city's general fund revenues have grown in line with national GDP. The city's multiyear projections assume comparable annual revenue growth going forward as a result of ongoing steady growth in employment, income, taxable sales, and tourism.

The city's independent revenue-raising capacity is limited by a variety of voter-approved state propositions. The key revenue flexibility for California cities are fees-for-services and fines. However, operationally the city does not have a good record of expeditiously increasing its fees and charges, and parking fine revenues are underperforming in fiscal 2016 due to diverted staffing and relaxed parking enforcement.

An annual transfer from the power revenue fund represents approximately 5% of annual general fund revenues. This transfer is currently subject to litigation which is expected to take some years to resolve. A possible ballot measure in November 2016 or March 2017 could clarify the future of this transfer as part of charter and administrative code changes designed to reform Los Angeles Department of Water and Power governance.

Expenditure Framework
The city has demonstrated its ability to control expenditures. Between fiscal years 2009 and 2015, general fund expenditures grew by 10% compared to 15% general fund revenue growth. However, going forward the city has agreed to multiyear remuneration increases, its employer contributions to the pension system and OPEB are rising, and it faces growing service pressures. In fiscal 2015, about 60% of general fund expenditures were for public safety.

The city faces expenditure pressure. Moderate baseline spending growth will result from agreed-upon compensation increases in the city's multiyear labor contracts, additional new positions, and new service priorities. Pension and OPEB contributions will likely rise at a faster rate than other expenditures despite pension reform, a successfully negotiated cap on retiree health benefit costs, and increased employee contributions. To manage its expenditure pressures, the city is focusing on limiting future employee cost increases, making resource allocation decisions based on performance-based budgeting in all departments, and limiting the backfilling of federal grant cuts.

There are two new key areas of additional expenditure pressure facing the city. First, addressing homelessness has become a policy priority. The city estimates the need for $1.85 billion for homeless housing over the next 10 years, plus the costs of coordinated case management, prevention programs, and ongoing support services. A possible November 2016 tax measure could provide an additional funding source for that purpose, supplemented by redevelopment or sale of surplus city properties. Second, there are unquantifiable but likely significant litigation risks associated with affordable housing compliance with federal disability access laws, health benefits for sworn personnel, and various wrongful incarceration lawsuits.

Long-Term Liability Burden
The city's long-term liability burden is moderate relative to personal income. The vast majority of the liability burden is generated by overlapping entities (in particular the Los Angeles Unified School District and the Los Angeles Community College District). The city itself has limited debt issuance plans. However, it might need to issue judgment obligation bonds to address future litigation-related costs. Mixed pension and OPEB funding ratios, plus revised investment return assumptions, will necessitate increased city contributions over time to maintain actuarial funding. While the Los Angeles City Employees' Retirement System (LACERS) pension liability is weakly funded, its OPEB liabilities are relatively well funded. By contrast, the Fire and Police Pension Plan (FPPP) pension liability is relatively well funded but its OPEB liabilities are very poorly funded. The city has limited exposure to variable rate exposure debt and no swap agreements are payable from the general fund.

The city's recent agreement with the coalition of major labor unions terminates the coalition's litigation against LACERS pension reform. As a result, more than 2,000 Tier 2 civilian employees are being transferred to Tier 1 at the city's expense, at an estimated one-time cost of $15 million in fiscal 2016 (approximately 0.3% of budgeted general fund revenues) plus the ongoing cost of more generous retirement provisions. New civilian employees are being hired under Tier 3 which will generate fewer savings than the unwound Tier 2. The large police overtime bank liability is gradually reducing (currently $109 million) as the city appropriates more funding for police overtime each year.

Operating Performance
The city has exceptionally strong gap-closing capacity. During the economic recovery of fiscal years 2012-2015, the city's general fund saw net operating surpluses after transfers, growing fund balances and reserves, and stronger liquidity. This was achieved despite increasing expenditures.

During the course of fiscal 2016, the city has identified an $86 million revenue shortfall (largely due to delayed receipt of the sales tax replacement component of property tax revenues) and $10 million in over-expenditures. The city expects to eliminate most of the resulting deficit by drawing down its unappropriated general fund balance, requesting departments to absorb over-expenditures, and using surpluses from other revenue sources which have outperformed budget, unexpended fund reversions, and encumbered fund sweeps. Fitch expects that the city will maintain its general fund reserves at levels well above the 5% policy minimum. The city estimates that it will end fiscal 2016 with emergency and contingency reserves totaling $447 million or 8.3% of general fund revenues, supplemented by a budget stabilization fund and a reserve for liability resolution (to be expended in fiscal 2017). Cumulatively, these reserves are projected to total $588 million or 10.9% of general fund revenues. The proposed fiscal 2017 general fund budget shows lower reserves that continue to remain above the policy minimum at 5.8% for the emergency and contingency reserves and 7.7% when the budget stabilization fund and a reserve for midyear adjustments are included.

The city's recently updated multiyear projections show an ongoing but manageable general fund structural imbalance through fiscal 2021. Previously, the city had projected breakeven operations for fiscal years 2019 and 2020, which Fitch viewed as unlikely given negotiated litigation settlements, rising pension and OPEB costs, and calls for increased operational spending.

Lease Revenue Bonds, Series 2016
MICLA lease revenue refunding bonds, series 2016-A (capital equipment) and 2016-B (real property) will refund certain outstanding MICLA lease revenue bonds, take out commercial paper borrowings, and fund tenant improvements to existing city-owned buildings. The bondholder protections are standard for lease revenue bonds. The series 2016-A bonds are secured by $150 million of equipment. The series 2016-B bonds are secured by four city-owned properties with a total estimated value of $829 million.