Fitch Ratings has affirmed the following Huntington Beach Public Financing Authority, CA rating:

--$14.6 million lease revenue bonds, 2014 series A (senior center project) at 'AA+'.

Fitch has also affirmed the Issuer Default Rating (IDR) of Huntington Beach, CA (the city) at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The lease revenue bonds, 2014 series A are secured by lease rental payments which the city covenants to budget and appropriate, subject to abatement. Additional security is provided by a debt service reserve fund sized at maximum annual debt service (MADS). The bonds are rated one notch below the city's IDR, reflecting the appropriation requirement.

KEY RATING DRIVERS

The 'AAA' IDR reflects the city's strong operating performance, low long-term liability burden, moderate fixed costs, and robust reserves. The tax base and economic fundamentals supporting the city's strong recent revenue performance will likely continue to position the city well, and Fitch expects it to continue controlling expenditures and focusing on paying down pension and OPEB liabilities.

Economic Resource Base

The city is located in coastal Orange County, 40 miles southeast of Los Angeles. Beach and event tourism are lynchpins for the local economy attracting more than 13 million visitors annually. However, the local economy is diverse and also includes aerospace, technology, petroleum, manufacturing, financial and business services, automobile services, and a broad-based retail sector.

Revenue Framework: 'aa' factor assessment

Fitch expects ongoing taxable AV growth and the city's broad-based commercial base to yield continued solid revenue growth without tax rate increases or other revenue enhancements. The city's legal ability to raise revenues is constrained by state propositions which require voter approval for tax increases.

Expenditure Framework: 'aa' factor assessment

The city has a moderate fixed cost burden and a demonstrated ability to manage spending in response to economic and revenue decline. On average, spending growth is likely to be in line with revenue growth over time.

Long-Term Liability Burden: 'aaa' factor assessment

The city's long-term liabilities are low relative to its resource base.

Operating Performance: 'aaa' factor assessment

The city has exceptionally strong gap-closing capacity. Its strong revenue base, demonstrated budget flexibility, and robust reserves would more than offset moderate recessionary revenue decline. The city's focus on paying down its pension and OPEB liabilities five to 15 years ahead of schedule will result in long-term savings.

RATING SENSITIVITIES

IDR Sensitive to Financial Performance: The 'AAA' IDR could come under downward pressure if the city fails to maintain satisfactory financial flexibility, including reserves sufficient to address periodic economic volatility.

CREDIT PROFILE

The city is a wealthy community, with a population of about 202,000 and a diverse range of employers and property taxpayers. Its unemployment rate is below average. The city's tax base continues to benefit from significant new development, as well as existing properties' rising prices. Taxable AV did not experience any recessionary decline. Since 67% of parcels have a taxable AV year prior to 2002, there is a significant Proposition 13 cushion. On completion, various residential, hotel, commercial, and car dealership construction projects currently underway will further bolster the city's property, sales, and transient occupancy tax revenues.

Revenue Framework

The city benefits from diverse revenue sources, whereby stable property tax revenues can offset volatility in more economically sensitive revenue streams. In fiscal 2015, property taxes represented 39% of its total general fund revenues, sales taxes 14%, charges for services 12%, utility taxes 9%, and all other sources 26%. During the Great Recession, the city experienced only one year with a slight 1% decline in its total general fund revenues. While there were two years of recessionary declines in sales tax revenues, the subsequent rebound was swift as the city's broad-based commercial sector recovered.

Between fiscal years 2009 and 2015, general fund revenues increased by 24%, with further growth expected in fiscal 2016. This positive revenue trajectory reflects the city's mature tax base, stable demographics, high personal incomes, focus on economic development, and continuing appeal as a southern California tourist destination. For example, the city expects fiscal 2016 transient occupancy tax revenues to increase by 12% over fiscal 2015. Due to the significant amount of residential, commercial, and hotel development currently in progress, property, sales, and transient occupancy tax revenues are all expected to grow from fiscal 2017 onwards. As a result, Fitch expects future revenue growth to be line with historical performance, above national GDP and inflation.

State law requires voter approval for tax increases, limiting the city's ability to control its revenues. In particular, property tax growth is constrained by an annual limit on taxable AV increases absent a change in ownership. Fees, charges for services, and fines can be raised only to recover the costs of providing related services. However, the city has demonstrated that it could generate significant annual general fund revenues by increasing its fee, charges for service, and fine amounts. Consequently, Fitch judges the city's revenue raising ability to be satisfactory.

Expenditure Framework

The city provides a full range of municipal services with public safety accounting for just over half of the general fund budget. Two key areas of expenditure focus for the city are infrastructure investments and liability reduction. Each year, the city devotes surplus revenues to one or both of these focus areas.

Based on the city's current spending profile, solid revenue growth and closely managed service cost increases should result in spending growth in line with revenue growth over time. Preliminary estimates for the proposed fiscal 2017 budget indicate a manageable 2% growth in expenses. During the recession, the city demonstrated its ability to reduce spending by having employees pick up a greater share of their pension and health care costs, freezing negotiated raises, suspending or eliminating paid time-off benefits, capping leave accruals, and implementing furloughs. Several bargaining groups went without raises or COLAs for multiple years. The city retains considerable expenditure flexibility as demonstrated by its list of expenditure reduction options graduated by severity.

The city benefits from a moderately flexible labor environment and tight control over position growth. In its current labor negotiations, the city is aiming for a 2% pensionable COLA increase and a 2% non-pensionable increase for all bargaining units. Fixed costs for debt service and retiree benefits are moderate relative to the resource base. While its debt service costs are declining, the city's employer contributions towards the adequately funded state pension plan will increase over time. This will be partially offset by the city's ongoing investments in liability paydown. Since 2014, all employees pay their full share of pension system contributions.

Long-Term Liability Burden

The long-term liability burden is likely to remain low. The city does not have future debt issuance plans (the bulk of the overall debt burden is generated by other governmental entities); it makes full actuarially-based annual pension contributions to the state pension system, and it has implemented various initiatives to pay down pension and OPEB liabilities five to 15 years ahead of schedule for long-term savings. By policy, the city's pension liability reduction initiative is now an automatic budget item supporting ongoing city commitment to this initiative. The city's net overall debt ($561 million) plus net pension liability ($336 million) represents a manageable 7% of personal income.

In fiscal 2014, the city completely paid down the unfunded liability for its miscellaneous OPEB plan. A $10 million net liability remains for the sworn OPEB plans (equivalent to only 0.1% of personal income). In December 2015, the city established an irrevocable tax-exempt, Internal Revenue Code section 115 trust to help pay this down. The city has already deposited $1 million into the trust and is now preparing to deposit a further $1.5 million.

Operating Performance

The city's strong financial resilience assessment is based on Fitch's expectation that the city would use a combination of its strong budget flexibility and robust reserves to offset recessionary revenue declines. Growth prospects for revenues are sound and revenues show limited volatility based on historical results, as evidenced by data from the Fitch Analytical Sensitivity Tool (FAST) that estimates a 1.8% revenue decline given a 1% drop in national GDP.

In order to retain expenditure flexibility, the city has not fully restored its pre-recession employee headcount, opting instead to hire part-time personnel, consultants, and contractors. Since the recession, the city has been steadily growing its general fund reserves. The unrestricted general fund balance grew by 78% between fiscal years 2009 and 2015 to $57.4 million or 27% of spending.

When taking into account the monies set-aside to reduce unfunded liabilities, the city has achieved its policy goal of setting aside two months' worth of general fund expenditures. In the event of a general fund emergency, the city could temporarily access approximately $2 million in borrowable funds from outside the general fund and the approximately $500,000 it receives each year in donations.

The city expects to end fiscal 2016 with a total general fund balance equivalent to that at fiscal 2015 year end ($64.8 million or 31% of spending). The city anticipates maintaining a similar total general fund balance at fiscal 2017 year end as well.