OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB' ratings on the following bonds issued by the Lynwood Public Financing Authority, California (the authority):

--$2.2 million lease revenue refunding bonds (public capital improvement project), series 2003A;

--$9 million lease revenue bonds (civic center improvement project), series 2010A.

In addition, Fitch affirms the City of Lynwood's (the city) Issuer Default Rating (IDR) at 'BBB+'.

SECURITY

The lease revenue bonds are payable from lease rental payments from the city to the authority for use of various essential assets, subject to abatement. The bonds are also supported by cash-funded debt service reserve funds.

KEY RATING DRIVERS

The 'BBB+' IDR reflects the city's very weak revenue framework, adequate expenditure flexibility, moderate liabilities and challenged financial operations providing just adequate gap-closing capacity. The city has made significant strides over the years to improve its financial position, eliminating deficits outside the general fund, improving liquidity and bringing the budget closer to balance. Nonetheless, weak revenue growth will challenge the city's ability to maintain desired service levels.

Economic Resource Base

The city's economic and revenue growth are below average despite several years of employment and labor force gains. Wealth indicators are significantly below average. The well-diversified tax base remained fairly stable through the recession and has been growing modestly, though unevenly.

Revenue Framework: 'bbb' factor assessment

Underlying revenue growth, relying primarily on growth in property and sales taxes, has been stagnant, reflecting the city's limited commercial base and low wealth levels. In addition, the state constitution severely limits the city's ability to raise revenues without a vote. Revenue growth prospects appear limited.

Expenditure Framework: 'a' factor assessment

Spending is likely to grow at a faster pace than revenues, as costs for county-contracted public safety services grow at above inflationary rates. Fixed costs are moderate, but the city's labor framework and already reduced levels of public safety staffing limit its flexibility.

Long-Term Liability Burden: 'aa' factor assessment

The city's long-term liability burden, including overall debt and pensions, is low to moderate at just over 10% of total personal income.

Operating Performance: 'bbb' factor assessment

The city retains just adequate gap closing capacity when budget flexibility, reserves and revenue volatility are considered. Budgets have been relatively conservative but are still pressured and tightly balanced. The city has been prefunding a portion of its post-employment benefit obligation.

RATING SENSITIVITIES

Financial Resilience: Improved financial flexibility through increased operating margins and/or reserves could result in positive rating action.

Spending Pressure: Increased spending pressure that reduces budget flexibility and gap closing capacity could result in negative rating action.

CREDIT PROFILE

The densely populated 4.9-square-mile city is situated about 11 miles south of downtown Los Angeles. While the city benefits from its participation in the greater Los Angeles economy, its own employment base is somewhat narrow. Large city employers include government, a large hospital, and a declining number of small to medium size industrial enterprises.

Revenue Framework

The majority of city revenues are derived from property and sales taxes. Property taxes have been stagnant in recent years, while sales taxes have shown more steady growth.

Given the city's limited commercial base and low wealth levels, Fitch expects continued stagnant revenue growth.

Pursuant to the state constitution as enacted through voter initiatives, local governments may not increase taxes without a vote of the people. Fees and charges may be raised only to recover costs. As a result, the city's revenue raising ability relative to its revenue volatility is limited.

Expenditure Framework

The city provides a full range of municipal services. The city's options for cutting or reallocating services are somewhat limited given the high level of public safety spending (about 63% of fiscal 2015 general fund resources were spent on public safety). Contracts with the county of Los Angeles for police and fire services appear to provide the city somewhat more staffing flexibility than with city employees. However, management reports staffing levels are already at a minimum relative to the desired service level.

The pace of spending growth is expected to exceed revenue gains, partly due to cost increases passed on by the county for sheriff and fire suppression services. Recent annual increases have ranged from 2%-3.5%, outstripping the city's modest average annual revenue growth of 2% over the last 10 years.

After years of cost-cutting, the city retains just adequate flexibility to trim spending. The city may adjust contracted staffing levels with the county, but policy makers may be reluctant to do so given concerns about adequate public safety services.

Long-Term Liability Burden

The city's overall debt burden is largely comprised of overlapping debt issued by the county and the school district. Combined debt and pension liabilities total just over 10% of personal income, which Fitch assesses as low to moderate.

The city participates in CalPERS for its two active bargaining groups. Former public safety employees (before the city began contracting with the county) belonged to two now-closed pension systems.

Operating Performance

The city's financial operations have been challenged in recent years, as cost increases have outstripped revenue growth. In addition, deficits in several funds outside the general fund reduced the city's overall liquidity. This issue was resolved in fiscal 2014, and both liquidity and fund balances are at improved levels. Gap closing capacity, as measured by the city's limited budget flexibility, relatively volatile revenue base and available fund balances, is adequate.

The city budgets relatively conservatively and has been prefunding a portion of its other post-employment benefits.