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Fitch Affirms City of Los Angeles Special Parking Revenue Fund Bonds at 'A'

The rating reflects the city's monopolistic position over essential street parking spaces and garages located in the city's central business district and other commercial centers serving a broad and populous area; favorable financial performance resulting in strong coverage ratios; the ability to fund capital needs on a pay-as-you-go-basis; and low leverage with a level to declining debt service profile making the system less reliant on increased usage or higher parking rates. Off-setting credit concerns include the significant impact of the economic recession on unemployment levels and the likely slow pace of economic recovery in the Los Angeles region, the potential for cash balance and reinvestment levels to be subject to the vagaries of the city's challenged fiscal situation; the backlog of capital and refurbishment needs; and the ability of the city to designate new or existing parking facilities as off-system subject to meeting the 1.25 times (x) rate covenant test.

Key rating drivers include the pace of economic recovery and its impact on demand and pricing for parking facilities located within the SPRF pool, decisions made by the city relative to asset maintenance and reinvestment, and retention of commensurate financial resources within the parking system indenture.

SPRF debt is secured on a gross lien basis, before operations and maintenance on the system, or capital requirements. No tax or other city revenue is pledged. The SPRF (a special fund of the city, instead of an enterprise fund) was established by ordinance in 1972, amended in 1998, and codified under Los Angeles Administrative Code. Under the Master Trust Indenture, the city's obligation to pay debt service from parking revenues is unconditional and irrevocable. In spite of the legal gross lien, Fitch's analysis focuses on the parking system as a viable enterprise and hence on debt service coverage on a net revenue basis.

The SPRF receives all monies, income, and investment earnings derived from operations of the on-street and off-street parking meters in the city and the parking lots, garages, and structures owned by the city except for excluded facilities, which according to the master indenture are defined as parking lots, garages, and other parking structures owned by the city and operated by the Los Angeles Department of Airports, the Los Angeles Department of Water and Power, the Los Angeles Harbor Department, the Los Angeles Convention and Exhibition Center, and the Community Redevelopment Agency of the City of Los Angeles.

Parking assets within the SPRF parking system produce strong cash flows and comfortable coverage on debt obligations. In addition, revenues collected allow for the SPRF to internally fund all capital needs of the system. Debt service coverage, when calculated per the indenture, generated 3.03x debt service coverage in fiscal 2009, slightly over the annual debt service coverage reported in fiscal 2008 of 2.78x. For fiscal 2010, the city estimates debt service coverage will be above 2.0x, consistent with historical performance. In addition, internal liquidity within the fund for the last five years has been robust. However, undesignated fund balances are expected to be substantially depleted as surplus cash will be transferred to the city's general fund to help alleviate budgetary deficits. The city's recent concerted effort to improve its parking facilities within the SPRF will allow for a small transfer of surplus revenues in fiscal year (FY) 2011, if any at all.

In fiscal 2011, the city is continuing with its efforts to address the backlog of capital needs and enhance net revenues, including the implementation of new parking access and revenue control systems, allowing the parking patron to use a central kiosk to pay parking charges, and substantially reducing staffing levels. This technology is already in place at one of the city's parking garages, and the city estimates its implementation will result in a 44% reduction in overall staffing levels. In addition, inoperable parking meters are also being addressed, which should bolster revenue collections going forward.

Other capital items included in the current year's fiscal budget include upgrades to 10,000 single-space parking meters with credit card capability. The anticipated revenue is envisioned to offset the cost of implementing the program.

Parking facilities are located throughout the city and are generally priced below market. The SPRF's assets include on-street parking spaces, off-street parking meters, parking garage spaces, and off-street parking lot spaces catering to the city's various downtown and suburban business districts. Spaces within the city's parking system are dominated by parking meters (representing nearly 83% of the city's 46,870 available parking spaces), providing a very stable component to its revenue stream and making system finances less vulnerable to the competitive forces for downtown parking garages and lots. For 2009, the city tabulated receipts by type of facility, which showed that 74.7% came from street meters, 6.7% from metered parking lots, and 18.6% from operated parking lots and garages. Demand for on-street and off-street parking meters are generally higher than for parking lot spaces given the lower parking rates and the ease of use. In fiscal 2009, approximately 19% of parking citations issued annually were for parking meter violations, which is approximately 10% lower than the 30% reported in fiscal 2003.

The city has recently undertaken studies to determine which parking structures are profitable and has determined that the parking structures are underperforming assets. The financial challenges currently facing the city resulted in the city issuing a request for qualifications (RFQ) to engage in a public private partnership (PPP) for some segments of the parking system facilities. The city views moving forward with this PPP as critical to help replenish the city's general reserve fund and continue generating revenue to fund other priorities. The city envisions issuing a RFP for a portion of the city's parking facilities in the current fiscal year. The resulting upfront payment would defease the outstanding debt associated with the SPRF bonds and excess proceeds would be transferred to the city's general fund reserves.

The city's economy is substantial, supported by continuous population growth, a highly diverse taxpayer base, and, until recently, strong assessed valuation growth. The city's top employers include major educational and health care entities, and significant companies within the entertainment, insurance, high technology, manufacturing, and property management sectors. The city also benefits from a sizable retail sector. Nevertheless, the current economic downcycle has resulted in employment opportunities contracting by 1.8% between June 2009 and June 2010 while the labor force declined by a smaller 1.1%, thereby contributing to the ongoing high unemployment rate of 13.5% in June 2010, up from 12.9% in June 2009. The city also has characteristics typical of large urban areas. Income levels are consistently below state and national levels, and there is a relatively high individual poverty rate.

Related Research:

--'Rating Criteria for Infrastructure and Project Finance', dated Aug. 13, 2010.

Additional information is available at 'www.fitchratings.com'.

Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548345

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