Moody's Investors Service said it has downgraded the issuer rating of the city of Torrance, Calif., to Aa2 from Aa1 and has downgraded to A1 from Aa3 the ratings of four series of lease supported obligations, including refunding certificates of participation (police and fire station), Series 1998; certificates of participation (refinancing and public improvement project), Series 2004A and 2004B; and certificates of participation, Series 2009.
Approximately $62.2 million of debt is affected by this rating action. The outlook on these ratings is stable.
The one notch issuer rating downgrade reflects the city's potential financial challenges going forward, notwithstanding the city's relatively strong operating performance and management through the recent economic downturn, and a moderately weakened general fund cash position compared to the city's pre-recession liquidity. Increasing pension payments and public safety costs will be the primary cost pressure points, especially if property tax revenue growth remains relatively weak.
The two-notch rating distinction between the A1 rating on the city's lease-backed obligations and the Aa2 issuer rating represents the weaker security pledge for lease-backed obligations and the additional risk to bondholders from the city's financial, operational, and economic conditions over the more secure general obligation pledge. A "lease pledge" is a contractual obligation, conditioned on use and/or occupancy of the least asset, effectively on parity with a city's other unsecured obligations. The city's issuer rating reflects what its secured, general obligation rating would be if the city issued such debt.
The outlook on the ratings is stable. After several years of operating deficits, the city's unaudited general fund performance was positive in fiscal 2012, and the local and regional economy are improving sufficiently to support projected fiscal 2013 expenditures. While the city's general fund cash position is not as strong as prior to the recession, it remains healthy for the rating level.
Both the issuer rating and the lease obligation rating primarily reflect the credit strength of the city's large and diverse tax base and the city's location in the greater Los Angeles area economy. The city's population appears to have benefited from the size and diversity of the region's economy given the gains in income levels relative to other cities in the state and the nation according to the 2010 census results.
The city's unemployment rate has continually been below state and national rates and was a low 5.0% as of September 2012, reflecting the city's strong local economy. The housing sector for the city has stabilized with recent data indicating housing prices that range from stable to increasing over the previous year and foreclosure rates comparable to national averages. Despite the city's economic strengths, however, financial operations of the city have varied in recent years with periods of large to modest deficit spending and similarly large to modest operating surpluses, but total ending fund balances have remained healthy and relatively stable.
Moody's notes that the city's total fund balance levels are significantly below those of other California cities in the Aa1-rating category, though comparable to the national median for that rating level. The city's ending cash balances have declined from healthy levels to levels not consistent with Aa1-rated city. Torrance maintains a modest lease burden as a percentage of expenditures.
With the inclusion of the city's annually required pension contribution (ARC), the city's lease and ARC burden as a percentage of general fund operating expenditures is slightly larger than other cities of similar size.
Additionally, the city's public safety costs as a percentage of total general fund operating expenditures are above-average and will likely remain so for the foreseeable future.
