Summary: Monrovia, California; Appropriations; General Obligation Primary Credit Analyst: Michael Parker, Centennial 303-721-4701; michael.parker@spglobal.com Secondary Contact: Li Yang, San Francisco (1) 415-371-5024; li.yang@spglobal.com Table Of Contents Rationale Outlook Related Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 22, 2017 1
Summary: Monrovia, California; Appropriations; General Obligation Credit Profile US$115.305 mil taxable pension oblig bnds ser 2017 due 05/01/2047 Long Term Rating AA-/Stable New Monrovia ICR Long Term Rating AA/Stable Affirmed Rationale S&P Global Ratings assigned its 'AA-' long-term rating to Monrovia, Calif.'s series 2017 pension obligation bonds (POBs). At the same time, S&P Global Ratings affirmed its 'AA-' long-term rating and underlying rating (SPUR) on the city's POBs and lease revenue bonds outstanding. In addition, S&P Global Ratings affirmed its 'AA' issuer credit rating (ICR) on the city. The outlook on all ratings is stable. The rating on the POBs reflects our view of the city's absolute and unconditional pledge to pay debt service during the life of the bonds. We anticipate that resources for debt service will come from the city's retirement tax and unrestricted general fund revenue. The retirement tax doesn't have a sunset date and is levied on taxable property within the city at a rate of 0.129%. Our rating is one notch below the city's general creditworthiness, consistent with our application of our non-ad valorem criteria. Proceeds of the series 2017 bonds will be used to fully refund the city's 2010 POBs outstanding, pay off the city's unfunded accrued actuarial liability with the California Public Employees' Retirement System (CalPERS), and pay the costs of issuance. The city's lease revenue bonds outstanding are secured by revenue from the Monrovia Financing Authority, which consists of an interest in base rental payments made by the city. Base rental payments are made from general revenue of the city pursuant to the facility leases, and are subject to annual appropriation. The rating on the lease revenue bonds is one notch lower than the ICR, in accordance with our criteria, to reflect the appropriation risk associated with appropriation-backed obligations. In addition, the ratings on the lease revenue bonds reflects our view of Monrovia's general creditworthiness and the city's covenant to budget and appropriate lease payments from any source of legally available funds. The 'AA' ICR reflects our opinion of the following credit factors: Very strong economy, with access to a broad and diverse metropolitan statistical area (MSA); Very strong management, with strong financial policies and practices under our Financial Management Assessment (FMA) methodology; Strong budgetary performance, with operating surpluses in the general fund and at the total governmental fund level in fiscal 2016; Strong budgetary flexibility, with an available fund balance that we expect will decrease in the near term from its WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 22, 2017 2
Summary: Monrovia, California; Appropriations; General Obligation fiscal 2016 level of 18% of operating expenditures; Very strong liquidity, with total government available cash at 82.6% of total governmental fund expenditures and 16.5x governmental debt service, and access to external liquidity we consider strong; Very weak debt and contingent liability position, with debt service carrying charges at 5.0% of expenditures and net direct debt that is 307.0% of total governmental fund revenue; and Strong institutional framework score. Very strong economy We consider Monrovia's economy very strong. The city, with an estimated population of 38,810, is located in Los Angeles County in the Los Angeles-Long Beach-Anaheim, Calif. MSA, which we consider to be broad and diverse. The city has a projected per capita effective buying income of 123% of the national level and per capita market value of $138,493. Overall, the city's market value grew by 5.6% over the past year to $5.4 billion in 2018. The county unemployment rate was 5.2% in 2016. Monrovia is at the edge of the San Gabriel Mountains in northern Los Angeles County, about 20 miles northeast of downtown Los Angeles. Given the city's participation in the Los Angeles-Long Beach-Anaheim MSA, management reports that residents have the option of commuting to nearby Los Angeles for work. The largest employment industries in the area transportation, professional and business services, and educational and health services. The population in Monrovia has grown modestly by an aggregate 2.9% since 2008, with estimates for 2017 indicating a 3% increase from the previous year. So far in the 2017 calendar year, the unemployment rate for the county is averaging about 4.7%. The city's assessed value (AV) totaled about $5.37 billion for fiscal 2018, an increase of 5.6% from fiscal 2017. Historically, the city has experienced good growth in AV, leading to extremely strong wealth indicators. The city's overall AV trend was generally insulated during the recession, as the city hasn't experienced any AV declines in the last 10 years. The city is expecting the growth trend to continue as the underlying economy continues to improve at a level similar to the larger Los Angeles MSA. Residential projects currently under construction include the apartment complex MODA at Monrovia Station and the Areum Apartments project. In addition, the Monrovia Landing Shopping Center opened in October 2017, and city officials report that the recent and current commercial development will lead to greater sales tax revenue and building permit fees collected. We consider the city's tax base very diverse, with the leading 10 taxpayers accounting for 6.2% of total AV. The Foothill Gold Line train project opened a station in Monrovia in early 2016, and management anticipates the new route will provide further contributions to the local economy. Very strong management We view the city's management as very strong, with strong financial policies and practices under our FMA methodology, indicating financial practices are strong, well embedded, and likely sustainable. We revised our FMA to strong from good given recent board-adopted debt and fund balance policies. Key policies include use of historical trends and third-party resources to project future revenue and expenditures, monthly presentations of the city's budget-to-actual results to the city council, maintenance of five-year financial forecasting that is updated once a year, and maintenance of a formal five-year capital improvement plan that is updated once a year with funding identified. The city also invests primarily with the county investment pool and reports its holdings WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 22, 2017 3
Summary: Monrovia, California; Appropriations; General Obligation and investment results to the county council monthly, but the county does not maintain its own investment policy. In 2016, the city adopted a formalized debt and reserve policy that proposes debt capacity limits and a general fund balance level above 10% of expenditures. Strong budgetary performance Monrovia's budgetary performance is strong in our opinion. The city had operating surpluses of 9.0% of expenditures in the general fund and of 12.3% across all governmental funds in fiscal 2016. Our assessment accounts for the fact that we expect budgetary results could deteriorate somewhat from 2016 results in the near term. We have adjusted general fund expenditures and the corresponding transfers in 2014 to 2016 to reflect ongoing transfers out for various special funds to support maintenance and operations. In addition, we have adjusted general fund revenue in those years to show continual transfers in from the retirement fund to cover pension costs, and transfers in from other funds to cover overhead and administrative charges incurred by the general fund; transfers in account for 21.6% of adjusted general fund revenue. The city has experienced growth in both property tax and sales tax revenue in recent years, which contributed to a second consecutive surplus in the general fund in fiscal 2016. In fiscal 2016, sales tax and property tax revenue increased 16.9% and 6.4%, respectively. We note that the larger-than-normal sales tax growth was largely due to one-time revenue of roughly $900,000 associated with the state's Triple Flip Program. Without the one-time revenue, the city still experienced 7% overall growth in sales tax collections, which officials attribute to continued economic activity. The city indicated the growth in AV contributed to the increased property tax collections. The city's 2016 general fund expenditures increased substantially from the prior year, as the city made additional contributions to community development and public safety. We expect no significant one-time expenditures for the city within the next year. The city's 2017 unaudited general fund results show a deficit of $1.4 million to end the year, which management attributes to increases in contributions for the CalPERS and increases in general government expenses. Given the expected deficit, we expect the city's overall operational performance to weaken slightly but remain at least adequate. The city is currently budgeting for balanced operations in fiscal 2018. Long-term financial forecasts include certain initiatives to ensure the city remains fiscally balanced. One of those items includes a proposed tax increase in calendar year 2018 to raise the transient occupancy tax (TOT) rate within the city to 12% from 10%. If passed by voters, the additional TOT revenue collected will increase by approximately $400,000, according to city estimates. In addition, the city reached an agreement with all employee labor groups, resulting in employees taking on some of the expected CalPERS increases forthcoming, which management estimates could save the city up to $300,000 a year. Moreover, the city expects to realize net present value savings in CalPERS costs through the issuance of the POBs. Strong budgetary flexibility Monrovia's budgetary flexibility is strong, in our view, with an available fund balance that we expect could decrease in the near term from its fiscal 2016 level of 18% of operating expenditures, or $7.0 million. Our calculation of available fund balance combines assigned and unassigned portions of the general fund balance as a percentage of general fund expenditures. The city increased its fund balances after reporting an operating surplus in the general fund in fiscal 2016, bringing reserves to a very strong level, in our view. Given the expected deficit in the general fund for fiscal 2017, we anticipate reserves will drop slightly to approximately 14% of expenditures, which we WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 22, 2017 4
Summary: Monrovia, California; Appropriations; General Obligation still view as strong. We expect reserves to remain at least strong, given the council-approved reserve policy of maintaining general fund reserves of at least 10% of expenditures. Very strong liquidity In our opinion, Monrovia's liquidity is very strong, with total government available cash at 82.6% of total governmental fund expenditures and 16.5x governmental debt service in 2016. In our view, the city has strong access to external liquidity if necessary. In our view, the city has strong access to external liquidity, as it has issued debt several times in the past 20 years. We do not consider the city's investments aggressive, as it invests primarily in U.S. government securities with maturities of less than five years. The city does not anticipate spending down its liquidity over the foreseeable future, and has no direct purchase agreements or private placement debt outstanding. We do not expect that liquidity will weaken over the next several years. Very weak debt and contingent liability profile In our view, Monrovia's debt and contingent liability profile is very weak. Total governmental fund debt service is 5.0% of total governmental fund expenditures, and net direct debt is 307.0% of total governmental fund revenue. We consider amortization slower than average, with officials planning to retire approximately 35% of principal during the next 10 years. We understand the city has no immediate plans to issue additional debt over the next two years. A noticeable portion of Monrovia's direct debt is in the form of tax allocation bonds (TABs) that were issued by the Monrovia Successor Agency, which collects tax increment property tax revenue separately to pay for debt service on the TABs outstanding. Monrovia's combined required pension and actual other postemployment benefit (OPEB) contributions totaled 12.1% of total governmental fund expenditures in 2016. Of that amount, 11.0% represented required contributions to pension obligations, and 1.1% represented OPEB payments. The city made its full annual required pension contribution in 2016. Monrovia participates in CalPERS for employee pension benefits. The city's net pension liability was $108 million as of June 30, 2016, and is 65% funded using its fiduciary net position as a percentage of the total pension liability. The city recently created a pension plan, or what the city refers to as the CalPERS Response Plan, to get ahead of newly implemented employer rate changes to CalPERS that will increase annual pension contributions over the next five to six years. The plan contains changes at the city level that includes passing some of the expected CalPERS costs to employees, issuing POBs, and creating an unfunded accrued liability policy help mitigate rising pension costs in the budget process. Additionally, Monrovia collects a pension override tax that is specifically used to fund its pension costs, which helps alleviate any downward pressure on the budget for pension-related obligations. Strong institutional framework The institutional framework score for California municipalities required to submit a federal single audit is strong. The institutional framework score is based on the state legislative and functional environment under which these local governments operate, including a framework that encourages transparency by requiring these local governments to perform annual financial statement audits of their entire operations if they become subject to the federal single-audit WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 22, 2017 5
Summary: Monrovia, California; Appropriations; General Obligation requirement on account of federal awards in multiple programs exceeding $500,000 per year. Outlook The stable outlook reflects our view of the city's very strong and stable economy, with participation in the Los Angeles-Long Beach-Anaheim MSA. The stable outlook also reflects our view of the city's strong management policies and practices and our expectation that the city will maintain at least strong general fund balances. In addition, the stable outlook reflects our anticipation that the city's sales and property tax collections will remain stable, providing support to the city's revenue profile. Finally, although we consider the city's debt profile to be very weak, the stable outlook reflects our view of management's proactive approach to its pension liabilities. Upside scenario Should the city sustain reserves at levels we consider very strong and the city's debt profile moderates, we could raise the ratings. Downside scenario If the city depletes its reserves to a level below its fund balance policy-mandated minimum, we could consider lowering the ratings. Related Research 2017 Update Of Institutional Framework For U.S. Local Governments Ratings Detail (As Of November 22, 2017) Monrovia POBs (AGM) Unenhanced Rating AA-(SPUR)/Stable Affirmed Monrovia Fincg Auth, California Monrovia, California Monrovia Fincg Auth (Monrovia) approp (BAM) Unenhanced Rating AA-(SPUR)/Stable Affirmed Monrovia Fincg Auth (Monrovia) lse rev bnds (Monrovia) (Measure R And Proposition C Street Imp) ser 2016 due 12/01/2045 Long Term Rating AA-/Stable Affirmed Monrovia Fincg Auth (Monrovia) lse rev rfdg bnds (Monrovia) (Library Project) ser 2017 due 12/01/2037 Long Term Rating AA-/Stable Affirmed Monrovia Fincg Auth (Monrovia) lse (AGM) Unenhanced Rating AA-(SPUR)/Stable Affirmed Monrovia Fincg Auth lse rev bnds (Monrovia) (Library Project) ser 2007 Unenhanced Rating AA-(SPUR)/Stable Affirmed Many issues are enhanced by bond insurance. Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 22, 2017 6
Summary: Monrovia, California; Appropriations; General Obligation have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on the S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 22, 2017 7
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Monrovia, CA Series 2017 Pension Obligation Bonds Assigned 'AA-' Rating Primary Credit Analyst: Michael Parker, Centennial 303-721-4701; michael.parker@spglobal.com Secondary Contact: Li Yang, San Francisco (1) 415-371-5024; li.yang@spglobal.com CENTENNIAL (S&P Global Ratings) Nov. 22, 2017--S&P Global Ratings assigned its 'AA-' long-term rating to Monrovia, Calif.'s series 2017 pension obligation bonds (POBs). At the same time, S&P Global Ratings affirmed its 'AA-' long-term rating and underlying rating (SPUR) on the city's POBs and lease revenue bonds outstanding. In addition, S&P Global Ratings affirmed its 'AA' issuer credit rating (ICR) on the city. The outlook on all ratings is stable. "The rating on the POBs reflects our view of the city's absolute and unconditional pledge to pay debt service during the life of the bonds," said S&P Global Ratings credit analyst Michael Parker. Our rating is one notch below the city's general creditworthiness, consistent with our application of our non-ad valorem criteria. Proceeds of the series 2017 bonds will be used to fully refund the city's 2010 POBs outstanding, pay off the city's unfunded accrued actuarial liability with the California Public Employees' Retirement System (CalPERS), and pay the costs of issuance. According to officials, the city's current 2017 unfunded accrued liability is about $98 million, and management expects to eliminate all unfunded liabilities with CalPERS following the series 2017 issuance. The 'AA' ICR reflects our opinion of the following credit factors: Very strong economy, with access to a broad and diverse metropolitan statistical area (MSA); Very strong management, with strong financial policies and practices WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 22, 2017 1
Monrovia, CA Series 2017 Pension Obligation Bonds Assigned 'AA-' Rating under our Financial Management Assessment methodology; Strong budgetary performance; Strong budgetary flexibility; Very strong liquidity, combined with access to external liquidity we consider strong; Very weak debt and contingent liability position,; and Strong institutional framework score. The stable outlook reflects our view of the city's very strong and stable economy, with participation in the Los Angeles-Long Beach-Anaheim MSA. The stable outlook also reflects our view of the city's strong management policies and practices and our expectation that the city will maintain at least strong general fund balances. In addition, the stable outlook reflects our anticipation that the city's sales and property tax collections will remain stable, providing support to the city's revenue profile. Finally, although we consider the city's debt profile to be very weak, the stable outlook reflects our view of management's proactive approach to its pension liabilities. Should the city sustain reserves at levels we consider very strong and the city's debt profile moderates, we could raise the ratings. Conversely, if the city depletes its reserves to a level below its fund balance policy-mandated minimum, we could consider lowering the ratings. RELATED RESEARCH 2017 Update Of Institutional Framework For U.S. Local Governments Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on the S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 22, 2017 2
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