FORM GEN.

160
CITY OF LOS ANGELES
INTER-DEPARTMENTAL CORRESPONDENCE

0670-00006-0000

Date: January 25, 2013

To: The Mayor

The Council

From: Miguel A. Santana, City Administrative Office~

Subject: COMMUNICATION WITH CREDIT RATING AGENCIES

At the beginning of January, this Office had rating agency meetings in Los
Angeles as part of the Solid Waste Revenue Bond issuance with all three rating agencies. As
part of that meeting, Fitch Ratings (Fitch) also decided to review the City's General Obligation
(GO) bond rating as well as the Proposition K bond rating. Attached is the list of questions and
answers that this Office discussed with Fitch.

Although Fitch acknowledged that the City had reduced its structural deficit, Fitch
stated that the City still had an imbalance and "further pension and benefit reform and ongoing
position control remain key to achieving out-year budget balancing regardless of the outcome
of the new sales tax measure." Fitch affirmed the City's AA- GO bond rating, the Prop K rating
at AA- and the Solid Waste Revenue bond rating at AA-, with a stable outlook for the three.

On October 9, 2012, Moody's Rating Service (Moody's) placed the City's GO

bond rating on review for upgrade as part of its rating review of 32 California cities. Moody's
upgraded the City's GO bond rating from Aa3 to Aa2 (basically AA- to AA). While Moody's
upgraded this rating one notch, they affirmed existing ratings on the City's Judgment
Obligation Bonds and Lease-backed debt. The Judgment Obligation Bonds and the City's real
property lease-backed debt (MICLA and LACC) are rated A2 (A) and the equipment lease-
backed MICLA debt are rated A3 (A-). The outlook on all of these ratings is now stable.

Moody's states that the GO bond rating upgrade reflects a change in Moody's
estimate of the likelihood of default on a California local government's GO bond. Moody's
widened the "notching" between the city's GO and General Fund-backed obligation ratings,
which reflects the specific challenges that Los Angeles faces in balancing its General Fund
budget. Moody's further states that "Despite significant General Fund budget cuts in recent
years, the City continues to have a substantial structural deficit. This is driven by deferred labor
cost increases, an above average General Fund pension burden compared to most highly
rated cities nationwide, and the relative weakness of the economic recovery compared to
projected expenditure growth. While the local economy is improving, projected expenditure
growth is likely to exceed revenue growth by a substantial margin in fiscal 2014 and 2015.
Closing this gap will likely be difficult, especially if the economy continues its slow expansion,
since the city has already made substantial cuts from its projected baseline budget
expenditures over the last several years."
 -2-

Standard and Poor's Ratings also reaffirmed the Solid Waste Revenue bond
rating at AA- but gave it a negative outlook due to their view of the Solid Waste Program's
projected increase in operating costs and mostly debt-financed large capital improvement
program (CIP).

Attached are the three credit rating reports.

MAS:NRB:09130168.doc

Attachments
FITCH MEETING ON JANUARY 11, 2013

Management and administration:

1. Compliance with city policies:

(a) Does the city meet its policy goal of devoting 1% of general fund revenues for
capital improvement projects in FY 2013? Is the city still considering annual $18 million
transfers from the special parking fund to the general fund to citywide capital
improvement projects?

No, the City has temporarily suspended the one-percent capital improvement
funding policy. Yes, the City is still including the transfer of $18 million in surplus funds
from special parking revenue fund.

(b) Are any additional funds being put into the Rainy Day Reserve Fund in FY 2013?

At this point, no funds have been added to the Budget Stabilization Fund.
However, as stated in the First Financial Status Report, the City will transfer at least $40
million to the fund in Fiscal Year 2012-13.

(c) Is the city complying with its policy of one-time funding for one-time expenditures in
FY 2013?

In Fiscal Year 2012-13, the City Budget was balanced with 63% in on-going
solutions and 37% in one-time solutions. The City has been reducing its reliance on
one-time revenues to fund on-going expenditures, by addressing the Budget shortfall on
a quarterly basis.

(d) Is the city complying with its policy of identifying a revenue source for any new
programs, unbudgeted expenditures, or new positions in FY 2013?

Yes. Any new program, expenditure or position not funded in the Adopted Budget
will be funded through department and non-department savings.

(e) Does the city's direct debt remain under 15% of general fund revenues and non-
voted direct remain under 6% of general fund revenues in FY 2013?

Yes, estimated 2012-13 direct debt is 8.71% and non-voter direct debt is 4.95%

(f) Has the city adopted a full cost-recovery plan for special-funded programs to phase
out general fund subsidies?

As part of the budget process, every year departments are instructed to complete
an annual review of fees for services and submit this analysis along with their proposed
budget to ensure full-cost recovery. Currently, all fee-supported departments are at full-
cost recovery. General Fund appropriations made to these departments are for services

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that cannot be paid for by the special fund (i.e. general benefit services) or to fund
Council and Mayor supported fee waivers and lifeline programs.

Additionally, over the course of the last three budget cycles, the following
departments have been able to achieve a greater share of cost-recovery, though not full
cost recovery due to debt service:

• Convention Center
• El Pueblo
• Cultural Affairs

It is anticipated that tile Library department will achieve full cost recovery as part of
the Fiscal Year 2013-14 budget.

2. In light of the recent press, what will happen to the current CAO when a new mayor is
elected?

The CAO works for both the Mayor and City Council. Per the City Charter, the
Mayor appoints the CAO and the Council confirms. The Mayor may remove a CAO but
this can be appealed to the Council within 10 days. During the 1Oday period, the
Council can reinstate the CAO by a two-thirds vote.

Debt and other long-term liabilities:

3. Have there been any impediments to timely payments of the various lease revenue
bonds rated by Fitch?

No.

4. With regard to the 2012 TRANs, please confirm that the city still expects to make
planned set asides on Feb. 28, Mar. 28, April 25, May 30, and June 27.

Yes.

5. What is the latest projected maximum debt exposure to the city for the new football
stadium and convention center expansion project? What is the current status of this
project?

The City plans to issue $268 million in LACC Lease Revenue Bonds and $123
million in Mello Roos bonds. The Lease Revenue Bonds are secured by revenue from
fair market lease payments from the Event Center and the two parking lots, possessory
interest tax and incremental parking tax from the two parking lots. If the revenue does
not generate sufficient funds to pay debt service, there is a Gap Funding Agreement
secured by a guarantee to make up the difference.

6. In light of recent civilian pension reform, please advise if the city's previous
projections for out year pension contributions have changed: FY 2014 $991 million; FY
2015$1.119 billion; FY 2016$1.211 billion; and FY 2017$1.283 billion.

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 In June 2012, the City projected a contribution of $999 million, $382 million to
LAGERS and $617 million to Pensions for Fiscal Year 2013-14. We are now projecting
a payment of $954 million for 2013-14: LAGERS $374 million; and Pensions $580
million, a $45 million cost avoidance from our June projection. At this time, we do not
have revised estimates for the City's pension contributions for Fiscal Years 2014-15 to
2016-17. The information required to complete these estimates has been requested of
the pension systems and should be available by next month.

Economy and tax base:

7. Did taxable retail sales increase in FYs 2012 and 2013 as predicted and, if so, by
what amounts?

Yes, the taxable retail sales increased in Fiscal Year 2011-12 by 9% ($323.2
million in sales tax receipts), and the 2012-13 Adopted Budget projects a Sales Tax
estimate of 4% growth or $332.9 million in sales tax receipts. Receipts through
November are on track with the budget projections.

8. Please confirm the TAV and MV figures for FY 2013.

Based on the Los Angeles County Assessor's 2012 Annual Report, the total
2012 Assessed Valuation in the City of Los Angeles is $442.3 billion (an increase of
2.45% from 2011 ). The total Taxable Assessed Value is $416.5 billion (an increase of
2.48% from 2011 ). The Market Value is not reported by the County Assessor as taxes
are not adjusted with annual property appreciation. The impact of Market Value to
property tax revenue is seen with new construction, when a property is sold, or when it
is reassessed for depreciation.

As an indicator of home price stabilization and subsequent incremental growth,

the Case-Shiller Index for the Los Angeles-Long Beach-Santa Ana MSA reports a 6.2%
year over year increase in home prices for October 2012.

9. What is happening to the city's residential and industrial/commercial property

bases? What are the positive and negative indicators that the city is seeing?

The City does not track AV by land use.

A positive residential indicator is the 18% increase in 2012 building permit valuations
from the prior year. Please see attached for figures.

Financial operations:

10. General fund revenues:

(a) Are general fund revenues perf?rming on target through December 2012?

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 Yes. General Fund revenues are ahead of plan, based on receipts through
December.

(b) What is the current status of negotiations with the state department of finance over
former CRA/LA revenues?

We are on target to receive a total of $48 million, as indicated in the 2012-13

Adopted Budget. The City has received $26.7 million as of January 2013. We are
expecting another $12.3 million this month and the final payment by June 2013.

(c) What is the current status of negotiations with the state department of finance over
fire emergency medical reimbursements?

The receipt of $23.5 million in revenue this fiscal year from AB 678 is less certain
compared to earlier projections yet the City remains optimistic that funds will be
received this fiscal year. Although the State has allocated $80 million for the first year of
the reimbursement program, the California Department of Health Care Services has not
received final approval from the U.S. Department of Health and Human Services,
Centers for Medicare and Medicaid Services (CMMS) on the cost allocation
methodology detailed in AB 678. Since the State Plan Amendment (SPA), including cost
allocation methodologies and reports, has not yet been approved, the City will continue
to closely monitor progress through the end of February 2013 to ensure approval of the
SPA by CMMS. If the SPA is not approved before March 2013, then the likelihood of
receiving funds this fiscal year would be low. SPA approval after April 2013 would most
likely result in receipt of AB 678 funds early next fiscal year.

(d) Please provide an update on the city's proposed changes to its business tax.

The City is considering both minor and major changes to the assessment of the
business tax. This item will likely be considered by Council within the next 60 to 90
days, although an actual decision is not expected until after the March 51h election.

The Council will be considering the Jobs and Business Development Committee
Report that recommends large scale changes to the business tax system to be phased
in upon meeting specified revenue criteria. In June 2012, the original proposal to
eliminate the business tax over five years was extended to fifteen years to be
accomplished in 3 phases. Phase 1 would reduce the rates for three of the nine
business categories, currently taxed between 0.315 and 0.507 percent, down to 0.255
percent over five years (20% a year) with an annual review of the revenue impact. The
full impact of Phase 1 would be approximately $127 million. Assuming revenue
neutrality at the conclusion of the first five years, Phase 2 would be implemented.

Other proposals adopted or being considered include:

• In August 2012, the City approved the exemption of all gross receipts from the
retail sales of new passenger motor vehicles by a new car dealerships from the
business tax effective January 1, 2013, through the 2020 tax year. The impact of
the change has not been estimated.

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 • In November 2012, the City approved extending the three-year new business tax
exemption by another three years for new businesses formed before December
31, 2015. This exemption is already in place so the impact is the loss of $16.8 of
currently unrealized revenue.

• The Jobs and Business Development Committee is considering action to

implement a cap on business taxes for the broadcasting industry. No estimated
impact at this time.

• The Jobs and Business Development Committee is also considering action to

permanently implement a lower business tax rate for internet-based businesses.
A temporary tax rate for these businesses is currently in place. No estimated
impact at this time.

(e) What is the budgeted transfer from LADWP to the general fund in FY 2013?

The budgeted transfer is $249.1 million. The actual transfer will be $246.5 million,
based on final net receipts.

(f) What progress has the city made in achieving fee increases since Fitch's last review
in June 2012?

Fee increases for parking fines, zoo admission, engineering services, fire industrial
building inspection have been implemented. The Planning Department's zoning code
rewrite fee ordinance has been approved and will be implemented in January. The
status of the Fire plan review fee and Planning's case management fee will be updated
in the next Financial Status Report.

(g) Are there any new revenue growth initiatives underway?

Yes, the City will present a sales tax measure for voter approval on the March 5,
2013 ballot to implement a 0.5% tax on sales. If approved, revenue from sales tax is
expected to increase $211 million annually. However, due to the timing of
implementation, only $105 million is estimated to be realized in Fiscal Year 2013-14.

11. In his Oct. 22, 2012 statement on the city's financial status, the Mayor laid out a list
of potential actions to eliminate the citls structural deficit. Please comment on progress
made on each of these proposals:

· Reducing scheduled FYs 2013 and 2014 pay increases.

This proposal is being considered by the Executive Employee Relations

Committee (EERC).

· Reducing civilian starting base salaries, expanding incentive-based pay,

eliminating/modifying automatic step increases, providing non-pensionable
compensation, and eliminating pay for non-federal city holidays.

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 These issues will be addressed as individual Memoranda of
Understanding (MOUs) are open for negotiations. There are nine MOU's
that expire on June 30, 2013. The EERC will give bargaining instructions
to the CAO.

· Reducing civilian-injury-on-duty pay

This is a long-term project.

· Reforming civil service layoff procedures and hiring practices.

This is a long term, project being addressed by the Personnel

Department and requires a Charter Amendment to be approved by the
voters.

· Changing automatic OPEB increases for existing retirees.

This is currently being considered.

· Modifying the deferred retirement option plan and reducing the 5%

return.

This is currently being studied.

· Using more part-time employ

The City has been increasing the use of part-time employees such
as part-time traffic officers to increase revenue and clerks. The City will
continue to seek opportunities to increase part-time employees in the
2013-14 Budget.

· Undertaking further departmental consolidations.

There have been further departmental consolidations: the Office of

Public Security to the Police Department; and, Human Resources
employees into the Personnel Department.

The following are being studied: the Department of Economic

Development with parts of the Community Development Department.

. Expediting a third party review of Fire Department deployment.

The Request for Proposal (RFP) has been issued and proposals
are due in January 2013.

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 · Contracting out more.

Currently, the City has released a RFP for the private management
and operations of the Convention Center. In addition, a RFP has been
issued for the management of six Animal Shelters.

· Bifurcating the city attorney's civil and criminal divisions so that the city
can appoint legal counsel on all civil matters.

This requires a Charter Amendment to be approved by the voters.

· Public/private partnerships. (Please specifically comment on the stalled

zoo negotiations, and the RFPs for six animal shelters and the convention
center.)

Zoo - The City is in the process of reviewing current agreements

between GLAZA and the Zoo to explore additional opportunities for
partnership.

LACC - Proposal responding to RFP for private management due on

February 8.

Animal Shelters - Responses were due on April 2, 2012. The City

received one proposal for the West LA Care Center. The CAO and
Animal Services Department are currently working with the proposer to
determine if it is viable for the proposer to provide animal services or
programs at the South LA Care Center versus the West LA Care
Center.

· Using the new economic development agency to stimulate economic

growth, create jobs, and grow the city's tax base.

See the attached report. This report can also be obtain at

http://cao.lacity.org/OEA/index.htm

This will be heard by Council this month.

12. How is the $16.6 million forecast budget deficit for FY 2013 being addressed? What
is the current projected general fund deficit in FY 2013?

We expect to report in the next Financial Status Report (FSR) that the projected
year-end deficit of $16.6 million is now closer to $10 million as a result of actions taken
in the 1st FSR and revised department expenditure projections. Additionally, we will be
making recommendations in the report to fully address this remaining deficit by
transferring funds set aside in the City's Unappropriated Balance. Please note this is not
the Reserve Fund. The $10 million projected year-end deficit represents 0.22% of the
City's $4.6 billion General Fund.

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13. What is happening with the 209 positions that were only funded for the first six
months of FY 2013? Please explain the labor and financial ramifications (in FY 2013
and beyond) of any actions being taken.

In lieu of the layoff of filled positions by December 31, 2012, Council authorized
departments to continue temporary employment of individuals through substitute
authorities. A total of 105 positions have been vacated and/or placed into vacant
authorities. The remaining 104 positions have been placed into substitute authorities,
effective January 1, 2013 through June 30, 2013. Nineteen of the 104 positions are
funded through vacancies. The remaining 85 positions remain a liability for the
remainder of 2012-13. The annual cost of the 85 positions is approximately $4.8 million
or $2.4 million for January through June. The City Council identified funds within the
Unemployment Insurance Account in the Human Resources Benefits Fund and
discretionary Council-controlled AB 1290 funds to cover the $2.4 million in additional
salary obligations. At this time, there is no impact in 2013-14 and beyond, as the
authority for these positions expire on June 30, 2013.

14. What is the status of the 50 positions in the city attorney's office that are slated for
elimination given the LA City Attorneys Association's opposition to furloughs?

To date, these positions have not been laid off. Thus, the furloughs will continue.

15. What are the current dollar amounts in each of the emergency reserve and the
contingency reserve? What is their cumulative percentage of general fund revenues?

As of the end of December, the Reserve Fund totals $244.8 million. Emergency
and Contingency Reserves of $125.1 million and $119.7 million, respectively, equivalent
to 5.38 percent of Adopted General Fund receipts.

16. What is the latest calculation of the city's exposure to litigation liabilities? Any status
change with regard to the utility users' tax cases?

Potential liability for Fiscal Year 2012-13 is $48.3 million. The City has approved
payment of $22.4 million through November 2012 from the Liability Claims Budget.
Potential total liability is $2.14 billion, which includes possible large settlements for
Ardon and ADA-related lawsuits.

See attached for all litigation.

A number of claims have been filed in connection with the City's utility users' tax
on telephone services, which was amended in 2008 to clarify such claims (see
"MAJOR GENERAL FUND REVENUE SOURCES - Utility Users' Taxes" herein.).
Ardon v. City of Los Angeles is a class action challenging the validity of the City's
telephone users' tax based on a federal government interpretation of the federal excise
tax. On the issues related to class actions, the appellate court held that class actions
against local taxes are not permitted under State law. The plaintiffs appealed to the
California Supreme Court, which reversed the appellate court decision on July 25, 2011.
The Supreme Court concluded that class claims for tax refunds against a local

8
governmental entity are permissible, and remanded the matter back to the trial court.
The class has not yet been certified. If the class is certified and plaintiffs prevail on the
merits, City liability could be up to $750 million. However, the City has procedural and
substantive defenses that make it likely that even if plaintiffs prevail, the City's ultimate
liability may be significantly less.
In Nextel Boost of California LLC v. City of Los Angeles, the plaintiff, a provider of
prepaid wireless services, seeks a refund of $6.3 million, which it alleges it overpaid for
the period February 2007 through February 2008 in connection with the telephone
users' tax. The matter has been stayed pending resolution of the Ardon matter.
In J2 Global Communications, Inc. v. City of Los Angeles, the plaintiff seeks a
$5.5 million refund for telephone users' taxes incurred for the years 2005, 2006 and
2007. Plaintiffs argue that the City's amendment to the Municipal Code was improper
prior to voter approval in 2008. The plaintiffs in the J2 Global Communications, Inc.
case filed a second lawsuit for $175,000 in damages in which they claim that the City's
utility users tax as amended does not apply to telecommunications services it
purchased in connection with its service of delivering faxes to customers' email
accounts. The City prevailed on its motion for summary judgment and the plaintiff
recovered nothing, although the plaintiff intends to appeal.
In Sprint Telephone PCS, L.P. v. City of Los Angeles, the plaintiff seeks a refund
in the amount of $8,320,000 for overpaid telephone users tax for the period January 1,
1998 through December 1, 2003 (the "Refund Period"). Plaintiff argues that it was not
subject to the federal excise tax during the Refund Period.
In TracFone Wireless, Inc. v. City of Los Angeles, the plaintiff, a national vendor
of prepaid telephone cards, filed a complaint in December 2006, seeking a refund of
amounts remitted to the City. The trial court and Court of Appeal have issued various
decisions on various procedural matters. Sprint Communications recently filed a lawsuit
seeking a $2.5 million refund related to the telephone users' tax.
The Nextel Boost, TracFone, Ardon, the first J2 Global case and the two Sprint
cases were consolidated and the trial court placed a stay on all but Ardon. Sprint
Communications filed a lawsuit for $2.5 million and T-Mobile filed a claim for $1.4 million
related to the utility users' tax.

labor:

17. (a) What is the latest status of the labor agreements for the Engineers and
Architects Association (EAA) and three police bargaining units which had not reached
settlements at the time of Fitch's last review (June 2012)?

New contract negotiations have started. EAA agreed to MOUs for July 1, 2011
through July 1, 2013: 2.5% COLA 7/1/12 and 1.5% COLA 7/1/13 in exchange for 4%
employee contribution to retiree health effective 7/1/12 and dismissal of lawsuits,
grievances and unfairs.

Final agreement approved and ratified. MOU ·38 (Port Police) agreed to MOU for
July 1, 2009 through June 30, 2014: 2% COLA 7/1/12, 2% COLA 1/1/13, 1% COLA

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7/1/13, 1% COLA 11/1/13, 1% COLA 3/1/14 in exchange for 4% retiree health and 5%
contribution to active health premium.

MOU 27 (Port Police Command) and MOU 39 (Airport Supervisory Peace

Officers) have reached tentative agreement with terms through June 30, 2013, but the
MOUs have not been approved by Council.

MOU 30 (Airport Police) is currently in impasse proceedings.

(b) What is the latest status of the Los Angeles City Attorneys Association lawsuit
against the city over the medical subsidy freeze?

The City is currently in the discovery phase of this litigation.

(c) What is the latest status of the EAA's lawsuit against the city over the use of
furloughs?

This case was dismissed with prejudice in June 2012.

(d) Please update us on the overtime bank for police officers. The Controller's October
2012 report indicates that the accrued overtime has increased in both numbers (now at
2.2 million overtime hours, up from 1.4 million) and value (now at $103.1 million, up
from $80 million) since our June 2012 review. How is the city handling this rapidly
growing liability?

The use of Police Overtime has been reduced by 50% since Fiscal Year 2008-
09. The number of banked hours and the corresponding dollar value are going up.
However, LAPD is managing the time by requiring time off to the greatest extent
possible. The balances will be paid out as officers retire over a 20-year period.
Continuation of this program will be considered in the new MOU negotiations.

LA Landscaping and Lighting District 96-1:

18. Please provide the total annual assessment revenues and total annual interest
earnings (separately) for FY 2012.

The actual revenue collections for Fiscal Year 2011-12 were $24,591,329.83. The
annual interest earnings for Fiscal Year 2011-12 were $1 ,434,932.44.

19. How many appeals were there in FY 2012, and how many are projected for FY
2013?

There were 22 appeals in Fiscal Year 2011-12 and 20 appeals are projected for
Fiscal Year 2012-13.

20. Please confirm that no further debt issuance is planned.

No future debt issuances are planned at this time.

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21. Please provide:

(a) the latest numbers of completed, active, and planned projects (adding up to a total
of 183 ballot measure projects):

The City is required to complete 183 specified projects over the 30 year life of the
program. As of Fiscal Year 2012-13, we have funded 138 specified projects. As of the
last count provided by the Bureau of Engineering in September 2012, there are 110
active projects, with a breakdown as follows:

Developrnenf Phase Number of Projects

Pre-design 26
Property Acguisitions 5
Design 28
Bid & Award 6
Construction 29
Post Construction 16
Total 110

The City is in the process of preparing updated cost estimates that will serve as the
basis for a long-term project delivery plan for the 45 remaining specified projects. With
14 years remaining in the program to accomplish the remaining program requirements,
it is generally viewed as premature to declare projects infeasible at this stage of the
program. As such, we are not pursuing reprogramming at this time.

(b) The latest number of competitive grant projects initiated as of Fiscal Year 2013
under eight (?) competitive award cycles.

Under the terms of the Proposition K Ballot Measure the City is required to award
$143.65 in competitive funds over the 30 year life of the program. To date,
approximately $106.69 million in Proposition K funds have been awarded to 210
competitive projects through seven award cycles.

An additional $26.6 million in Proposition K Eighth Cycle competitive funds are

pending award. These monies will be programmed over a three-year period that
includes Fiscal Years 2013-14 through 2015-16. The initial competitive funding
recommendations will be submitted to Council in April 2013 and with final authorization
scheduled to occur in June 2013.

Inclusive of the Eighth Cycle funds pending award, the cumulative award of
Proposition K funds will totals $133.3 million. As such, the City will satisfy the
competitive funding limit established in the Ballot Measure through the Ninth Cycle that
will cover FYs 2016-17 through 2018-19.

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22. For the Park Assessment Fund (Proposition K), please provide the audited FY 2011
and draft FY 2012 balance sheets and income statements.

Attached is the audited statement for Fiscal Year 2010-11. The audited
statements for Fiscal Year 2011-12 will be available in March. The Controller does not
distribute unaudited statements.

23. Are there any issues related to the LA Landscaping and Lighting District 96-1 and
its debt about which we should be aware?

None.

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 FitchRatings
._.;.

FITCH RATES LOS ANGELES, CA'S SOLID WASTE BONDS

'AA-'; OUTLOOK STABLE

Fitch Ratings-San Francisco-24 January 2013: Fitch Ratings assigns an 'AA-' rating to the following
. ~os Angeles (city), California bonds:

--$71,735,000 solid waste resources revenue bonds, series 2013-A;

--$80,665,000 solid waste resources revenue refunding bonds, series 2013-B.

Both series are expected to sell competitively on Feb. 5, 2013. The series 2013-A bonds will fund
the purchase of vehicles and equipment, improvements to Bureau of Sanitation facilities, and a
reserve fund deposit. The series 2013-B bonds will fully refund the parity sanitation equipment
charge revenue bonds, series 2003-A, 2003-B, and 2004-A, and a reserve fund deposit.

Fitch also affirms the following ratings:

--$255.1 million Los Angeles sanitation equipment charge revenue bonds, series 2003-A, 2003-B,
2004-A, and 2005-A, and solid waste resources revenue bonds, series 2006-A, 2009-A, and 2009-B
at 'AA-';
--$1.2 billion in outstanding Los Angeles general obligation (GO) bonds at 'AA-';
--$22.2 million City of Los Angeles Landscaping and Lighting District 96-1 assessment bonds,
series 2000, 2001, and 2002 at 'AA-'. ··

The Rating Outlook is Stable.

SECURITY
' ..

The sanitation equipment charge and solid waste resources revenue bonds are secured by a first lien
9.11, pledged solid waste resources fee revenues, including penalties and interest, net of
?dm1nistrative costs, and by extra capacity fee revenues.

Th,e GO bonds are secured by ad valorem property taxes levied without limitation on rate or amount
~pon taxable properties within the city.

~h,~ Landscaping and Lighting District 96-1 assessment bonds are secured by a first lien on 82% of
parcel tax assessment revenues and 100% of delinquent penalties and interest.
. '
SENSITIVITYIRA TING DRIVERS
' ~

qiJY'S INHERENT ECONOMIC IMPORTANCE: The city is the commercial and cultural center
of. a very large, diverse economy that is starting to benefit from revenue and property market
i~provements, despite an unemployment rate which .remains very high.

SOLID WASTE DEBT COVERAGE STRONG ON GROSS BASIS: The predictable revenue
stream generated by property-based fees set to recover full costs and a huge customer base provides
~qFd waste resources revenue bonds with very strong gross debt service coverage. However, some
draw down of the solid waste fund balance is expected through fiscal 2019 when the next fee
i~creases are planned.

ONGOING STRUCTURAL IMBALANCE: The city's four-year financial projections indicate a

significant structural imbalance despite cost control measures which have reduced, but not closed,
th(i gap. While the structural imbalance will be difficult to resolve without significant economic
improvement, a new sales tax measure going before the voters in March could facilitate future
deficit reduction.
·'':'/,
i 1'

FURTHER BENEFIT REFORM NECESSARY: Building on pension and benefit reforms already
implemented, further pension and benefit reform and ongoing position control remain key to
achieving out-year budget balancing regardless of the outcome of the new sales tax measure.

CHALLENGING POLITICAL ENVIRONMENT: The city's challenging political and labor

relations environment can hinder its ability to respond swiftly to budgetary pressures.
Improvements in some revenue streams and slightly improved reserve levels could reduce labor's
willingness to make further concessions.

WFFORDABLE DEBT: Fitch Ratings expects the city's debt ratios to remain affordable but notes
the increasing pension and OPEB costs resulting from investment losses.
ASSESSMENT BONDS PERFORMING WELL: The City of Los Angeles Landscaping and
Dighting District 96-1 assessment bonds all continue to perform well, with strong debt service
coverage even under severe Fitch stress tests.

CREDIT PROFILE

Los Angeles is an important economy and by virtue .of its size and diversity is well positioned to
benefit from the incipient national economic recovery; Substantial recessionary pressures caused
sharp tax revenue declines in the recent past. However, the city is now experiencing revenue and
property base growth, which is expected to continue into fiscal2014. Fiscal2012 sales tax revenues
i11c:t;eased 9% year-over-year and are budgeted to grow a further 4% in fiscal 2013. Following two
x~ars of slight declines, taxable assessed valuation (t~y) increased by 1.3% in fiscal 2012 and
2.5% in fiscal2013.
l , ', > : ~ ,
,. I

'!he unemployment rate remains stubbornly high at 11.4% in October 2012, an improvement over a
ye1\:t; prior (13.3%) and the July 2010 peak of 14.7%. However, this improvement resulted from
i~.bo.r force declines rather than employment gains.
'''I''·>
\ • ~ • !

wh.'ile the city has taken significant actions in response to economic contraction and its
personnel-related expenditure pressures, the time taken to achieve the necessary political consensus,
;:\~'well as the longer-term budget initiatives still in development, indicates how politically difficult
H -is for the city to respond nimbly. Rebuilding the· general fund reserves will need ongoing
concerted action from all of the stakeholders.
. ..
1.; 1 : ] : ' , :•, L

SOLID WASTE RESOURCES REVENUE BONDS CAPPED AT GO RATING

L ( ·, '. : ,

Fitch caps the sanitation equipment charge and solid waste resources revenue bonds' rating at the
citY's unlimited tax GO rating. Although the bonds have a gross revenue pledge, Fitch regards
~y~tem operations as important to the bonds' credit ,quality. While the solid waste system is
~urre,ntly demonstrating self-support with only minimal general fund contributions for lifeline
program and city department costs, more significant subsidization has been needed in the recent
~-~~t. Projections indicate the system will be self-s'l}pporting through fiscal 2019, when the next
solid waste fee increase is planned, but with declining margins. In addition, since pledged revenues
~re ~erived from a property- rather than user-based. fee, Fitch considers that they could be subject to
~i~iuption or diversion in the unlikely event of a city bankruptcy filing.

The bonds benefit from strong gross debt service coverage provided by a predictable revenue
S~i:eam from flat fees charged to a huge customer base (approximately 740,000 households). By
f~~; the city is the sole solid waste collector for all of the city's single family residences and
multiple units up to four residences, eliminating service provider competition. Since the city
9P~iates only a collection system and no landfills, operl;ltional risks are also limited.

Stiqng gross debt service coverage levels reflect fee rates which are designed to recover costs fully.
}.\:Th~le there has been historical commitment from elected officials to implement rate increases to
f!t~~t the program's operational costs, there is political sensitivity about increasing rates again
before fiscal 2019 due to scheduled rate increases by the city's utilities over the next six years.
11:·'-
Although there is an additional bonds test, there is no rate covenant requiring maintenance of a
defined operational margin.

CITY'S OVERALL FINANCIAL OPERATIONS STILL UNDER PRESSURE

Despite significant budget gaps, fiscal 2011 ended with a strengthened total general fund balance of
$520J million (11.8% of spending), up 19% from the year prior. The $493.8 million unrestricted
g~neral fund balance (the sum of committed, assigned, and unassigned fund balances under GASB
~4)equaled 11.2% of spending. Fiscal2011 's net general fund surplus of $83.6 million was the first
sprplus in some years.

Infisca12012, the city had to close significant general fund budget gaps (an initial $336.3 million
gap, a $72 million mid-year gap, and an $18.4 million year-end gap). To do so, the city again relied
on a mixture of recurring and non-recurring solutions. Audited fiscal 2012 year-end results are due
io be published in March 2013. In fiscal 2013 1 the city closed an initial budget gap of $238.3
ill'iliion with approximately 63% recurring solutions and 37% non-recurring solutions, and it
6\:irrently faces a mid-year budget gap of approximately $10 million. Nevertheless, the city recently
acnfeved its minimum combined emergency and contingency reserve goal of 5% of general fund
~6venues.
:, j··

'the city projects similarly sized annual budget deficits (ranging between $216-$327 million) for
fi~cal years 2014-2017, indicating the ongoing nature of the city's remaining structural deficit, even
#t~r the cost control actions taken to date. While the city is starting to benefit from increased
f~xenues and property market recovery, Fitch cons1ders solving such budget deficits in the future
will only grow more difficult. The city has already made significant personnel cuts including
layoffs, increased employee contributions to reduced: benefits, and reduced new hire salaries for
sworn personnel. It retains a range of budget options to achieve medium- to long-term structural
balance, but implementing them will require. tough political decisions, further labor concessions
(4ifficult in light of those already achieved), and new revenues.
•f , .~- I

On March 5, voters will consider a sales tax rate increase that, if approved, would generate
a~4itional general fund revenues of approximately $105 million in fiscal 2013 and $211 million per
year thereafter. If approved by voters, Fitch would regard the resulting general fund revenue
increase as a credit positive so long as it results, as, the city intends, in reduction of the city's
shuctural budget imbalance. Fitch anticipates, however, that there will be considerable pressure to
4,se at least some of these additional general fund revenues for service cut restoration and deferred
i'n:ftastructure needs.
;') l'

'!:~~.city has a rapidly growing bank for overtime accrued by police officers. The accrued hours are
cunently
J.
il.,. . .
valued at $103 million. While the city intend.
. '·
s to reduce this liability through managed
l~ave, those hours which are not used for leave will have to be paid out when individual police
l. '" 1

officers resign or retire. Management regards providing the overtime banlc as preferable to funding
l}.~gher overtime usage. Fitch notes that this approach risks creating significant future financial
~re~sure since the stored time will become more expensive given future agreed wage increases.
;L l c;:
The city also has large potential general fund liabilities related to litigation, in particular
~pp.roximately $777 million in claims connected to the city's former utility users' tax on telephone
sl(rv,ices. Significant settlements would likely be funded through judgment bonds which would not
$igrtificantly increase the city's moderately high debt burden, but would put some additional strain
?n. qngoing resources.
iANDSCAPING & LIGHTING DISTRICT BONDS PERFORMING WELL

The City of Los Angeles Landscaping and Lighting ,District 96-1 assessment bonds continue to
p~rform well. Their 'AA-' rating reflects debt service coverage levels which remain strong even
-4J;l4er harsh stress scenarios.
It,••.

':• I'

The .assessment burden created by these bonds is very low for the large and diverse taxpayer base.
Eipenditures are monitored for their compliance with the highly prescribed use of assessment
!d!

i.: ·.·.
r~venues. There is ongoing community involvement in both the individual projects and program
6versight. While the initial slim voter approval margin, along with the assessments' limited purpose,
could have resulted in appeals and higher delinquency'rates, to date appeals have been minimal and
collection of the assessment benefits from being part of the city's standard ad valorem property tax
collections.

While the district is separately named from the city of Los Angeles, the two entities share
governance and staffing. Therefore, Fitch caps the district's assessment bond rating at the city of
Lgs Angeles' unlimited general obligation rating.

AFFORDABLE DEBT BURDEN BUT SIGNIFICANT PENSION & OPEB LIABILITIES

Nttt overall debt is moderately high at $4,695 per capita and 4.1% of market valuation.
Amortization of direct debt is above-average at approximately 65% in 10 years. Fitch expects that
the overall debt burden will remain affordable.

For fiscal 2011, the city reported that its pension systems, the Los Angeles City Employees
Retirement System (LACERS) and the Fire and Police Pension Plan (FPPP), were funded at 72.4%
and 86.3% respectively. Using Fitch's more conservative 7% discount rate, funding levels drop
lightly to 70.1% for LACERS and a still well-funded 82.5% for FPPP. The city's updated LACERS'
funded ratio for fiscal 2012 has dropped to 69% as its deferred net investment return losses have
grown by 75%. The city's $577.4 million in fiscal 2011 LACERS and FPPP contributions for
g_e,n_eral fund departments represented 18.5% of general fund spending. Fitch anticipates that
P,~rc:;entage will continue to remain high for some time despite recent changes to both sworn and
e!xiJian pension systems.
·.>. ll·' :
T~tt city's annual OPEB contributions for general fund departments ($773.5 million or 19.8% of
fiscal 2011 general fund spending) are projected to grow between $72-$151 million per year
th~;ough fiscal 2017. LACERS' OPEB funding deteriorated to 72% in fiscal 2012, down from 79%
'i\' li

in.flscal 2011, although this level of prefunding remains notably high for a municipal OPEB
~x~tem. ·

ltl: ·fiscal 2011, combined debt service payments, annually required pension contributions, and
di>EB pay-as-you-go costs were a moderate 19.2% of total governmental fund expenditures and
transfers out (net of capital fund expenditures).
' ~ • c

P~imary Analyst
~Jan Gibson
Director
+l~415-732-7577
_Ritch, Inc.
~·so
.:.·,'·'
California Street, 4th Floor, San Francisco, CA 94'1 08

~~~ondary Analyst
S((ott Monroe
Dir~ctor
+1-415-732-5618
t:.
I,

:,
C,<;>punittee
l.;., ' .
Chairperson
Amy
.d
Laskey J

Managing Director
+'1~212-908-0568
fn
M~dia Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email:
Y:li,~abeth.fogerty@fitchratings.com.

A(lqitjonal information is available at 'www.fitchratings.com'. The ratings above were solicited by,
'• '; ·'

~ I I '
or .on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the
tatings.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this
action was additionally informed by information from Creditscope, University Financial Associates,
S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, and National Association of
Realtors.
.'
'i'

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
~~·u.s. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012) .
....·.-;,
Applicable Criteria and Related Research:
Tax~Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
lJ.S.. Local Government Tax-Supported Rating Criteria
http://www .fitchratings.com/creditdesk/reports/repQrt_frame.cfm?rpt_id=685 314

ALL. FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND

DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY
FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COMIUNDERSTANDINGCREDITRATINGS. IN ADDITION,
MTING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE
ON. THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED
RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT
.A,LL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF
IJ:\ltEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES
AND
;J ..,.;_,
PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION
OF THIS SITE.

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MoooY's
INVESTORS SERVICE

Affects approximately $3.3 billion of outstanding debt

LOS ANGELES (CITY OF) CA

Cities (including Towns, Villages and Townships)
CA
Opinion

NEW YORK, January 23, 2013 --l'vbody's has upgraded the City of Los Angeles' general obligation bond rating to
Aa2 from Aa3. We had placed the city's GO rating on review for upgrade on October 9, 2012, as part of our review
of 32 California cities' ratings announced at that time and detailed in our special comment "Key Drivers of
California Cities' Rating Actions and Reviews". Today's rating action concludes that review of the City of Los
Angeles' ratings. While we have upgraded the city's GO rating one notch, we have affirmed our existing ratings on
the city's unsecured, General Fund-backed obligations, including its various issues of Judgment Obligation Bonds,
Lease Revenue Bonds (LRBs) and Certificates of Participation (COPs). The Judgment Obligation Bonds and the
city's real property lease-backed LRBs and COPs are rated A2. The city's equipment lease-backed LRBs and
COPs are rated A3. Our outlook on all of these ratings is now stable.

RATINGS RATIONALE

The GO bond rating upgrade reflects a change in l'vbody's estimate of the likelihood of default on a California local
government's GO bond relative to obligations paid from the city's general resources as well as factors specific to
the City of Los Angeles' tax base and GO bond structure. Despite the last few years' extreme housing market
volatility, the assessed valuation of Los Angeles' property tax base has proven quite stable and is now on an
upward track. Assessed valuation growth in the past two fiscal years has more than compensated for the slight
declines that occurred in the prior two years. The city's direct GO debt burden on this property tax base is low, and
the debt is structured conservatively with 20-year final maturities and level annual retirement of principle. Absent
additional borrowing, the tax rate to support the city's GO bonds would decline over time even in the absence of
additional assessed valuation growth.

The affirmation of the city's other ratings, and the resulting widened "notching" between the city's GO and General
Fund-backed obligation ratings, reflects both the difficult operating environment for California cities generally and
the specific challenges that Los Angeles faces in balancing its General Fund budget. Despite significant General
Fund budget cuts in recent years, the city continues to have a substantial structural deficit. This is driven by
deferred labor cost increases, an above average General Fund pension burden compared to most highly rated
cities nationwide, and the relative weakness of the economic recovery compared to projected expenditure growth.
While the local economy is improving, projected expenditure growth is likely to exceed revenue growth by a
substantial margin in fiscal2014 and 2015. Closing this gap will likely be difficult, especially if the economy
continues its slow expansion, since the city has already made substantial cuts from its projected baseline budget
expenditures over the last several years.

STRENGTHS

--Large, highly diverse, and expanding economy, albeit slowly

--Highly diverse general revenue base, also slowly expanding with the economy

--Very stable property tax base, despite sharp swings in real estate market values

--Strong mid-year General Fund budget oversight and sound balance sheet for a large US city

--Well-structured, rapidly retired general obligation debt, and a modest direct debt burden
CHALLENGES:

--1\ibdest General Fund reserves and continuing cost pressures, particularly for pension and health care benefits

--Very little revenue raising flexibility

--High overall debt burden on city residents and likely limited willingness to approve additional taxes

--City residents' modest socioeconomic profile

--Inherent complexity of managing a city of Los Angeles' size and diversity

DETAILED CREDIT DISCUSSION

TheAa2 rating on the city's general obligation bonds primarily reflects the city's exceptionally large, highly diverse,
and now modestly growing property tax base. We believe this property tax base is likely to continue growing in the
near term, as housing prices have sharply rebounded over the past year and California's property tax assessment
system virtually assures assessed valuation growth in older, built-out communities as long as there is continued
property ownership turnover.

The city continues to have near-term General Fund financial challenges, however, which much more directly affect
its judgment obligation bonds and lease obligations. These are paid from the city's general resources and do not
benefit from any dedicated taxing power like the general obligation bonds. General obligation bond debt service is
derived from a dedicated, voter-approved property tax, which is unlimited as to rate and amount, and restricted for
use to the related bonds' debt service. The judgment obligation bonds are unconditional city obligations, though
without any specifically pledged revenue source, and the leases are conditional obligations, though the condition is
simply the city's continued use and/or occupancy of the leased asset. With continued use/occupancy, the city is
legally obligated to budget and appropriate the lease payments for the full term of the lease.

EXCEPTIONALLY LARGE, HIGHLY DIVERSE PROPERTY TAX BASE EXPERIENCING rvlODEST ASSESSED
VALUATION GROWTH; LOW DIRECT DEBT BURDEN

Los Angeles has approximately $1.3 billion in general obligation bonds outstanding, representing just 0.3% of its
fiscal2013 assessed valuation. The city has a substantially larger amount of capital leases outstanding- more
than $1.9 billion. Combined, these GOs and leases represent just 0.9% of the city's 2013 assessed valuation,
which is well below average for a large Aa2 rated city.

Taxpayer diversity is very high, and the city's total assessed valuation as of fiscal2013 is over $416 billion, having
increased by about 3.8% over the last two years after falling just 2.4% in the prior two.

The constraints imposed on assessed valuation growth by Proposition 13 in the late 1970s have largely
disconnected assessed valuations from market values in older, built-out cities like Los Angeles. Even if the
economy were to continue its sluggish growth trajectory, we would expect the city's total assessed valuation to
remain quite stable.

General obligation debt service, which is directly derived from this tax base, is only about $164 million in FY 2013
and it declines annually thereafter. By 2023, absent additional issuance, it would fall to only $78 million. The city
currently only has about $61 million of unused general obligation bonding authority, so near-term additional
issuance will be very modest.

The city's total property tax collections are generally over 100% of the levy, reflecting in part the collection of
penalties and interest on prior years' delinquencies.

The city is considering putting a $3.0 billion general obligation bond measure before its voters in an upcoming
election. While this would represent a massive increase in the city's authorized GO borrowing, the implications for
the city's GO rating would be evaluated when and if the bond passes and depending on how the bonds are
structured when sold.

LEASE PAYMENTS REIIMIN rvlODERATE RELATIVE TO GENERAL FUND REVENUES

The city's peak lease payments, combined with a very small judgment obligation payment, amount to just slightly
more than $213 million in FY 2014, or only about 4.4% of the city's projected General Fund expenditures. Absent
any additional issuance, scheduled lease payments fall by more than 50% over the next ten years to just $88.4
million in 2024.

GENERAL FUND FINANCIAL PERFORi\1\A.NCE HAS STABILIZED BUT CONTINUING COST PRESSURES WILL
CHALLENGE THE CITY

After five consecutive years of General Fund operating deficits, the city posted a surplus in fiscal2011 (the last
year for which audited financial data is available) and fiscal2012 should, based on reported budget performance,
result in balanced or slightly positive GAAP-basis results. The city's fiscal2013 cash-basis budget was balanced
without a reserve fund draw and the city's first interim financial report for fiscal2013 indicates that budgeted
revenues were generally on track or slightly better than projected. However, Los Angeles continues to have a
substantial budget challenge, as reflected in projected General Fund budget gaps of $216 million and $327 million
over the next two fiscal years (2014 and 2015). These gaps represent 4.5% and 6.5% of projected expenditures.
While the city has made substantial cuts from its projected, baseline expenditures over the last three years,
continued willingness to cut costs will likely be required to maintain the city's long-term financial health. Projected
revenue growth falls several points short of projected expenditure growth, primarily due to deferred labor cost
increases and the increasing cost of amortizing unfunded pension liabilities. While the city has established new,
less generous pension tiers for new employees, and existing employees are picking up more of their annual
pension contributions going forward, reducing employees' and retirees' existing benefits is exceedingly difficult, if
not impossible under California law. The city is considering putting various tax measures before its voters which
would, if approved, boost revenue growth and help close the projected budget gaps. But after the Nov. 2012
general election resulted in increased sales and income taxes statewide, overcoming local voters' natural
resistance to tax increases may be even more difficult.

RAISING TAX RATES IS DIFFICULT FOR ALL CALIFORNIA CITIES COMPARED TO THEIR PEERS NATIONALLY

Like all California cities, Los Angeles has very limited ability to raise revenue faster than the rate of economic
growth. Ad valorem property tax rates statewide are constitutionally fixed at 1%, unless a supermajority of local
voters authorize a local property tax override to fund capital project-related debt (that is, general obligation bonds).
Local income taxes are not permitted. Other taxes, or fees and charges that relate to property ownership, may not
be raised without voter approval, either majority or two-thirds supermajority, depending on the tax's purpose. So
even in good economic times, raising revenues beyond basic growth rates is uncertain proposition for a California
city.

LOS ANGELES RESIDENTS SOCIOECONOMIC PROFILE HAS IMPROVED, BUT REMAINS RELATIVELY LOW

The 2010 American Community Survey results put Los Angeles' median family income at 85.0% of the national
average. This is up from 79.8% as of the 2000 Census, but still relatively modest, and the city's unemployment
rate remains almost four points higher than the national average (11.4% as of Oct. 2012 compared to the US
average of 7.5%).

KEY STATISTICS

Fiscal2011, GAAP-basis:

Net cash as% of revenue: 21.7%

Total fund balance as % of revenue: 11.6%

Available fund balance as % of revenue: 11.0%

Net direct debt as % of FY 2013 AV: 0.9%

Overall net debt as % of FY 2013 AV: 4.3%

2010 American Community Survey:

Median Family Income: $53,312 (85.0% of US average)

WHAT COULD CHANGE THE RATING- UP

Sustained, robust economic recovery leading to revenue growth in excess of projected expenditure growth

Materially reduced pension cost pressures

WHAT COULD CHANGE THE RATING--DOWN

Continued General Fund structural imbalance, further weakening the city's balance sheet

Renewed recession, further weakening already slow revenue growth

The principal methodology used in rating the general obligation bonds was General Obligation Bonds Issued by
U.S. Local Governments published in October 2009. The principal methodology used in rating the lease debt was
The Fundamentals of Credit Analysis for Lease-Backed 11/k.micipal Obligations published in December 2011. Please
see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory
disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of
debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with
1\ibody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory
disclosures in relation to the rating action on the support provider and in relation to each particular rating action for
securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this
announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation
to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the
transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that
would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the 1\ibody's legal entity
that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for
each credit rating.

Analysts

Eric Hoffmann
Lead Analyst
Public Finance Group
1\ibody's Investors Service

Kristina Afagar Cordero

Backup Analyst
Public Finance Group
1\ibody's Investors Service

Gregory W. Lipitz
Additional Contact
Public Finance Group
1\ibody's Investors Service
Contacts

Journalists: (212) 553-0376

Research Clients: (212) 553-1653

1\ibody's Investors Service, Inc.

250 Greenwich Street
New York, NY 10007
USA

MooDY's
INVESTORS SERVICE
TAN ARD
0 R"S

Los Angeles, alifornia; Solid

aste/Resource Recovery
Primary Credit Analyst:
Paul J Dyson, San Francisco (1) 415-371-5079; paul_dyson@standardandpoors.com

Secondary Contact:
Edward R McGlade, New York (1) 212-438-1000; edward_mcglade@standardandpoors.com

Rationale

Outlook

Bond Provisions

Economic Base And Finances

Related Criteria And Research

WWW.STANDARDANDPOORS.COM/RATINGSDIR.ECT JANUARY 24, 2013 1

1066471 i 300097587
Los , California; Solid Waste/Resourc
Recovery

US$80.665 mil solid waste res rev rfdg bnds ser 2013B due 02/01/2026
Long Term Rating AA/Negative New
US$71.735 mil solid waste res rev bnds ser 2013A due 02!0112026
Long Term Rating AA/Negative New

Los Angeles san equip

Unenhanced Rating AA(SPUR)/Negative Outlook Revised

Los Angeles solid waste res

Unenhanced Rating AA(SPUR)/Negative Outlook Revised

Los Angeles San Equip Chg

Unenhanced Rating AA(SPUR)/Negative Outlook Revised

Standard & Poor's Ratings Services revised its outlook to negative from stable and affirmed its 'AA' long-term rating
and underlying rating (SPUR) on Los Angeles, Calif.'s solid waste resources (SWR) and sanitation equipment bonds. In
addition, we assigned our 'AA' long-term rating to the city's $71.7 million series 2013A SWR revenue bonds and $80.7
million series 2013B solid waste resources refunding revenue bonds.

The outlook revision reflects our view of the city's projected increase in operating costs and mostly debt-financed large
capital improvement program (CIP). The CIP will require additional bond issuances in fiscal years 2016 and 2018, the
combination of which will result in reduced liquidity and debt service coverage (DSC) on a net revenue basis, possibly
to less than 1x by fiscal2016. We believe these factors could result in financial challenges, especially given the city's
desire to avoid fee increases until fiscal2019, despite what we consider to be good rate flexibility.

The rating reflects our view of the city's:

• Historical willingness and ability to adjust the SWR fee to cover debt service and system operating costs;
• Substantial and diverse economic base, despite weakened trends in the previous few years because of the recession;
• Median household effective buying income (EBI) that we consider good, which enhances rate affordability and
flexibility;
• High collection rate and strong collection method, which includes a charge on bimonthly electric, water, and sewer
bills collected by the Los Angeles Department of Water and Power (LADWP), with strong enforcement
mechanisms, including shut-off of water and/ or electric service;
• Extremely strong historical DSC on a gross basis of around 7x, with debt service paid prior to operating expenses
according to bond provisions; and
• Good liquidity, with an estimated $143 million system fund balance for fiscal2012, equal to 234 days of operating

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JANUARY 24, 2013 2

1066471 i 30009'7587
 Los Angeles, California; Solid Waste/Resource Recovery

expenses.

Partly offsetting the above strengths, in our view, are the city's:

• Moderate capital plan totaling $264 million, which will require additional bond issuance of approximately $160
million during the next five years and increase debt service requirements by 40% by fiscal 2017; and
• Desire to hold SWR fees constant until fiscal2019, which is likely to constrain financial margins;
• Projected reliance on cash balances to fund both debt service and operations, as the city projects DSC at less than
1x on a net revenue basis in fiscal 2016; and
" Permissive bond provisions, with an additional bonds test (ABT) of 1.25x based on gross revenue, although the city
is unlikely to leverage the ABT. to the fullest extent given its need to fund operations.

The bonds are secured by a senior lien on gross revenue from the SWR fee as well as miscellaneous related revenue,
including interest earnings and penalties. Despite the gross revenue pledge, our analysis focuses on revenue available
for debt service after consideration of operating costs (net revenue pledge) because, in our view, a system must pay
operating expenses to be a viable concern that will generate revenue for the payment of debt service.

The series 2013A bond proceeds will fund the acquisition of various equipment, the purchase of 220 vehicles
(including 150 refuse collection vehicles), and the construction and acquisition of improvements to certain facilities,
while the series 2013B bond proceeds will refund the city's series 2003A, 2003B, and 2004A bonds.

The Bureau of Sanitation is responsible for the collection, transport, recycling, and disposal of residential solid waste
and for managing the SWR revenue fund. The city administrative officer manages the debt, and the city accounting
staff and Public Works manage the accounting function. Oversight is by a five-member Board of Public Works,
appointed by the mayor to five-year terms. The service area for solid waste collections as of fiscal 2012 includes
736,300 households divided into six collection districts. Total accounts have declined by about 6,000, or just 1%, since
2008. Single-family residences account for the majority of SWR revenue, and collections include refuse, green
materials, recyclables, and, for some residents, horse manure. Solid waste collections totaled 1.52 million tons in fiscal
2012, down 4% from the prior year and 16% below the fiscal 2007 peak of 1.81 million tons. ~he bureau anticipates
future growth in total accounts and volume to be negligible at 0.1% annually.

The system includes a sizable fleet of 789 collection vehicles whose current average life is 6. 7 years. According to the
bureau, the average life of the fleet will be reduced to 5.3 years with the purchase of 150 new clean fuel vehicles using
series 2013A bond proceeds. The majority of the city's waste goes to the Sunshine Canyon Landfill at the north end of
the San Fernando Valley and the remainder goes to the El Sobrante Landfill in Riverside. The bureau uses the Falcon
Disposal Transfer Station in Wilmington and the Central Los Angeles Recycling and Transfer Station (CLARTS) for
transfer of solid waste. The disposal contract for Sunshine Canyon runs through 2021 (useful life is estimated at an
additional 20 years), with an option to renew every five years. Beginning in 2007, the city began intentionally reducing
its reliance on the Sunshine Canyon Landfill as the primary disposal alternative, at the city council's direction.
Approximately 3,300 tons of refuse are disposed daily-- most of it at the Sunshine Canyon Landfill, 600 tons at the El
Sobrante Landfill, and 100 tons at the South East Resource Recovery Facility (a waste-to-energy facility in Long Beach,
Calif.).

The city anticipates that the volume of refuse disposed at Sunshine Canyon will continue to decline with increased

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recycling efforts and alternative disposal options. The bureau's recycling program is one of the strongest in the U.S.,
diverting 72% of materials from landfills in 2012, well above the 50% required by 1989 Assembly Bill939. The bureau
targets a diversion rate of 75% by 2013 and 100% by 2025, and believes it can achieve this through public education
and enhanced technologies.

The SWR fee, pledged as security to the bonds, dates back to 1983 and the city has historically reviewed and adjusted
the SWR on a frequent basis, with six fee increases since fiscal 2003. Fee increases are essential to provide funding for
the overall program, including capital, labor, maintenance, fuel, and other operating costs. In 2008, the city adopted
SWR fee increases to reduce general fund subsidization of the solid waste system, increasing the SWR fee to $36.32
per month on all single-family residences and $24.33 per month on multifamily residences, up from $26.00 and $17.16,
respectively. Rates have increased significantly since 2003, when the single-family residential fee was just $6 per
month. The city forecasts that it will not need the next fee adjustment until fiscal 2019, and management reports that
the fee increase process may take as long as 18 months, which we consider relatively onerous.

Despite rate increases, sanitation rates are, in our view, competitive compared with those of other regional systems,
and, given good income levels within the service territory, rate flexibility remains. SWR revenue historically covered
about 40% of collection and disposal costs, but now cover about 93% of program costs given rate increases in 2006
and 2008. The city's general fund pays the remaining costs associated with low-income-eligible senior citizen or
disabled customers ("lifeline" customers) and interdepartmental solid waste collection services. The number oflifeline
customers totals 36,199, or about 5% of total customer accounts, and is capped at 51,400.

Revenue collections are strong, as are the enforcement mechanisms. LADWP collects the revenue (for an annual
nominal fee) along with electric and water service revenue on a bimonthly basis, and remits the solid waste revenue to
the bureau. Recourse for uncollected charges is suspension of water and/ or electric utility services. Payments are first
credited to water or electric reconnection charges, then amounts in arrears, then any late payment charges, then the
current bill. In our view, collection rates continue to be very strong, ranging from 95.7% to 99.3% since fiscal 2003.

Historical DSC by SWR fees on a gross basis has ranged from 6.9x to 7.1x during fiscal years 2009 to 2012, with DSC
of 7.1x in 2012. The bureau projects DSC on a gross basis to decline but remain extremely strong at no less than 5x
through fiscal 2017, with the decline resulting from an increase in debt service requirements associated with series
2013 and future bonds.

However, as explained above, our focus is on the system's ability to cover debt service payments after paying
operating expenses. DSC under this net revenue approach has been strong at 1.8x in fiscal 2010, 2.1x in fiscal 2011,
and 2.7x for unaudited fiscal2012. The city's financial projections indicate that financial margins will decline given
stagnant revenue and increasing operating costs, and that increasing debt service requirements will reduce DSC ratios
further. The city projects DSC on a net revenue basis at a strong 1.7x in fiscal 2013 and a good 1.4x in fiscal2014, but
projects DSC to decline again to a marginally adequate l.Ox by fiscal 2015 and an inadequate 0.8x by fiscal2016 and
0.6x by fiscal 2017. In future years in which DSC is less than 1x on a net revenue basis, the city's plan is to use cash
balances as opposed to increase fees, a management practice we consider weak for solid waste systems rated 'AA'.
Management does report, however, that as part ofits fiscal 2014 budget development process, various operating costs
will be lower than projected.

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 Los Angeles, California; Solid Waste/Resource Recovery

The solid waste system's available fund balance as of unaudited fiscal2012 was a strong $143 million, or 234 days of
operations, up from $89 million, or 143 days' cash, as of fiscal 2011. These balances have risen recently because of
savings in tipping fees resulting from lower volumes, a salary freeze, and other savings, but the city is planning to
reduce these balances. The city anticipates that when cash balances decline to $100 million or less, this would trigger
the beginning of the SWR fee adjustment process. That process, according to the city, could take as much as 18
months, such that new rates would likely be in place prior to the cash balance's dip to less than $50 million. According
to the city's forecast, cash balances will decline to $92 million by fiscal2017, equal to 125 days of operating costs. The
affordability of the SWR fee (even after the 2008 fee increase) continues to provide flexibility to adjust rates to cover
debt service and helps to partially offset the slimmer projected coverage on a net revenue basis.

The series 2013A bonds will mature over a 14-year period because of the relatively short useful life of solid waste
assets. The bureau has a moderate CIP totaling $264 million, which will require additional bond issuances of
approximately $80 million in both fiscal years 2016 and 2018. Cash will finance 31% of the CIP. Significant equipment
and capital projects include vehicle replacements, automated recycling containers, facility upgrades, and expansions.

The negative outlook reflects our view of the city's projected increase in operating costs and large CIP. We anticipate
that the general fund reliance will remain low and that rates, even if increased, will remain affordable, with strong
collection rates. If DSC on a net revenue basis significantly decreases, we could lower the rating. Likewise, if capital
needs are significantly higher than anticipated or if liquidity materially erodes, we could lower the rating. On the other
hand, we could revise the outlook to stable if future financial results and projections from the city indicate maintenance
of structural balance, with DSC on a net revenue basis consistent with recent results.

We view bond provisions as permissive, as the ABT of 1.25x is based on gross revenue, although we don't anticipate
that gross DSC will approach 1.25x because surplus funds after debt service are needed to fund operating costs and a
portion of the city's capital plan. Other bond provisions include a cash-funded debt service reserve fund funded at the
least of 10% of par, 125% of average annual debt service, and maximum annual debt service. In addition, the trust
agreement requires that the city maintain the SWR fee at a level sufficient at all times to provide for payment of all
debt service and other costs.

The city serves a population of about 3.8 million and has a broad and diverse employment base, including the
entertainment, aerospace, international trade, tourism, and business services industries. Unemployment declined to
10.9% as of November 2012 from a high of 14.8% in July 2010, but remains above the state's rate of 9.6%. We consider
median household EBI good at 91% of the national average.

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 Los Angeles, California; Solid Waste/Resource Recovery

The solid waste system's reliance on the general fund is significantly reduced given recent SWR fee increases, with the
general fund representing just 5% of total solid waste system revenue in fiscal2012, but that reliance was higher than
normal because of billing delays. Management projects general fund support at 2% of total revenue in fiscal 2013 and
beyond. The bureau can enroll new eligible lifeline customers (it is under its cap by about 14,000 accounts), subject to
the availability of the general fund. As such, we view the solid waste system's exposure to recent city budget deficits
and other general fund challenges as small and manageable. For fiscal2012, management estimates a $27 million
increase in combined emergency and contingency general fund budgetary reserve to $198 million, or about 4.5% of
expenditures. The city's fiscal2013 budget reflects an increase in these reserves to almost $218 million, or 4.8% of the
general fund budget. Los Angeles has a policy goal to restore its reserve fund to 5% of general fund revenue. The city
has historically addressed annual budget gaps through reduction of positions, increases in the employee share of
retiree health contributions, and one-time solutions.

USPF Criteria: Solid Waste System Financings, June 15, 2007

Los Angeles Solid Waste Resources rev bnds ser 2009A

Long Term Rating AA/Negative Outlook Revised
Many issues are enhanced by bond insurance.

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 1/25/13 Bond Buyer Online- MBFAWarns oflmpacts From28% Cap

HE OND BUYER
Friday, January 25, 2013 as of5:31 PM ET
Washington - Taxation
MBFA Warns oflmpacts From28% Cap
by: Lynn Hume
Friday, January 25, 2013

The Municipal Bonds for America coalition warned Friday that a retroactively applied 28% cap on the
value of tax exemption would fundamentally alter 100 years of precedent, raise borrowing costs for
issuers, limit infrastructure development and constrain economic development, while doing little to help
solve the nation's :fiscal crisis.

,. :~,,:1:: The group issued the warning in a two-page paper, which also cited an analysis by Citigroup Municipal
Strategists that found the value of outstanding municipal bonds could pltnnmet by at least $185 billion
because of uncertainty if a retroactively effective cap were adopted.

The cap would end 100 years of precedent in the relationship between the federal government and
state and local governments by taxing state and local bonds, the coalition said.

For taxpayers in the 39.6% bracket, the 28% cap would amount to an 11.6% tax on income that was
once entirely excluded from taxation, it said.

"Moreover, while the 28% limit is designed to target only wealthier investors, the reality is that all bond
investors ... would feel the effect ifthe proposal were enacted," the group added.

MBFA said 55.5% of all tax-exempt income is reported by taxpayers with adjusted gross incomes of
less thari $250,000. In addition, ahnost 60% of the tax-exempt income is reported by taxpayers over
the.age of65.
' ' l • ·~ ~ :

The munimarket has already shown some of the impact a 28% cap would have, according to the
;. ~: ,~ ce>ali,tion.

When investors felt the cap could be enacted for a period oftime in December, muni bond funds
experienced net cash outflows and the increase in tax-exempt bond yields was 14 to 40 basis points
gteater than the increase in Treasury bond yields.

For someone in the 39.6% bracket, the 28% cap would lower by 29 basis points the after-tax return
on a tax-exempt bond, assuming an average yield of2.5%, the group wrote in the paper.

Investors would demand higher yields to adjust for the cap. They could seek premiums of as much as
30 to 40 basis points to account for the future risk of tax increases, the coalition said.

President Obama first proposed a 28% cap on all tax expendittrres, including the exclusion from
income for muni bond interest, in a jobs bill, then proposed it again in his :fiscal20 13 budget request.
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1/25/13 Bond Buyer Online- MBFA Warns of Impacts From 28% Cap

He is expected to propose the cap again in his :fiscal20 14 budget request, which is due to be issued in
March.

Democrats and Republicans supported the cap proposal in debates over a :fiscal cliff agreement.
Though the compromise reached did not include such a cap, it continues to be on the table in budget
and tax reform discussions.

The paper's findings resulted from research developed by members ofMBFA's technical advisory
connnittee, which is led by Citigroup chief municipal strategist George Friedlander and Janney
Montgomery Scott director and municipal credit analyst Tom Kozlik.

SOURCEMEDIA

© 2013 SmrrceMedia. All rights reserved.

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