Fitch Ratings affirms its 'A' rating on the following bonds issued by
Lynwood Utility Authority, California (the authority) on behalf of the
City of Lynwood, California (the city) as obligor:
--Approximately $5.3 million outstanding enterprise revenue bonds,
The Rating Outlook is Stable.
The 2003 bonds are secured by a pledge of and first lien on the net
revenues of the city's combined water and sewer system (the system).
There are also parity series 2008 and 2009 bonds outstanding which are
not rated by Fitch.
KEY RATING DRIVERS
SOUND FINANCIAL PROFILE: Financial metrics are healthy and above the
current rating category medians. The system's liquidity position is
particularly strong at 836 days cash on hand.
ENTERPRISE FUND DRAWS: Historical inter-fund loans made to other city
funds from the system and the possibility that additional system
resources may be utilized for general city purposes in the future given
the city's strained financial position present potential challenges to
MANAGABLE DEBT BURDEN: Debt ratios are mixed with favorable long-term
debt per customer but slow principal amortization. With no near-term
borrowing plans, these ratios should improve over time.
SERVICE AREA VULNERABILITY: The city is largely residential and is
located in an area near Los Angeles which has very low socio-economic
indicators, low income, high unemployment, and a history of elevated
RELIANCE ON INTERFUND LOANS: A planned spend-down of liquidity for
capital projects combined with any unforeseen fund transfers to other
city funds may weaken the city's otherwise sound financial position. The
Stable Outlook reflects limited fund transfers over the past five years
and Fitch's expectation that future transfers are unlikely.
The authority, established by the city in 2003, provides lease,
operation, management and maintenance for any utility system or service,
and the financing of capital projects for the city. Under an agreement
with the authority, the city is responsible for operations and
management of the system.
The city, with a population of approximately 70,000 residents, is
located in an economically challenged portion of Los Angeles County,
approximately 11 miles south of downtown Los Angeles.
SYSTEM FINANCIAL PROFILE IS SOLID
The system's financial performance has been mostly solid over the past
five fiscal years. All-in annual debt service (ADS) coverage has ranged
from a very strong 2.6x-4.0x over this period. However, the city uses
operating revenue transfers to pay for capital improvement projects. Net
of these transfers, ADS coverage ended at a still adequate five-year low
of 1.5x in fiscal 2012. The system's liquidity, measured by Fitch as the
number of days of operating cash on hand, is very strong, ranging from a
low of 591 days in fiscal 2009 to a high of 891 days in fiscal 2011.
Management's financial projections show total ADS coverage dropping to a
sufficient 1.8x in fiscal 2014 and then improving in the subsequent five
years to a high of nearly 2.7x by 2018. Forecast assumptions include
year-over-year revenue growth ranging from 5%-9% driven by continued
rate increases and marginal growth in operating revenue. Fitch views
these projections as somewhat optimistic, although possible given
available rate flexibility (Fitch calculates combined water and sewer
rates to be 1.6% of median household income, comfortably below Fitch's
2% threshold). Management notes that a recent rate study was completed
and its findings, which are expected to include moderate rate increases,
are scheduled to be presented to the city council soon. To some extent,
rate increase will be necessary to offset climbing debt service costs.
CITY'S PAST RELIANCE ON ENTERPRISE FUND STRAINS OTHERWISE SOUND
Inter-fund loans made to other city funds from the system, and the
possibility that additional system resources may be utilized for general
city purposes in the future given the city's financial challenges, could
pressure the system's otherwise sound financial position. Management has
indicated to Fitch that the city's general fund liquidity profile is
ample due to large borrowable resources in other funds, such as the
water enterprise, suggesting further enterprise fund draws are possible.
However, management has also stated that there are no near-term plans
for such draws. Fitch's implied rating of the city's unlimited tax
general obligations is 'BBB+'.
WATER SUPPLY APPEARS ADEQUATE
Lynwood has an advantageous local groundwater supply that provides the
majority of its water needs. Historically, groundwater provided around
80%-85% of total water needs, although with the recent consumption
declines experienced in fiscals 2010 through 2012 the local supply
provided more than 95% of total needs. Lynwood is required to provide
minimal treatment of the groundwater supply given the high quality of
the water, and as such does not operate a water treatment plant. The
sewer system consists of collection responsibilities only, with
wastewater flows conveyed to the Los Angeles County Sanitation District
No. 1 for treatment. This limits the operation risk and capital cost
implications of operating treatment facilities.
MANAGEABLE CAPITAL NEEDS AND DEBT
The city is projecting capital needs of $19.5 million over the next five
years split evenly between water and sewer system projects. Projects for
the water system include supply-related projects and rehabilitation
projects. The majority of the capital projects identified for the sewer
system are related to the city's collection system. Funding for projects
is expected to be provided by unspent revenue bonds from previous
issues, cash reserves, and operating revenue (pay-go) spending.
Debt ratios are mixed, with favorable long-term debt per customer and
per capita levels of 1,053 and 283, respectively, but slow principal
amortization at 27% in 10 years. With no near-term borrowing plans,
these ratios should improve over time. However, due to the age of the
system, more borrowing may be necessary for ongoing system upgrades and
SERVICE AREA VULNERABILITY
The 4.9-square-mile city is largely built out, so population figures
have been flat, contributing to stable but low revenue growth excluding
rate changes. The local economy is strained as exhibited by a 14.8%
February 2013 unemployment rate. However, this high rate is much
improved from a year prior (16.7%). The city's median household income
levels are extremely low at 71% and 83% of state and national levels,
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's
Revenue-Supported Rating Criteria, this action was informed by
information from CreditScope and IHS Global Insights.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 3, 2013;
--'U.S. Water and Sewer Revenue Bond Rating Criteria', dated Aug. 3,
--'2013 Water and Sewer Medians', dated Dec. 5, 2012;
--'2013 Outlook: Water and Sewer Sector', dated Dec. 5, 2012.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
2013 Water and Sewer Medians
2013 Outlook: Water and Sewer Sector
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