Fitch Affirms Lodi PFA, CAs LRBs at AA-; Outlook Stable

Fitch Ratings has affirmed Lodi Public Financing Authority, California’s (the authority) $19.1 million 2012 refunding lease revenue bonds (LRBs) at ‘AA-‘.

In addition, Fitch affirms the City of Lodi’s implied general obligation (GO) rating at ‘AA’.

The Rating Outlook is Stable.


The LRBs are secured by lease payments from the city to the authority for the use of various essential assets. The city has covenanted to budget and appropriate lease payments, subject to abatement, and payments can be made from any available funds of the city. The bonds do not include a debt service reserve.


SOLID FINANCIAL PROFILE: The ‘AA’ implied GO rating reflects the city’s good financial position, including sound reserve levels, structurally balanced operations, and early and full funding of the city’s recently-instituted 16% reserve policy. However, policymakers will need to exercise spending restraint moving forward given anticipated pension and health care cost pressures.

ADEQUATE LEGAL PROVISIONS: The LRBs’ one-notch distinction from the city’s implied GO rating reflects the essential nature of the leased assets, overcollateralization, and adequate legal provisions including a covenant to budget and appropriate lease payments, two years of rental interruption insurance, and other standard insurance provisions.

CONTINUED ECONOMIC RECOVERY: The city’s economic recovery continues, with rapidly recovering home prices, new residential and commercial construction, and rising employment. However, income levels are below state and national averages, and unemployment remains high despite recent improvements.

SOUND DEBT PROFILE: The city enjoys low net debt levels, an adequately funded pension system, minimal capital needs, and a small OPEB liability. However, debt amortization is slow and pension costs are expected to climb moving forward.


FINANCIAL OPERATIONS KEY: An unexpected and material deterioration of the city’s financial position could lead to negative rating action. The Stable Outlook reflects Fitch’s expectation that such a decline is not likely over the next review cycle.


The city of Lodi serves a population of 63,300 in the San Joaquin Valley, about 34 miles south of Sacramento and 14 miles north of Stockton. The local economy is moderately concentrated in agriculture and food processing, although it also has large employers in the packaging, plastics manufacturing, and service industries. The area also benefits as a regional tourist destination.


The city’s economic performance continues to improve from trough levels reached during the recession. The housing market has shown marked improvement, with increasing residential construction, and home prices up a substantial 19% year-over-year as of May 31, 2014, according to Zillow.

The recovering housing market has helped stabilize the city’s property tax base, which experienced a significant 10% peak to trough decline. The city’s assessed valuation (AV) in fiscal 2013 was nearly flat and fiscal 2014 AV grew 3.2% to roughly $4.8 billion. Fiscal 2015 AV likely will receive a boost from recent and rapid valuation gains, in addition to ongoing residential and commercial construction.

Although the city’s economy continues to recover, its key economic data is somewhat weak. Unemployment registered a high 8.8% in April 2014, which compares poorly to the state and national averages of 7.4% and 5.9%, respectively. Income levels also lag the state and nation. Compared to the Stockton regional economy, however, Lodi’s key economic metrics compare favorably.


The city’s financial position is solid, exhibited by sound general fund reserve levels and five consecutive years of structural balance. Management prudently initiated various expenditure reductions during the recession to offset declining revenues, including reducing the city’s employee count and reforming its benefit programs. General fund operations in fiscal 2013 produced a $1.7 million surplus, raising the total and unrestricted balances to sound levels of $8 million (19.2% of expenditures and transfers out).

Estimated general fund results for fiscal 2014 include nearly balanced operations after consideration of a one-time bonus payment in lieu of a wage increase for the general fund’s major bargaining units. The bonus cost to the general fund is approximately $750,000. The city’s adopted fiscal 2015 budget is balanced.

The city maintains prudent financial management practices. Management produces multi-year financial projections, and recently the council adopted a sound minimum reserve policy of 16% of revenues and transfers in, divided evenly between economic and contingency reserves. The city’s positive financial performance over the past two years enabled it to fully fund the 16% reserve minimum faster than Fitch had anticipated. Also, labor relations historically have been positive, and management is well tenured.


Net debt levels are low at just $1,521 per capita, or 1.9% of AV, though debt matures rather slowly, with just 36% of principal retired over 10 years. Fiscal 2013 carrying costs (pension, OPEB, and debt service over total governmental expenditures) were moderate at 15.6%, though likely to increase moving forward. Capital needs are minimal and are expected to be funded with cash in the capital reserve fund and pay-as-you-go funding.

The city’s two pension plans, offered through CalPERS, have an adequate combined funded ratio of 79.1%. However, recent CalPERS actuarial adjustments are expected to result in significantly higher pension contribution rates over the coming years.

In addition to the sources of information identified in Fitch’s Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope and Zillow.

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

U.S. Local Government Tax-Supported Rating Criteria

Additional Disclosure

Solicitation Status