Fitch Rates Baton Rouge, LA Sales Tax Revs 'AA+'; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA+' rating to the following Baton Rouge, Louisiana's sales tax revenue bonds:

--$19.93 million public improvement sales tax revenue refunding bonds, series 2010B.

The bonds are expected to sell via negotiation the week of Sept. 13, 2010.

In addition, Fitch affirms the following ratings:

--$111.9 million in outstanding parity sales tax revenue bonds at 'AA+'(pre-refunding).

The Rating Outlook is Stable.

RATING RATIONALE:

--The consolidated city-parish government maintains a sound financial profile, despite recent weakness in sales tax revenues.

--The area economy is relatively diverse, although some petrochemical industry concentration exists.

--An apparent permanent shift in population and business activity from hurricane-affected parts of Louisiana continues to boost the Baton Rouge economy.

--While consolidated government debt totals remain manageable, capital needs for roads and wastewater system improvements remain sizable and management has identified significant needs for public safety, drainage and other infrastructure.

KEY RATING DRIVERS:

--Weakness in sales tax revenues that began in 2009 has continued through the first half of 2010, and additional declines will continue to pressure operations and may generate an erosion of operating reserves.
--Recent bond election failures present a challenge to elected officials and management to secure financing for needed public safety and drainage infrastructure projects.

SECURITY:

The bonds are payable from and secured by the net proceeds (after administrative and collection expenses) of a 2% sales and use tax levied and collected within the city.

CREDIT SUMMARY:

The financial profile of the city/parish government remains sound, despite recent weakening of sales tax revenues. The shift of population and businesses from hurricane-impacted areas in south Louisiana in 2005 and 2006 benefited Baton Rouge economically, and Fitch believes a significant portion of that shift is permanent. The general fund reported significant net income from 2004 to 2007, and the unreserved general fund balance climbed from roughly $57 million to nearly $90 million during this period. Since then city/parish officials have applied portions of these reserves to capital needs, resulting in a moderate drawdown of general fund balance. Results for 2008 and 2009 included declines in unreserved fund balance of $14.3 million and $9.6 million, respectively. Projected 2010 general fund results include another, albeit smaller decline in reserves of between $5 million and $8 million as management continues to apply monies to one-time needs. Despite these drawdowns, Fitch anticipates that the unreserved general fund balance at 2010 year-end will remain healthy at approximately 20% of spending, which is consistent with the city/parish policy.

The city levies and collects a 2% sales and use tax for general municipal purposes on sales and services within the city, which secures the bonds being offered and outstanding parity debt; the parish also levies and collects a 2% sales tax for general purposes on transactions within the unincorporated areas of the parish. City receipts were essentially flat from 1997-2004, but spiked in fall 2005 with the influx of hurricane evacuees; 2005 city receipts increased 14% to nearly $88 million. Following an 11% increase in 2006, collections flattened in 2007 and 2008 at about $97.5 million and then registered a nearly 11% decline in 2009 as the economy cooled. Combined city/parish sales tax receipts registered a more modest 3% decline in 2009. Management anticipates a smaller dip of around 2.5% in city sales tax receipts for 2010, and is planning for a modest 1% increase in collections for 2011. In response to the weaker revenue picture, city/parish officials instituted various cost-saving measures during 2010, including a recent 4% downward revision in the budget. For 2011, management reports that all departments are being asked to reduce spending 5% below prior year levels. Longer term, management notes that addressing a sizable post-employment benefit liability will become a priority.

The city/parish has large capital programs underway for both roads and the parish wastewater system. These programs are supported by separate one-half cent sales taxes and wastewater system revenues. The failure of large bond elections in both 2008 and 2009 casts uncertainty on the financing of various public safety and drainage capital projects that officials have identified; the city/parish presently has no outstanding general obligation debt.

The current offering will refund the outstanding parity series 2001A sales tax revenue bonds for interest cost savings. Legal provisions are fairly typical, with an additional bonds test (ABT) requiring the average net revenues of the prior two years to equal at least 3.0 times (x) maximum annual debt service (MADS), including the proposed bonds. The debt service reserve fund (DSRF) requirement has been removed for the series 2010B bonds, but Fitch believes that healthy coverage and the strong ABT mitigate the absence of a DSRF as a credit concern. Debt service coverage is healthy, with projected 2010 revenue generating more than 5.0x MADS coverage. Sound coverage is expected, given that these sales tax receipts are a primary operating revenue source. Direct and overlapping debt ratios for the city are moderate, and the pace of 2% sales tax debt retirement is slightly above average.

The local economy, while characterized by some concentration in the petrochemical industry, retains a fair amount of diversity through state government, higher education, financial services and healthcare. Officials report that more than $6 billion in new commercial and industrial construction and expansion of existing enterprises is scheduled for the next several years in the Baton Rouge area. Unemployment rates, which had declined in the months following the 2005 hurricanes as the economy recovered, have climbed moderately due to the recession. However, the most recently available monthly figure for the parish of 8% (June 2010) remains below the state (8.3%) and U.S. (9.6%) averages for the month.

Additional information is available at www.fitchratings.com.

In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, LoanPerformance, Inc., IHS Global Insight, and Morgan Keegan & Co. (Underwriter).

Related Research:

--'Tax-Supported Rating Criteria', dated Aug. 16, 2010.
--'U.S. Local Government Tax-Supported Rating Criteria', dated Dec. 21, 2009.

For information on Build America Bonds, visit www.fitchratings.com/BABs.

Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=492470

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