NEW YORK--()--As part of its continuous surveillance effort, Fitch Ratings affirms the following city of St. Louis, MO (the city) outstanding general obligation (GO) bonds:
-- $42.7 million GO bonds, series 2006, at 'AA-'.
Additionally, Fitch affirms its rating on the following St. Louis Municipal Finance Corporation outstanding leasehold revenue bonds:
-- $140.03 million (Pension Funding Project) leasehold revenue refunding bonds (taxable), series 2007, at 'A+';
-- $15.2 million (Pension Funding Project) leasehold revenue refunding bonds (taxable), series 2008A, at 'A+';
-- $24.1 million juvenile justice detention center leasehold revenue bonds, series 2008B, at 'A+'.
The Rating Outlook is Stable.
RATING RATIONALE:
-- Although economic pressures exist, the city has prudently managed operations by conservatively forecasting economically sensitive revenues, implementing new revenue sources, and by continuously monitoring expenditures and making judicious cuts in its workforce.
-- The one notch rating distinction on the leasehold revenue debt from the city's general obligation rating reflects annual appropriation risk and essentiality of pledged assets.
-- The city's diverse economic base and institutional anchors promote stability within the region.
-- Debt levels are above-average but include debt supported by non-general fund revenues.
-- Socioeconomic indicators are below average with a declining population, low wealth levels and high unemployment rates.
-- Financial margins are currently slim, and the city's primary revenue sources are tied to economic cycles.
-- Development is ongoing and the city and surrounding region feature prominent businesses.
-- Pensions are well funded and unfunded pension, and other post employee benefit liabilities are manageable.
KEY RATING DRIVERS:
-- The city's continued prudent budgeting practices and maintenance of fund balance levels consistent with its rating category despite economically sensitive revenue sources will be a key consideration to preservation of existing credit quality.
-- Population and labor-force declines could hamper future growth prospects.
SECURITY:
The GO bonds are backed by the city's full faith and credit and unlimited tax pledge. The leasehold revenues are a special obligation of the St. Louis Municipal Finance Corporation, paid solely from lease rentals paid to the corporation by the city, subject to annual appropriation, and other revenues pledged to the trust estate. The leasehold deed of trusts established for the series 2007 and series 2008 A&B bonds provides for a leasehold interest in city assets. The series 2008 A&B bonds are additionally secured by a debt service reserve fund funded with a surety bond issued by Assured Guaranty.
CREDIT SUMMARY:
The city of St. Louis is a constitutional charter city, independent of St. Louis County. The St. Louis downtown area remains the largest employment center in the region focusing on health, education and business services, in addition to convention and entertainment enterprises. Leading employers include Washington University (13,672), St. Louis University (9,500), AT&T (5,683), and BJC Health System (12,225). Notable companies with headquarters in the city include Wells Fargo, Stifel Financial, Energizer Holdings and Anheuser Busch/InBev. Unemployment rates continue to be high but have improved to 8.5% for April 2011, down from 9.6% the prior year and below the state and national rate of 8.9% and 9%, respectively for April. Population has been declining since 2000 with the 2010 census population indicating an 8.3% decline in the city to 319,294 down from 348,189, while the MSA has experienced 4% growth since 2000.
With a downtown population of over 13,000, expansion continues in the retail and residential housing markets with 435 new units about to be brought on line. The presence of three major sports teams (Rams, Cardinals and Blues) makes for significant contributions to the economy with ticket sales, concession and merchandise sales, and money spent at restaurants and hotels. A number of recent developments have been completed with new projects underway including additional new office, retail, hotel and residential facilities helping to continue the development of the downtown. The downtown has seen an impressive $4.5 billion in investment since 1999.
The city's financial position is sound but has been pressured the last few years due to the slowdown in the economy and reliance on economically sensitive tax revenues. The city's earnings tax, comprising 33% of fiscal 2010 general fund revenues, is the largest non-property tax revenue source, followed by franchise taxes (10.64%), sales taxes (10.5%) and a payroll tax (7.6%). The earnings tax is a 1% tax on gross income of residents of the city, and non-residents working in the city and on net profits of businesses within the city. The earnings tax is currently subject to voter approval every five years, and city residents overwhelmingly approved the continuation of the tax on April 5, 2011. However, the city's primary revenue source is still at risk of a permanent phase-out as residents will be asked every five years to maintain or repeal the earnings tax. If not renewed, the tax will be phased out in 10% increments over 10 years, and the city is prohibited from instituting a new earnings tax.
Sales tax experienced a decline in fiscal years 2009 and 2010 of 2% and 5%, respectively, due to the slowdown in the economy. The slowdown also impacted the earnings tax (base down approximately 2% over the same period), and the city experienced declines in payroll taxes (down 4% and 7%, respectively) reflective of lower compensation in these years from businesses within the city. But fiscal 2011 projections indicate a positive trend in earnings tax receipts (after netting out a protested amount received in fiscal 2010), and an increase of 1.7% in payroll tax (through the 3rd quarter) and a 1.1% total increase in sales tax. Franchise taxes on utilities operating in the city have exceeded estimates due to settlements with telecommunication providers' from challenges on the exemption of wireless services and from higher electric company receipts due to the overly hot summer. Fitch believes that the prospects for an economic recovery are improving, but growth in these non-property tax revenues may be limited in the near term as unemployment rates remain high and new development may not be as robust as in prior years.
Property taxes comprise only 10% of general fund revenues and are restricted pursuant to the state imposed Hancock Amendment. Passed by the state legislature in 1980, the Hancock amendment limits increases in tax rates and the total amount of taxes that may be imposed in any fiscal year unless otherwise approved by the requisite two-thirds majority vote of the electorate. Additionally, the amendment limits growth in the tax base to real economic expansion.
Due to the continued downturn in the economy and strain on revenues, the city had an operating deficit of $6.5 million for fiscal 2010 even after making prudent efforts to correct a mid-year budget gap of close to $20 million through the maintenance of vacant positions, budgetary reversions, and transfers and reallocation of special funds. The city's unreserved fund balance dropped to a low $22 million, or 4.7% of spending from $35.6 million or 7.5% of spending in fiscal 2009. The city is projecting breakeven results for fiscal year 2011 resulting from a conservative estimate of revenues, reduced expenditures due to the decline in its workforce, and use of one-time special revenue funds to support operations.
The fiscal 2012 overall budget is flat to 2011 and includes no use of fund balance. The general fund budget is $450 million, equivalent to 48% of the total budget, and is down 0.3% from fiscal 2011. In order to balance the general fund budget, the city implemented $24 million in cuts, including salary reductions to help offset rising benefit costs tied to earnings, additional reductions in staff, and expenditure cuts across most departments. The city has reduced worker positions by 6% from 7,300 in fiscal 2009 to 6,840 as reflected in the fiscal 2012 budget, but has made efforts to preserve core city services deemed essential to its residents, businesses and visitors. For fiscal 2012, 75% of the budget is related to salary and benefit costs.
The fiscal 2012 budget also includes $7.4 million (1.6% of general fund budget) in sales and use tax revenue reallocations and the charging of some expenses to the special revenue funds. The city can designate through ordinance the use of sales and use taxes collected in its special revenue funds but has a degree of flexibility in reverting these revenues for operations if necessary through budget ordinance if they meet the designated use. Additionally, the city's property tax rate is 19 cents under its Hancock limit providing for another source of financial flexibility.
Providing an additional revenue source, the city enacted a new refuse collection fee in July 2010 of $11 per month per household, providing a projected $10.6 million in receipts for fiscal 2011 and $12.6 million in fiscal 2012, the first full year of implementation. These fees have supported recycling efforts and have offset the costs of collection and disposal of city waste. Aside from refuse, a number of other departments have either imposed new fees or updated existing fees in the past year, helping to offset reductions in taxes and departmental revenues.
The leasehold revenue bonds issued by the St. Louis Municipal Finance Corporation are rated one-notch below the city's GO rating due to the annual appropriation risk and the pledge of essential assets. Although not specifically pledged to the bonds, the city has covenanted to use proceeds from its half-cent public safety sales tax to pay debt service on the series 2008A bonds. Bond documents require the city's budget director to include the full appropriation for debt service each year within the budget.
Although the city has issued very few GO bonds, direct debt levels have increased in recent years to moderate levels, reflecting the city's increased use of lease/purchase and tax increment financing. The city charter requires a restrictive two-thirds voter approval to authorize GO debt issuance, necessitating the use of lease financings to address capital needs. Overall debt ratios including tax increment and lease revenue debt are $3,850 per capita and a high 6.8% of fiscal 2010 market value.
The city's five-year capital improvement plan has a cost of $320 million with an estimated $217 million to be funded through cash and debt service payments. For fiscal 2012, the capital budget funds the first year of the plan in the amount of $34.9 million through the use of capital improvement sales tax revenues, gaming revenues, $5 million in general fund transfers and the sale of city owned property. The city has traditionally done short term cash flow borrowing to supplement operations due to the lumpy receipt of tax revenues. The recent note offering is estimated at $70 million; an increase from $65 million in fiscal 2011 and $55 million in fiscal 2010.
As of June 30, 2009, the aggregate unfunded actuarial accrued liability (UAAL) associated with the city's three defined benefit pension plans totaled $237 million (89% funded), which equals 1.3% of market value. The city paid 101% of its aggregate annual pension cost ($49 million) in fiscal 2010, which comprised 11% of general fund expenditures. The city paid $9 million towards its $23 million OPEB annual required contribution (ARC) and has an unfunded liability of $244 million as of July 1, 2009. The city issued the series 2007 and series 2008A leasehold revenue bonds totaling $159 million to fund the unfunded liability for the city's three employee pension systems.
Additional information is available at 'www.fitchratings.com'.
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 the National Association of Realtors.
Applicable Criteria Related Research:
-- 'Tax-Supported Rating Criteria', dated Aug. 16, 2010;
-- 'U.S. Local Government Tax-Supported Rating Criteria', dated Oct. 8, 2010.
Applicable Criteria and 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=564566
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING 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 ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
Facebook
Twitter
LinkedIn
Delicious
Reddit
StumbleUpon
Digg
MySpace
Newsvine
Google Bookmark
Yahoo! Bookmark
Email
Email 
