Fitch Rates Baton Rouge/East Baton Rouge Parish, LA Sales Tax Revs 'AA-'& 'AA'; Affirms ULTGO

AUSTIN, Texas--()--Fitch Ratings has assigned the following ratings to the Baton Rouge and East Baton Rouge Consolidated Government, Louisiana:

--$75 million Parish of Baton Rouge Sales Tax Revenue Refunding Bonds series 2015 AA-';

--$40 million Louisiana Local Government Environmental Facilities and Community Development Authority (LCDA) Subordinate Lien Revenue Bonds (Parish of East Baton Rouge Road Improvements Project) series 2015 'AA'.

Both series are scheduled for a negotiated sale the week of March 23. Proceeds will finance road improvements as part of the parish's 'Green Light Plan.'

The Rating Outlook is Stable.

(Fitch also affirms the ratings on certain outstanding parish and city obligations; details follow at the end of this release.)

SECURITY

The parish road & street improvement sales tax revenue bonds are payable from a first lien on 70% of the 1/2 cent parish-wide road sales tax.

The LCDA series 2012 and series 2015 bonds are special obligations of the LCDA, payable from revenues received from the parish under the loan agreement, which are payable from a subordinate lien on 70% of a 1/2 cent sales tax levied parish-wide for road projects. In the event pledged revenues are insufficient, the obligation shall be satisfied from the parish's lawfully available funds (LAF).

The City of Baton Rouge public improvement sales tax revenue bonds are payable from net proceeds (after administrative and collection expenses) of a 2% sales and use tax levied and collected within the city.

KEY RATING DRIVERS

SATISFACTORY PARISH SALES TAX COVERAGE: The 'AA-' rating on the parish road sales tax bonds reflects satisfactory debt service coverage from the pledged revenues. Projected combined MADS coverage of outstanding senior lien bonds was roughly 1.6x using unaudited 2014 totals. Further leveraging is not expected given previous borrowings and program status; the ABT is 1.25x MADS.

BACKUP REVENUE PLEDGE: The 'AA' rating for the LCDA bonds benefits from the 'lawfully available funds' pledge, which Fitch rates one notch below the implied ULTGO rating. The city/parish covenants to budget and appropriate funds sufficient to pay debt service if sales tax collections are insufficient.

SOUND FINANCIAL PROFILE: The combined city/parish financial profile is a credit strength, characterized by solid operating reserves and conservative budgeting and spending practices.

SIZABLE LONG TERM LIABILITIES: Pension and post-employment benefit liabilities are large, and addressing these obligations in the future likely will exert financial pressure and reduce operating flexibility.

MANAGEABLE DEBT BURDEN: Overall city/parish debt levels are moderate, and the rate of debt retirement is slightly above average. Borrowing for several large capital programs is winding down, and near term borrowing plans are limited.

CITY SALES TAX COVERAGE STRONG: Coverage on the city sales tax revenue bonds is healthy at over 10.0x, as expected given this is a primary operating revenue source. Collections have posted steady gains since a roughly 10% recessionary decline.

DIVERSIFIED REGIONAL ECONOMY: Fitch considers the regional economy to be a positive credit factor given its location and diversity. The economy continues to post a steady recovery from the recent recession and future growth prospects remain positive.

RATING SENSITIVITIES

INCREASING OPERATIONAL COSTS: Escalating outlays, particularly wage and/or benefit increases, could pressure operations over the near to medium term; the pressure would be exacerbated by any downturn in economically sensitive sales taxes. Current healthy operating reserves afford some short-term flexibility to address increased spending levels.

CREDIT PROFILE

Baton Rouge is the capital of Louisiana, located in the southeast part of the state. In 1947, voters in East Baton Rouge Parish and the city approved a consolidation of most of their local government services, one of the first local government consolidations in the U.S. The structure, which was initiated in 1949, includes a mayor-president and a 12-member metropolitan council. The independent cities of Baker, Central and Zachary also are located in the parish.

ROAD SALES TAX COVERAGE SATISFACTORY

The 1/2 cent sales tax securing the outstanding road & street improvement bonds and the LCDA bonds posted gains each of the past four years following a roughly 10% recessionary dip in 2009 and 2010. A preliminary 2014 estimate of the 70% available to secure the outstanding senior lien and the LCDA bonds totaled roughly $28.1 million, providing satisfactory senior lien MADS coverage of roughly 1.6x. A stress test reducing pledged revenues by 10% still generates adequate MADS coverage of 1.43x on the senior lien bonds.

AVAILABLE FUNDS PLEDGE KEY

The primary pledged revenues for the LCDA bonds are a subordinate lien on 70% of the 1/2% parish road sales tax. However, Fitch considers the additional 'lawfully available funds' pledge to be the key factor in the 'AA' rating. This LAF pledge is on parity with other loans outstanding and must exclude certain City of Baton Rouge sales tax revenues and various constitutional and statutory obligations. These obligations total roughly $39 million (13%) out of $370 million 2015 general fund budget, leaving a significant amount as 'available'.

Historically healthy general fund liquidity represents additional flexibility if pledged sales tax revenues are insufficient. Using preliminary 2014 collections, the all-in MADS coverage for road sales tax bonds (including the LCDA bonds) is adequate at 1.20x and a 10% drop in revenues reduces coverage to 1.08x.

SOUND OPERATING PROFILE

Financial operations posted positive results each of the past three years, boosting reserves after a series of drawdowns caused by revenue declines and drawdowns of reserves (largely for one-time outlays). The 2013 unrestricted general fund balance totaled a healthy $110 million or 38% of spending. The gains resulted both from a rebound in sales taxes, which are the largest operating revenue source, and moderate spending increases. Preliminary 2014 results suggest a manageable $4 million draw on reserves, the result of a one-time benefit related expense. Sales taxes totaled $171.7 million, a modest 1% increase from the prior year.

The 2015 budget includes the use of roughly $7 million (2% of spending) in reserves, consistent with the past three budgets. This projection assumes conservative revenue totals, and previous experience suggests it is likely the gap will be closed by year-end. The city/parish has a policy of maintaining a 5% budget stabilization reserve and an informal reserve target of 20%-25% of spending, both of which are presently exceeded.

General fund operations are supported primarily by sales and gross receipt tax revenues, typically more than 60% of the total, while property taxes comprise less than 10%. Public safely is the largest expense item, totaling more than 50% of general fund spending in recent years. The reliance on inherently volatile sales taxes presents a credit risk, mitigated presently by the sound reserves. Any additional spending pressures over the near term, which mostly likely would originate in wages and benefits, could stress operations if sales tax collections fail to keep pace. The 2015 budget includes an approximate 3% pay hike for eligible employees, totaling $3.4 million.

CAPITAL PROGRAMS ONGOING

The city/parish has large capital programs underway for both roads and the parish sewer system, each supported by separate one-half cent sales taxes and by sewer user fee revenues for the utility. The failure of large GO bond elections in 2008 and 2009 casts uncertainty on the financing of certain infrastructure needs that officials have identified, particularly public safety. The city/parish presently has no outstanding general obligation debt.

The road program's series 2008A bonds were issued as variable rate bonds with two swaps to synthetic fixed rate. The combined mark-to-market value as of March 10, 2015 was negative $20 million. Although the swaps mitigate much of the interest rate risk, variable rate debt secured by special taxes presents credit exposure in the event of a termination event because the issuer has no ability to increase pledged revenues to make any required termination payment. This variable-rate exposure is manageable at roughly 10% of tax-supported city/parish tax debt. Overall tax-supported debt is moderate at $2,418 per capita and 2.6% of market value.

The city/parish contributes 100% of its actuarial annual required payment to both non-uniformed and police pensions. The two cost-sharing multiple employer pension plans have somewhat weak funded ratios (estimated 68% non-uniformed and 71% police) using a more conservative 7% investment return and, as a result, contributions will likely increase over the near to medium term.

No progress has been made to date on a sizable $948 million post-employment benefit liability. For 2013 the city/parish funded 28% of the actuarially required contribution (ARC). While the unfunded liability is minimal compared to taxable market value, the $68 million primary government ARC, if fully funded, would have represented 13% of 2013 governmental fund spending. Total carrying costs remain manageable; 2013 debt payments, OPEB paygo and pension required contributions totaled roughly 18% of governmental spending, which Fitch considers moderate.

CITY SALES TAX COVERAGE REMAINS STRONG

A 2% sales and use tax is levied for general municipal purposes within the city, which secures the city sales tax bonds; a 2% sales tax is also levied for general purposes on transactions in the unincorporated areas of the parish. Tax receipts rebounded from four consecutive annual declines in 2007?2010 to post moderate gains each of the past four years. Preliminary 2014 collections of roughly $98 million provide healthy MADS coverage of more than 10.0x, well above the 3.0x ABT threshold. Coverage is expected to remain ample given limited future leveraging plans, a favorable economic outlook and the significant reliance on sales tax revenue for operations.

GROWING POPULATION & DIVERSE ECONOMY

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. Wealth levels are above the state and slightly below the national averages. The estimated 2014 parish population is approximately 445,000, up 7% since the 2000 census.

Local employment levels have increased steadily after recessionary declines in 2010 and 2011, and the December 2014 parish employment total of 219,000 was up 3.5% from the prior year. The unemployment rate of 5.5% for the month was actually higher than in 2013 because the labor force expanded by a faster 5%. The local rate remains below the state (6.2%) and roughly equal to the national (5.4%) averages. Fitch has some concern about recurring state budget pressures and possible local state job losses, but ongoing expansion in the area industrial and commercial sectors lessen this risk.

The list of new commercial projects for Baton Rouge is led by a new IBM software development center downtown that is nearing completion and scheduled to employee 800 workers by 2016. Also, ground was recently broken on the Water Campus, a 35-acre research facility near the LSU campus dedicated to coastal water issues that eventually will include a staff of 4,000 researchers and staff.

Fitch also affirms the following ratings:

--$96.4 million East Baton Rouge Parish road & street improvement sales tax revenue bonds series 2006A and 2009A (pre-refunding) at 'AA-';

--$93.4 million East Baton Rouge Parish variable rate road & street improvement sales tax revenue bonds series 2008A underlying rating at 'AA-';

--$78.7 million City of Baton Rouge public improvement sales tax revenue bonds, series 2007A, 2008A-2, 2008B, 2010A and 2010B at 'AA+'.

--$29.4 million Louisiana Local Government Environmental Facilities and Community Development Authority (LCDA) Revenue Bonds (Parish of East Baton Rouge Road Improvements Project), Series 2012 at 'AA';

--Implied unlimited tax general obligation bond rating of Baton Rouge and East Baton Rouge Parish Consolidated Government at 'AA+;

The Rating Outlook for all the above securities is Stable.

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, and the National Association of Realtors.

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

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981456

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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Steve Murray, +1-512-215-3729
Senior Director
Fitch Ratings, Inc.
111 Congress Ave., Suite 2010
Austin, TX 78701
or
Secondary Analyst
Shane Sellstrom, +1-512-215-3727
Analyst
or
Committee Chairperson
Jessalynn Moro, +1-212-908-0608
Managing Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Steve Murray, +1-512-215-3729
Senior Director
Fitch Ratings, Inc.
111 Congress Ave., Suite 2010
Austin, TX 78701
or
Secondary Analyst
Shane Sellstrom, +1-512-215-3727
Analyst
or
Committee Chairperson
Jessalynn Moro, +1-212-908-0608
Managing Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com