AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has affirmed the following Terrebonne Parish, Louisiana, ratings at 'AA-':
--$1.2 million general obligation (GO) bonds, series 2007 and 2008;
--$1.6 million public improvement bonds (PIBs), series ST-2008;
--the parish's Issuer Default Rating (IDR).
The Rating Outlook is Stable.
The GO bonds are supported by the full faith and credit of the parish and payable from an unlimited property tax levied against all taxable property within the parish.
The PIBs are payable from 1/3 of the receipts of a 1% parish general sales and use tax and from the receipts of a separate 1/4% capital improvement sales and use tax. The PIBs also have a cash-funded debt service reserve equal to maximum annual debt service (MADS).
KEY RATING DRIVERS
The 'AA-' IDR and GO bond ratings reflect the parish's low debt burden and its strong financial resilience that is supported by solid spending flexibility and healthy reserves. Fitch views these as important offsetting factors to the parish's severely limited revenue flexibility.
The 'AA-' rating on the PIBs reflects expectations for a strong coverage cushion during periods of moderate economic decline relative to both MADS and the additional bonds test (ABT) of 2.0 times (x).
Economic Resource Base
Terrebonne Parish is located on the Gulf of Mexico in southern Louisiana and has an estimated population of about 114,000. Economic activity is historically driven by the oil and gas industry, and the currently low price environment for crude oil is expected to slow employment and population growth. Wealth metrics in the parish are below average.
Revenue Framework: 'bbb' factor assessment
Operating revenues from sales taxes and mineral royalties have slowed in recent years, but Fitch expects the long-term overall revenue trend to continue at least in line with U.S. CPI. The parish has limited independent legal ability to raise general fund revenues.
Expenditure Framework: 'aa' factor assessment
A solid degree of expenditure flexibility is derived from moderate carrying costs and strong control over workforce spending. Fitch expects expenditure growth to trend in line with, to slightly above, revenue trends.
Long-Term Liability Burden: 'aaa' factor assessment
The burden for overall debt and net pension liabilities is low in relation to personal income and will likely remain in this range.
Operating Performance: 'aa' factor assessment
The parish's operating reserves and expenditure flexibility provide strong gap-closing capacity. Fitch expects the parish's conservative budget practices will maintain an adequate financial position through a typical economic cycle.
Diminished Financial Position: The IDR could face downward pressure if the parish fails to maintain satisfactory financial flexibility, including reserves sufficient to address periodic economic volatility.
Major employers are fairly limited, with healthcare and government institutions somewhat mitigating private sector concentration in the oil industry. Oil and gas concentration is evidenced among the parish's top 10 property taxpayers, predominantly petroleum and complementary firms, which constitute over 16% of the tax base. Despite current industry softness, taxable assessed valuation (TAV) grew by 20% for the 2017 collection year, reflecting property appreciation since the prior reassessment (2013 collection).
Sales taxes and mineral royalties represent about one-quarter and one-tenth of general fund revenues, respectively, while property taxes compose less than 10% of the total. Other sources include a mix of state-shared and local revenues. Sales tax receipts declined by 13.5% in 2015 and are expected to decline further over the near term.
Strong revenue growth in 2004-2014 exceeded the level of U.S. economic performance due to significant energy sector activity. However, slowed oil production is expected to produce a more subdued pace of revenue growth, below that of U.S. GDP but at or above the rate of inflation.
The parish has no independent legal ability to raise property or sales tax rates, so revenue flexibility is limited to increases in locally controlled franchise taxes, fees, and charges. Parish council does have the option to carry forward its millage rate following increases in property valuation, generating a higher tax levy.
As of 2015, general government items make up the majority of general fund spending (63%), followed by public safety (20.5%).
Given the region's rising, but slower population growth, Fitch expects the pace of spending growth to trend in line with, to slightly above, revenues in the absence of policy action.
Terrebonne Parish's fixed cost burden is moderately low, with carrying costs for debt service, pensions, and other post-employment benefits equal to 11.4% of governmental fund spending in 2015. Expenditure flexibility is aided by management's strong degree of control over workforce spending, as the parish has no collective bargaining agreements and pay adjustments for all employee classes are determined annually during the budget process.
Long-Term Liability Burden
The long-term liability burden, incorporating overall debt and net pension liability, is a modest 5% of personal income, and is expected to remain low based on regional capital needs and moderate amortization of direct debt. The parish has no plans for near-term issuance of tax-supported debt.
Parish employees participate in three separate cost-sharing multiple employer (CSME) pension plans for parochial employees, police, and firefighters, and each plan's benefits and contributions are set by the state legislature. The parish consistently funds its pensions at or above the actuarially determined level and the net pension liability is modest at $31 million (0.2% of personal income) using an adjusted 7% rate of return.
The parish's expenditure flexibility and operating reserves provide strong gap-closing capacity through a typical economic cycle despite economically sensitive revenues. Sales tax collections in 2016 to date are lower than budgeted, but management projects that cost-cutting measures (including capital outlay deferrals, attrition, and service cuts) will allow the parish to end the fiscal year, on Dec. 31, with a $1 million general fund drawdown as budgeted. Fitch expects the parish to make further spending adjustments as needed to maintain compliance with its informal fund balance target of 2.5 months of expenditures. An emergency reserve ($2.5 million at 2015 year-end) provides some additional flexibility in the event of a declared emergency.
Terrebonne Parish historically employs practices in support of financial flexibility, including conservative budget assumptions and allocations of excess revenues for non-recurring expenditures in the subsequent year.
Dedicated Tax Bonds
Sales tax revenues dedicated to the repayment of PIBs grew at a strong compound annual rate of 4.8% over the 10 years through 2014. However, energy industry weakness has led to declines both in 2015 and in 2016 to date, weakening near-term growth prospects for pledged revenues. Despite weaker near-term prospects, the PIBs are likely to maintain strong coverage cushions well in excess of MADS, in Fitch's view.
To evaluate the sensitivity of the dedicated revenue stream to cyclical downturn, Fitch considers both the revenue sensitivity results (using the same 1% decline in national GDP scenario that supports assessments in the IDR framework) and the largest decline in revenues over the period covered by the revenue sensitivity analysis. Fitch's analytical sensitivity tool (FAST) generates a moderate 4% revenue decline in the moderate downturn scenario. Even with this scenario decline, PIBs could tolerate a further 73% drop in revenues before revenues become insufficient to cover MADS. Such a decline would be 18.3x more severe than the scenario results and 10x the largest actual revenue decline in the review period.
Assuming issuance up to the PIBs' 2.0x ABT, debt service would continue to be covered with as much as a 50% drop in revenues. Such a decline would still be 12.5x greater than the scenario results and 5x the largest actual decline in the review period, consistent with an 'aaa' assessment for revenue sensitivity.
The rating on the PIBs is capped at the parish's IDR. Fitch does not view the dedicated sales taxes as special revenues under section 902(2)(B) of the bankruptcy code, which defines 'special excise taxes imposed on particular activities or transactions' as special revenues.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
Dodd-Frank Rating Information Disclosure Form