The bonds are scheduled for a negotiated sale the week of Feb. 20. Proceeds will finance street and road improvements as part of the parish's 'Green Light' program.
In addition, Fitch affirms the following ratings:
--$119.2 million East Baton Rouge Parish road & street improvement sales tax revenue bonds, series 2006A and 2009A at 'AA-';
--$93.4 million East Baton Rouge Parish variable rate road & street improvement sales tax revenue bonds, series 2008A underlying rating at 'AA-';
--$100.4 million City of Baton Rouge public improvement sales tax revenue bonds, series 2007A, 2008A-1, 2008A-2, 2008B, 2010A and 2010B at 'AA+';
--Implied unlimited tax general obligation (ULTGO) bond rating of Baton Rouge and East Baton Rouge Parish Consolidated Government at 'AA+;
The Rating Outlook for all the above securities is Stable.
The series 2012 bonds are special obligations of the LCDA, payable from revenues received from the parish under the loan agreement, which are secured by 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 outstanding parish road & street improvement sales tax revenue bonds are secured by a first lien on 70% of the 1/2 cent parish-wide road sales tax.
The City of Baton Rouge public improvement sales tax revenue bonds are secured by net proceeds (after administrative and collection expenses) of a 2% sales and use tax levied and collected within the city.
KEY RATING DRIVERS
BACKUP REVENUE PLEDGE: The 'AA' rating on the LCDA 2012 bonds benefits from the 'lawfully available funds' pledge, which Fitch rates one level below an issuer's ULTGO rating.
SATISFACTORY PARISH SALES TAX COVERAGE: Debt service coverage on the parish road sales tax bonds from the pledged revenues is satisfactory, with projected combined maximum annual debt service (MADS) coverage of outstanding parish senior lien bonds and the LCDA 2012 bonds of roughly 1.25 times (x) using unaudited 2011 totals.
CITY SALES TAX COVERAGE STRONG: Coverage on the city sales tax revenue bonds remains healthy at over 5.0x, and unaudited 2011 results show a nearly 4% increase in general fund sales tax receipts.
DIVERSIFIED REGIONAL ECONOMY: Fitch historically has cited the regional economy as a positive credit given its diversity and gains since the 2005 Louisiana hurricanes; while weaker due to recessionary forces, the economy still is faring relatively well.
SOUND FINANCIAL PROFILE: The combined city/parish financial profile is a credit strength, characterized by solid operating reserves, conservative budgeting, and a tenured management team; these are the key drivers for the implied 'AA+' ULTGO rating.
GROWING FIXED COST BURDEN: While overall city/parish debt levels are moderate, benefit-related liabilities are large and likely increasing. Increases in these liabilities, combined with identified capital needs for drainage and public safety, could reduce financial flexibility in the future.
AVAILABLE FUNDS PLEDGE KEY
The series 2012 bonds are being sold through the LCDA pursuant to a loan agreement between the authority and the parish. While the primary pledged revenues are a subordinate lien on 70% of the 1/2% parish road sales tax, 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 $40 million out of a $280 million 2012 general fund budget, leaving a significant amount as 'available'. Historically healthy general fund liquidity also indicates substantial flexibility if pledged sales tax revenues are insufficient.
Pledged road sales tax receipts rebounded moderately in 2011 (unaudited), increasing 4% following two years of declines. The 70% available to secure the outstanding senior lien and these LCDA bonds totaled $25.3 million for the year, providing satisfactory senior lien MADS coverage of roughly 1.5x and all-in coverage of 1.25x. A stress test reducing pledged revenues by 10% still generates adequate coverage of 1.3x (senior lien) and 1.15x (all-in).
The Green Light program is financing roughly $600 million of street and road improvements throughout the parish, the funding a combination of bond proceeds and pay/go spending. Previously issued bonds totaling $236.2 million and available resources have financed roughly $480 million of projects, and management reports 22 completed projects and 16 either in design or under construction. The 1/2 cent road sales tax, of which 70% is pledged to debt, was last extended in 2005 to last until 2030. The final maturity on all parish road sales tax debt is 2030, and management anticipates no further borrowings for this program.
OPERATING RESERVES DOWN BUT STILL AMPLE
Parish financial operations remain sound despite recent revenue declines and drawdowns of reserves (largely for one-time outlays). The 2010 unreserved general fund balance totaled $66.7 million or 24% of spending, up slightly from 2009 but down from the peak of 38% in fiscal 2006. The 2011 preliminary results indicate an increase in reserves of more than $3 million, as essentially break-even operations were aided by one-time monies. The 2012 budget includes the use of roughly $7 million in reserves, but this projection assumes conservative revenue growth and management anticipates the gap will largely be closed by year-end. Given the city/parish history of conservative budgeting, Fitch considers this projection reasonable. The city/parish has a policy of maintaining a 5% budget stabilization balance as part of the unreserved fund balance and an informal reserve target of 20%--25% of spending.
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. To combat recessionary budget pressures over the last few years, the parish has cut spending-general fund expenditures and transfers out have declined the past three fiscal years, including a preliminary reduction of roughly $4 million in 2011. The 2012 budget assumes a modest increase in general fund outlays of less than 2%.
GROWING POPULATION & DIVERSE ECONOMY
The shift of population and businesses from hurricane-impacted areas in south Louisiana in 2005 and 2006 benefited Baton Rouge economically, and a significant portion of that shift appears permanent. The 2010 parish population is approximately 440,000, up 6.5% since the 2000 census. 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 but below the nation averages.
Calendar 2011 marked the fourth consecutive year of employment declines in the parish, bringing total employment down below pre-hurricane levels. Over the last five years the labor force has been generally stable and the unemployment rate in the parish on par with the state and below the nation. The 6.3% parish unemployment rate in December 2011 reflected a drop from 7% one year prior and was consistent with the state average (6.4%) and well below the U.S. average (8.3%) for the month.
LARGE & GROWING FIXED COST BURDEN
The city/parish has large capital programs underway for both roads and the parish wastewater system, each supported by separate one-half cent sales taxes and by wastewater system revenues for the utility. The failure of large GO bond elections in 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 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 January 2012 was negative $28 million; the combined variable-rate exposure (including the tax-supported portion of sewer system debt) is roughly 22% of combined city/parish tax debt. Overall tax-supported debt is moderate at $2,073 per capita and 2.5% of market value.
The city/parish contributes 100% of the annual required pension payment, which increased 18% from 2008 to 2010 but has since slowed. The cost-sharing multiple employer pension plan is at Fitch's low range of adequate funding (70%) using a more conservative 7% investment return and, as a result, payments will likely continue to increase. Management has identified addressing a sizable post-employment benefit liability as a priority. For 2010 the city/parish funded one-third of the actuarially required contribution (ARC). While the unfunded liability is minimal compared to taxable market value, the $52 million ARC, if fully funded, would have represented nearly 20% of 2010 general fund spending. When 2010 tax-supported debt service and pensions costs are added, the fixed cost burden associated with long-term liabilities across general and relevant debt service funds increased to a high 30% of spending.
CITY SALES TAX COVERAGE REMAINS STRONG
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 city sales tax bonds; the parish also levies and collects a 2% sales tax for general purposes on transactions within the unincorporated areas of the parish. Following a sizeable decline in 2009, combined city/parish sales tax receipts registered a more modest 3% decline in 2010 and then posted a 4% gain for 2011. Management has conservatively budgeted a 1% increase for 2012. MADS coverage from preliminary 2011 revenues was down from prior years but remains healthy at nearly 5.5x, well above the 3.0x ABT threshold. Coverage is expected to remain ample given limited future leveraging plans and high sales tax revenue proportionate to the budget. The city/parish calculates additional bonding capacity for this dedicated revenue source pursuant to state statue at $651 million as of 2010.
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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 and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria