Fitch Ratings assigns an 'AA' rating to Baton Rouge, Louisiana's sales tax revenue bonds as follows:
--$5.45 million public improvement sales tax revenue bonds, series 2010A.
The bonds are expected to sell via negotiation the week of Jan. 18, 2010.
In addition, Fitch affirms $116.1 million in outstanding parity sales tax revenue bonds at 'AA'
The Rating Outlook is Stable.
RATING RATIONALE:
--The consolidated city-parish government maintains a sound financial profile, characterized by healthy reserve levels.
--The area economy is relatively diverse, although some petrochemical industry concentration exists.
--The area continues to benefit from the extended difficulties in rebuilding New Orleans, as evidenced by elevated sales tax receipts and relatively low unemployment.
--While consolidated government debt totals remain manageable, capital needs for roads and wastewater system improvements remain significant and management has identified sizable needs for public safety, drainage and other infrastructure.
KEY RATING DRIVERS:
--While the recessionary impact on sales tax revenues has been modest to date, further weakening of this critical revenue source, combined with recurring increases in outlays, likely will pressure operations.
--The failure of a November 2009 bond election will force management to consider alternative financing approaches for 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 has strengthened considerably since 2005, led primarily by the rapid growth in sales tax revenues. The shift of population and businesses from hurricane-impacted areas benefited Baton Rouge economically, and Fitch believes a significant portion of that shift is permanent. The general fund reported significant net income from 2005 to 2007, and the unreserved general fund balance climbed from roughly $55 million to nearly $90 million during this period. Operating results for 2008 included a decline of more than $8.5 million in reserves, as city/parish officials applied some of this buildup in reserves to fund capital needs. Preliminary 2009 general fund results include an $11 million decline in reserves as management continues to apply monies to one-time needs. Despite these drawdowns, Fitch views the projected 2009 unreserved general fund balance of nearly $64 million (or 23% of spending) as sound.
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% 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 the projection for 2009 is for a modest decline of less than 1%. Fitch considers the sustained annual sales tax revenue increase of roughly $20 million from pre-2005 totals evidence of the permanence of the shift in economic activity to Baton Rouge from storm-affected areas. Also, the city/parish budgets sales tax revenues conservatively in light of the unusual circumstance surrounding the recent increase, a prudent approach that Fitch views positively.
The city/parish has sizable capital programs underway for both roads and the parish wastewater system. These programs are supported by separate 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 finance the construction of a new hangar at the municipal airport, and officials plan for hangar rental payments to repay the series 2010A bonds. Legal provisions are fairly typical, with an additional bonds test 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. Debt service coverage is healthy, with projected 2009 revenue generating 6.0x MADS coverage. Sizable 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 6.6% (October, 2009) remains below the state (7.1%) and national (9.5%) averages for the month.
These rating actions reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com' and specifically include the following reports:
--'Tax-Supported Rating Criteria', dated Dec. 21, 2009;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Dec. 21, 2009.
Additional information is available at 'www.fitchratings.com'.
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