Fitch Affirms St. Louis (MO) GO & Muni Finance Corp Lease Rev Bonds; Outlook
NEW YORK -- June 17, 2013
Fitch Ratings affirms the following city of St. Louis, MO (the city)
outstanding general obligation (GO) bonds:
--$10.52 million GO bonds, series 2006, at 'AA-'.
Additionally, Fitch affirms its rating on the following St. Louis Municipal
Finance Corporation outstanding leasehold revenue bonds:
--$99.56 million (Pension Funding Project) leasehold revenue refunding bonds
(taxable), series 2007, at 'A+';
--$11.99 million (Pension Funding Project) leasehold revenue refunding bonds
(taxable), series 2008A, at 'A+';
--$23.115 million Juvenile Justice Detention Center leasehold revenue bonds,
series 2008B, at 'A+'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
SOLID MANAGEMENT: The city has prudently managed operations by conservatively
forecasting economically sensitive taxes that make up the majority of city
revenues, implementing new revenue sources, continuously monitoring
expenditures and making judicious cuts in its workforce.
REGIONAL ECONOMIC HUB: The city's diverse economic base and institutional
anchors promote stability within the region. Development is ongoing and the
city and surrounding region feature prominent businesses.
WEAK SOCIOECONOMIC BASE: Socioeconomic indicators are below average with a
declining population, low wealth levels and high unemployment rates.
ELEVATED DEBT LEVELS: Debt levels are above-average.
MANAGEABLE PENSION OBLIGATION: Pensions are well funded and recent, steep
increases are expected to level off in the near future.
RATING DISTINCTION: The one notch rating distinction on the leasehold revenue
debt from the city's GO rating reflects annual appropriation risk and
essentiality of pledged assets.
DIRECTION OF FUND BALANCE: The maintenance of continued prudent budgeting
practices and fund balance levels consistent with its rating category, despite
a reliance on economically sensitive revenue sources, is key to preservation
of existing credit quality.
POPULATION CHANGES: A continuation of population and labor-force declines
could hamper future growth prospects, impacting current credit quality.
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.
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.
REGIONAL ECONOMIC HUB
The city's economy focuses on health, education and business services, in
addition to convention and entertainment enterprises. Leading employers
include Washington University (14,422), St. Louis University (10,140), and BJC
Health System (12,696). Notable companies with headquarters in the city
include Stifel Financial, Energizer Holdings and Anheuser Busch/InBev.
Unemployment rates remain above average but have improved to 8.5% for April
2013, well below past highs but above the state and national rates of 6.3% and
7.1%, respectively. 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 in 2000, while the metropolitan statistical area (MSA) has experienced
4% growth over the same time period.
The city's downtown population is over 14,000 and expansion continues in the
retail and residential housing markets with 523 new units brought on line in
2012. 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 associated transactions 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 and a redesign of the area near the Gateway Arch
helping to continue the development of the city's downtown.
FINANCIAL STABILITY DEPENDENT ON ECONOMICALLY SENSITIVE TAXES
The city's earnings tax, comprising 36% of fiscal 2012 general fund revenues
(fiscal year ending June 30), is the largest non-property tax revenue source,
followed by franchise taxes (12%), sales taxes (12%) and a payroll tax (8%).
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
in April, 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
The earnings tax was up 4.8% in fiscal 2012, its third consecutive year of
growth after a small dip in fiscal 2009, and is projected to finish fiscal
2013 up about 2.5%, slightly ahead of the 2.2% budgeted growth figure. The
payroll tax is up 4.1% through three quarters of fiscal 2013, while the sales
tax is down 4.2% during the same period, following particularly strong results
in fiscal 2012 driven by the Cardinals participation in the World Series. The
city also implemented a refuse fee in July, 2010 that is expected to generate
$14 million or 3% of general fund revenues in fiscal 2013.
Property taxes comprise only 12% 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. The city's projected 2013 tax rate of $1.4419 is below the
Hancock limit of $1.49. Assessed values and home prices in the city have been
After two years of general fund deficits, the growth in the city's
economically sensitive revenue sources led to a $6.5 million surplus in fiscal
2012. This surplus raised the city's unrestricted fund balance to $39 million
or 7.5% of expenditures. Active management of costs kept general fund
expenditures almost flat to fiscal 2011. The city instituted layoffs in fiscal
2010 and 2011 and its estimated fiscal 2014 workforce will be down 10% from 10
The fiscal 2013 overall budget has flat expenditure growth when compared to
fiscal 2012 and includes no use of fund balance. Management currently projects
a small surplus from tax revenue growth and increased permitting and court
fees. For fiscal 2013, 75% of the budget is related to salary and benefit
costs, including a $16 million or 21% increase in pension costs.
The city estimated a preliminary fiscal 2014 budget gap of $16 million.
Through expenditure cuts and the use of special revenue funds, the city was
able to close the gap and adopt a balanced fiscal 2014 budget. The budget
includes moderate projected growth in tax revenues, and a more manageable $7
million increase in pension costs.
ELEVATED DEBT LEVEL CONSISTS OF LEASE REVENUE AND GO BONDS
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 in the budget.
Although the city has issued very few GO bonds, direct debt levels have
increased in recent years, 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 $4,646 per
capita and a high 8.4% of market value. The city does short term cash flow
borrowing to supplement operations due to the lumpy receipt of tax revenues.
The most recent note offering was $65 million, down from $70 million the prior
The city has three pension plans, all of which are moderately or well-funded.
As of Oct. 1, 2011, the city's firemen's fund is 94% funded, or about 88%
using Fitch's 7% discount rate assumption. The police plan is 81% funded or
about 75% assuming a 7% discount rate. The employee's retirement system is 79%
funded, or about 71% assuming a 7% discount rate. Funding levels have been
aided through the issuance of pension obligation bonds. Pension costs have
been growing rapidly but are expected to level off beginning in fiscal 2016.
The city paid $9 million towards its $38 million other post-employment
benefits (OPEB) annual required contribution and has an unfunded liability of
$443 million as of July 1, 2011. Total carrying costs for debt, pension and
OPEB are a moderate 19.4% of government fund expenditures.
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
Applicable Criteria Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 14, 2012;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 14, 2012.
Applicable Criteria and Related Research:
U.S. Local Government Tax-Supported Rating Criteria
Tax-Supported Rating Criteria
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Eric Friedman, +1-212-908-9181
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Karen Wagner, +1-212-908-0230
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