AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings takes the following rating action on Lafayette, LA's, (the city) sales tax bonds:
--$201.9 million public improvement sales tax bonds, series 2003C, 2003D, 2004, 2004A, 2005, 2005A, 2005B, 2005C, 2006A, 2006B, 2006C, 2007A, 2007B, 2009A, and 2009B affirmed at 'AA'.
Fitch has withdrawn its ratings on certain maturities of the following bonds due to prerefunding activity:
--Lafayette (LA) public improvement sales tax bonds, series 2003C (certain maturities);
--Lafayette (LA) public improvement sales tax bonds, series 2003D (certain maturities).
Fitch also affirms the city's implied unlimited tax general obligation (GO) rating at 'AA'.
The Rating Outlook is Stable.
SECURITY
$112.3 million in bonds (2005, 2005B, 2006B, 2007A, and 2009A) are secured by revenues generated by a 1% sales tax (the 1961 tax) levied against general commercial activity within the city.
$89.5 million in bonds (2004, 2004A, 2005A, 2005C, 2006A, 2006C, 2007B, and 2009B) are secured by a separate 1% sales tax (the 1985 tax) also levied against general commercial activity with food and drug purchases exempted.
All above series and all outstanding parity debt have a first lien on the respective pledged sales tax revenues.
KEY RATING DRIVERS
STRONG COVERAGE; RATING CAPPED: The 'AA' rating on the sales tax bonds reflects the strong coverage provided by the pledged revenues, which are also a key source of operating revenues, as well as the bonds' sound legal provisions and general creditworthiness of the city. The rating is capped at the city's GO rating.
ADEQUATE FINANCIAL FLEXIBILITY: Strong general fund reserves provide the city with a good degree of financial flexibility. Recent spending reductions, revenue increases, and one-time budget savings appear to have arrested a period of budget imbalance.
SALES TAX RELIANCE: The city's reliance on sales tax revenue for operations presents risk due to economic sensitivity of the revenue source.
DIVERSIFYING ECONOMY: Lafayette is a regional economic hub with an oil and gas based economy that is complemented by growing retail and healthcare sectors. Population, wealth, and taxable assessed value (TAV) continue to register moderate growth and the housing market is healthy.
AFFORDABLE DEBT BURDEN: The city's debt profile is average with manageable future capital plans.
GROWING PENSION COSTS: Annual required pension contributions are above average and growing. Continuing increases could present near-term budget pressure.
RATING SENSITIVITIES
RETURN TO BUDGET IMBALANCE: Fitch views as key to rating stability the maintenance of strong reserve levels to provide cushion against economically sensitive revenue streams and potential increases in already high pension costs. Further reductions to fund balance driven by budget imbalance could pressure the ratings.
CREDIT PROFILE
Lafayette is located in south central Louisiana and is the fourth largest city in the state with an estimated population of approximately 122,000. Population growth has been steady with a one-time boost in 2005 following hurricanes Katrina and Rita. Lafayette is 135 miles from New Orleans.
The city and Lafayette Parish have operated under a consolidated form of government since 1996. The consolidated government is governed by a city-parish president and nine-member council. The city and parish provide shared municipal services and audited financial statements are presented on a consolidated city-parish basis.
REGIONAL ECONOMIC HUB COMPLEMENTS OIL/GAS ECONOMY
Lafayette's dominant economic sector is oil and gas operations, making it susceptible to the cyclicality associated with energy prices. However, the local economy is increasingly diversifying due to the city's status as a regional hub for retail, healthcare, and higher education for the surrounding eight-parish region known as Acadiana. The city is home to the University of Louisiana at Lafayette, the state's second largest university, as well as five acute care hospitals. Other top employment sectors include trade, transportation, and utilities, government, leisure, and business services.
Employment concentration in the oil/gas sectors is above national norms, totaling 11% of the parish-wide non-farm employment. Employment in this sector continues to climb as drilling activity in the Gulf resumes after the Deepwater Horizon oil spill in 2010. There is some diversity amongst top employers, with growth in the healthcare and manufacturing sectors also playing a part in the robust employment gains seen recently. Parish employment has risen steadily since a recessionary contraction in 2009 and jumped 8.7% in 2012. Unemployment rates in the parish are low compared to the state and nation. The February 2013 rate was 4%.
The economic activity has also increased TAV and wealth levels. Per-capita income now approximates the national average and per-capita market value has risen to $97,000 in fiscal 2013 from $68,000 in fiscal 2008. Residential and commercial development coupled with a stable housing market have supported consistent and moderate annual TAV growth. The city's TAV climbed 7.1% to $1.3 billion in fiscal 2013 due to re-assessment of properties (occurring every four years in Louisiana). Fitch expects moderate TAV growth to continue based on the area's economic indicators.
STANDARD LEGAL PROVISIONS AND STRONG DEBT SERVICE COVERAGE
Neither the 1961 nor the 1985 sales taxes expire, and Fitch considers legal provisions, which are identical for each security, to be standard. Bond covenants preclude the city from issuing additional debt unless average annual revenues immediately preceding the issuance exceed 1.5x MADS. The authorizing language also limits the use of the residual pledged revenues for general fund purposes to 35%; the remainder is applied to capital projects.
Collections have grown each year except during a recessionary decline in fiscal 2009. Pledged 1961 sales taxes equaled $40.5 million in fiscal 2012, up by 12% from fiscal 2009, and covered MADS 2.35x. Pledged 1985 sales taxes equaled $34.3 million in fiscal 2012, reflecting a similar 10% increase, to cover MADS 2.42x. The different collection amounts for the 1% sales taxes reflect an exemption granted under the 1985 sales tax for food and drug purchases. The growth in pledged revenues has preserved satisfactory coverage levels despite additional parity debt issuance in recent years.
FISCAL CUSHION BEING RESTORED
The consolidated city-parish general fund recorded three years of deficits after transfers from fiscal years 2009-2011 due to a combination of pay-go capital outlays and structural budget imbalance. The gap in spending and revenues widened each year during this period, in part due to increased staffing levels without corresponding revenue growth. The impact was a string of net deficits growing from 3% to 9% of spending and a cumulative $18 million draw-down on general fund balance to sustain operations (over half of beginning fiscal 2008 fund balance). Combined city-parish general fund reserves fell significantly, from 35% to 14% of spending to conclude fiscal 2011.
Sizable spending adjustments and one-time budget savings were utilized in the fiscal 2012 budget to restore fund balance. Management froze hiring and salaries and left over 70 positions vacant. In addition, refunding of special millage bonds paid from the general fund provided one-time savings of $3.6 million. Management also transferred $3.5 million of unrestricted traffic fine revenues to further boost general fund reserves.
Primary operating revenues, which include sales taxes equal to 34% and property tax revenues equal to 23% of operating revenues, also improved measurably and were conservatively budgeted. Total general fund revenues and transfers in climbed 12% while spending and transfers out were reduced by 6% from the year-prior, yielding an impressive $8.4 million general fund surplus after transfers (8% of spending). The unrestricted portion of the city-parish general fund balance climbed to $24.3 million or 23% of spending.
The fiscal 2013 city-parish budget continues with the leaner spending levels but does forecast a net operating deficit of $3.4 million. The budget eliminates 84 positions left vacant from the prior-year and foregoes staff pay raises, except for 2% state-mandated increase for fire personnel; management also continues to hire conservatively. Council approved a 'roll-forward' of the current property tax millages, which yielded additional property tax revenues in light of a 7% climb in TAV due to property reassessments.
Fitch believes that the city-parish may outperform the fiscal 2013 budget based on conservative assumptions and year-to-date revenue and expenditure trends; sales taxes were budgeted slightly lower than fiscal 2012 actual receipts and February collections were up 3% year-over-year. Fitch views as important the maintenance of healthy reserves given the sales tax dependency, noting that a return to the degree of budget imbalance seen in prior years would be a negative credit factor.
MANAGEABLE DEBT BURDEN & CAPITAL PLAN BUT ELEVATED FIXED COSTS
Overall debt ratios for the city are average to above average at 4.3% of market value and 4,193 per capita. Debt has increased in large part due to the debt issuance of the Lafayette Parish School Board, which has significant capital needs. The pace of principal retirement is above average with 61% retired in 10 years. Both the 1961 and the 1985 taxes have been leveraged regularly in recent years with approximately $290 million outstanding combined. The city's non-utility capital improvement plan is manageable and down from prior-year plans at about $195 million through 2017. Funding is split between use of available resources and bond proceeds, and the borrowing plan calls for annual sales tax debt offerings between $10 and $30 million.
Pension and other post-employment benefits (OPEB) are provided to employees through one of four state run plans. Contributions to the state-wide plans have increased significantly, driven by the under-funded position and lower investment returns of the CSME police and fire plans. Each plan's benefits and contributions are set by the legislature, and Fitch believes further increases to contribution rates are likely to come out of the current legislative session set to adjourn in June 2013. Total pension payments by the city increased 19% from 2010-2012 and consumed 7.5% of governmental fund spending (adjusted to exclude capital projects funds) in fiscal 2012. Continued increases similar in magnitude to the recent rate hikes could pressure the city's budget and will need to be managed accordingly with spending adjustments. Total fixed charges for debt service, pension ARC, and OPEB paygo consumed a high 25.7% of governmental fund spending.
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, 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=790731
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