AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has taken the following rating action on the following bonds for which the city of Lake Charles, LA (the city), is the obligor:
--$25.6 million Louisiana Local Government Environmental Facilities and Community Development Authority revenue bonds, series 2007, affirmed at 'AA-'.
In addition, Fitch affirms the city's implied unlimited tax general obligation (ULTGO) rating of 'AA'.
The Rating Outlook is Stable.
SECURITY
The bonds are special and limited obligations of the authority, payable from any lawfully available funds of the city that have not been legally dedicated and required for other purposes. The city's obligation to pay debt service, in the form of a loan repayment to the authority, is absolute and unconditional.
KEY RATING DRIVERS
HEALTHY RESERVE LEVELS: A key rating driver supporting its implied 'AA' ULTGO rating is the city's significant financial cushion, reflected in strong liquidity and reserve levels despite recent draw-downs.
BUDGET CHALLENGES EVIDENT: The general fund's heavy dependence on sales tax revenues, coupled with pension and other spending increases, will likely continue to cause budget challenges in fiscal 2015. The fixed cost burden on the budget for pensions, other post-employment benefits (OPEB), and debt service currently consumes a manageable 12% of the fiscal 2014 budget.
REVENUES IMPROVING: Economically sensitive gaming revenues and sales taxes, the main revenues for repayment of the bonds, each weakened modestly in 2009 and 2010 but have since shown improvement.
MANAGEABLE DEBT: Overall debt ratios are moderate, amortization is above average, and the city's capital plan is manageable. Tax-supported debt plans are minimal although the city reports notable deferred capital needs.
CONCENTRATED ECONOMY BUT REGIONAL HUB; POSITIVE ECONOMIC TRENDS: The city serves as a regional economic hub of southwestern Louisiana with a concentration in refining, petrochemicals, and gaming, supplemented by manufacturing, and a notable government presence. Management reports significant investment underway in various industrial and commercial projects.
RATING DISTINCTION: The one-notch differential in the ratings reflects what Fitch believes is a slightly weaker pledge than either a general obligation or a first lien on a specific revenue source. The city has the ability to levy additional taxes for debt service should intended sources be insufficient.
RATING SENSITIVITIES
SUSTAINED BUDGETARY IMBALANCE: Fitch is concerned about the city's recent fund balance draws but notes that financial performance has improved and liquidity and reserves remain high. Any material deterioration below the city's 30% fund balance policy could create downward rating pressure given the city's economically sensitive revenue base.
CREDIT PROFILE
Lake Charles is located 30 miles inland from the Gulf of Mexico between Houston and Baton Rouge. The area economy has historically centered on refining, petrochemicals, gaming, and aircraft maintenance/rebuilding operations. The city is also home to McNeese State University, a public university with enrollment of 9,000. Population has remained level over the past decade at roughly 74,000.
OPERATING RESERVES PROVIDE FINANCIAL CUSHION
The city's unrestricted general fund balance is significant at $25.4 million or a solid 43% of expenditures and transfers out at fiscal 2013 year-end. Operations produced modest positive results in fiscals 2012 and 2013 following a cumulative 21% decline over the three prior fiscal years. The draws on fund balance resulted from a combination of capital and other one-time spending as well as recurring expenditures, as revenues weakened and spending pressure (particularly rising pension costs) continued.
CONSERVATIVE BUDGETING AIDS PERFORMANCE
The city outperformed a fiscal 2013 budgeted operating deficit of $2.6 million with a modest $539,000 gain at year-end (0.9% of spending), due largely to unfilled budgeted positions and better than budgeted revenues. Sales taxes provide over 50% of general fund revenues, and receipts have strengthened following declines in 2009 and 2010. Fiscal 2013 receipts totaled $46.4 million, 3.5% above 2012 totals and exceeding a budgeted 2% increase.
The fiscal 2014 $59.7 million operating budget is 3.9% above last year's budget and again forecasts an operating deficit (after transfers) of $2.4 million. City officials expect actual expenditures will be $1 million under budget. With another 3.3% gain in sales taxes anticipated, management expects to produce a small surplus at fiscal year-end. Fitch considers this projection reasonable given recent performance.
MODEST DEFICIT FORECAST IN 2015
The fiscal 2015 budget is again likely to be challenging, as officials expect continued pressure from deferred capital needs and pension costs. The city is currently litigating with police employees over supplemental pay, and settlement is pending. Fitch views the budgetary impact as manageable given the multi-year payout anticipated by city management. The city expects to again meet its formal minimum fund balance policy of 30% of budgeted expenditures and non-capital transfers. An extended trend of budget imbalance would lead Fitch to reconsider the current rating.
STANDBY REVENUES PROVIDE SOME FLEXIBILITY
The city has designated in the covenant resolution primary revenues for the repayment of the series 2007 bonds and series 2010 bonds (not rated by Fitch). Authorized sources include riverboat gaming revenues (of which 60% is allocated for debt service), a 0.28% sales tax levied specifically for capital projects (60% allocated for debt service), and revenues generated from an increase in wastewater rates effective Jan. 1, 2007 (of which 85% is allocated for debt service, with a cap of $500,000 annually). Maximum annual debt service (MADS) coverage by fiscal 2013 primary revenues is satisfactory at 1.6 times (x).
Voters also approved an additional 0.25% sales tax and 2.5 mills property tax (referred to as the standby revenues) to be levied in the event the primary revenue stream does not appear sufficient in any given year, as determined by an annual coverage calculation during the city's annual budgeting process. Fiscal 2013 MADS coverage from combined primary and standby revenues is a stronger 2.8x. The city maintains approximately $15 million in remaining bond authorization but has no additional plans to leverage lawfully available revenues.
RENEWAL RISK ASSOCIATED WITH PRIMARY REVENUES
There is some risk to governmental funds associated with several of the primary revenues. The sales tax is subject to periodic voter renewal (the last 10-year renewal election was in 2006). In addition, the city maintains an agreement with the Calcasieu Parish (the parish) regarding distribution of riverboat gaming revenues. The renewal period for the sales tax and gaming agreement is shorter than the final maturity of the series 2007 bonds (sales tax expires in 2016 and the gaming agreement expires in 2017, while the bonds mature in 2027).
However, officials report that sales tax renewals have historically received strong voter support (the most recent renewal was approved by two-thirds of voters), and at this time there is no indication from the parish that the gaming agreement will not be renewed. Any interruption in the primary revenue flow likely would cause downward pressure on the ratings.
AFFORDABLE DEBT BURDEN
Overall debt levels (city and parish debt) are moderate at $1,778 per capita and 2.7% of estimated full market value (MV). Debt service consumed a manageable 10% of governmental expenditures in fiscal 2013, and the city's debt amortizes rapidly (71% retired in 10 years). The city does not presently have tax-supported borrowing plans, but is utilizing a state revolving fund loan to make improvements to its wastewater system (to be repaid with system revenues). The city benefits from a dedicated sales tax for capital projects and gaming revenues are also typically applied to capital projects after payment of debt service. A combination of unspent bond proceeds and draws on strong reserves will be used to address deferred capital needs in the medium term.
INCREASING BUT STILL MANAGEABLE PENSION COSTS
The city participates in three separate pension programs for municipal employees, police, and firefighters, and each plan's benefits and contributions are set by the state legislature. The city fully funds its actuarially determined required contributions but has seen sharp increases in the required contribution rates due to poor investment returns. Since fiscal 2009, the contribution rate for the police plan has jumped from 11% to 31.5% of payroll, for firefighters from 14% to 29.25%, and for municipal employees from 6.75% to 9.5%.
Despite the increase, pension costs as a share of governmental expenditures are still a reasonable 5% ($5.1 million) in fiscal 2013. OPEBs are paid as incurred and the unfunded liability of $4.9 million as of Oct. 1, 2012 equals a nominal 0.1% of full MV. Total fiscal 2013 carrying costs (combined debt, pension ARC and OPEB paygo) were 16% of governmental fund spending, which Fitch views as moderate. Further pension contribution increases, however, will maintain pressure on operations.
IMPROVING ECONOMIC INDICATORS
The city's shrinking labor force and employment count from 2009-2011 mirrored the broader nationwide trend. An improving economic environment has boosted employment figures in the last two years, lowering the April 2014 employment rate to 4.4%, which is comparable with the state and below the national rate of 5.9%.
Recent and announced investments by several area refineries and other enterprises are expected to spur employment growth even further; management reports $65 billion in industrial and commercial projects either underway or planned for the region. Wealth indices are below the national and state benchmarks, and the city's above average poverty rate was 1.6x the national rate in 2011. However, Fitch's concerns over the low wealth levels are partly eased by the area's lower cost of living.
Gains in taxable values slowed in conjunction with the regional and national economic slowdown as well as the weakened local housing market. Fiscal 2012 TAV was essentially flat, but reappraisal of existing properties for fiscal 2013 contributed to a solid 6.6% growth in the tax base. Further tax base gains are likely given the economic activity underway and scheduled.
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 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=840277
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