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Fitch Affirms St. Louis IDA, MO's Lease Revenue Bonds at 'AA-'; Outlook Stable

August 26, 2016 2:15 PM EDT

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the ratings on the following bonds issued by the Industrial Development Authority of the City of St. Louis (MO) (the IDA) at 'AA-':

--$25.8 million taxable leasehold revenue bonds, series 2010A-1 (St. Louis Public Library Project - Recovery Zone Economic Development Bonds - Direct Pay);

--$11.2 million taxable leasehold revenue bonds, series 2010A-2 (St. Louis Public Library Project - Recovery Zone Build America Bonds - Direct Pay);

--$13 million variable rate taxable leasehold revenue bonds, series 2010A-3 (St. Louis Public Library Project - Recovery Zone Economic Development Bonds - Direct Pay).

In addition, Fitch has affirmed St. Louis Public Library, MO's Long-Term Issuer Default Rating (IDR) at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are limited obligations of the district payable solely from rents, revenues, and receipts paid to the authority under the lease with the district. The district's obligation to make lease payments is absolute and unconditional without right to abatement, set-off, or counterclaim and is payable from any legally available funds and subject to annual appropriation. The leased asset is the central library.

The bonds are additionally secured by a shared cash-funded debt service reserve. The 2010A-3 bonds are additionally secured by a subordinate pledge of certain capital campaign gift proceeds.

KEY RATING DRIVERS

The 'AA' IDR reflects Fitch's expectation that the district will maintain financial flexibility during economic cycles through a combination of expenditure controls and budget management, further bolstered by a strong reserve cushion. Fitch expects that these credit positives will mitigate potential revenue pressures and sustain the district's strong financial profile.

The leasehold revenue bonds are rated one notch lower at 'AA-', reflecting the risk of appropriation for lease payments.

Economic Resource Base

The City of St. Louis Municipal Library District, which is coterminous with the city of St. Louis (IDR 'A-'/ Stable Outlook), consists of a central library and 15 branch locations. The district is governed by an independent board of directors whose members are appointed by the city's mayor and confirmed by the city's board of aldermen. St. Louis' growing healthcare and higher education sectors are its main growth drivers, but result in a slow-growth tax revenue profile given that these institutions are property-tax-exempt. Recent policy initiatives have made extensive use of tax incentives to spur redevelopment, making it difficult for government to fully capture new growth in the near term. Until incentives begin to expire, policymakers will have to endure the revenue time lag until revitalized properties are added to the taxable base.

Revenue Framework: 'bbb' factor assessment

The district's revenues, which are concentrated in property taxes, have historically grown in line with inflation but moderately below U.S. GDP. Fitch expects stagnant revenue growth over the medium term based on projected slow AV growth. The district's legal ability to raise revenues is limited as the current tax rate lies at the legal cap, barring voter approval to exceed the cap.

Expenditure Framework: 'aa' factor assessment

The natural pace of spending is expected to grow above that of revenues; however, the district's expenditure flexibility is solid. Carrying costs for debt service and retiree benefits are moderate, and will increase considerably as principal begins to amortize, but should not pressure the expenditure framework assessment.

Long-Term Liability Burden: 'aa' factor assessment

Long-term liabilities are moderate at roughly 13% of personal income, though much of the burden is due to overlapping city and county debt. The district does not provide OPEB.

Operating Performance: 'aaa' factor assessment

Fitch expects the district to maintain a high level of financial flexibility through an average economic downturn due to sizeable reserves and sound expenditure flexibility. Active budget management practices enhance overall operating performance.

RATING SENSITIVITIES

Maintenance of Strong Financial Profile: The rating is sensitive to the district's ability to maintain a solid financial position, including strong reserves and prudent fiscal management.

CREDIT PROFILE

St. Louis' broad and diverse economic base acts as a central hub for a multi-county region that extends across the Mississippi River into west Illinois and neighboring Missouri counties. The city's major employers and institutional anchors provide a measure of economic stability, and the city's downtown is the region's largest employment center. The city grows by an estimated 36% during work hours due to sizable numbers of commuters entering St. Louis from adjacent counties and from Illinois. Non-residents working in the city contribute to the local earnings tax. St. Louis contains pockets of severe poverty (the overall poverty rate is close to 30%, almost double the national rate) and wealth and income levels are well below U.S. and state averages.

St. Louis' unemployment rate has historically trended higher than those of the U.S. and Missouri, but the differentials have narrowed since 2013; St. Louis' March 2016 unemployment rate was 5.5% compared to 5.1% for the U.S. and 4.8% for the state. For 2015, the city's average unemployment rate was 6.1% compared to 5.3% for the U.S. and 5% for the state. Growth in the city's labor force has been positive, albeit slow, with only 2,500 additions between first quarter 2012 (1Q12) and 1Q16. With a population of almost 320,000, St. Louis is the home to nine Fortune 500 companies including Anheuser Busch, Express Scripts, Wells Fargo and Monsanto, and strong institutional anchors, including Washington University and BJC Healthcare. These entities have acted as an economic and employment stabilizer during past recessions.

Revenue Framework

The district's primary source of revenues almost exclusively derives from a statutory property tax levy. Increases in the district's tax rate have offset persistent post-recession AV declines, though the district reached the maximum voter approved mill rate in fiscal 2013.

Historical general fund revenue growth has been approximately in line with inflation, but below U.S. GDP growth. In fiscal year 2015 the district's AV rebounded slightly for the first time since the Great Recession. Fitch believes this pattern of sluggish growth is likely to persist, with some modest risks to the downside given St. Louis' multi-decade pattern of population loss, and the large number of new developments being spurred by tax incentives that will delay realization of new tax revenues.

The district's legal ability to raise revenues is constrained by constitutional limitations that apply throughout the state of Missouri. These limitations require elected leaders to seek direct voter approval to raise taxes above an annual limit via a local referendum.

Local tax limitations are governed by the Hancock Amendment to the Missouri state constitution, which was enacted in 1980. The Hancock Amendment limits the ability of Missouri local governments to raise their property tax levy above the lower of 5% or the rate of inflation annually without recourse to a special election. The district's tax rate currently lies at the maximum voter approved cap of $0.56 per $100 TAV.

The district receives intermittent distributions from the Library Foundation, a not-for-profit organized for the purpose of accepting contributions for the library. In fiscal 2015 distributions accounted for 13% of general fund revenues.

Expenditure Framework

The district maintains a significant level of expenditure flexibility as it has full discretion over library operations and workforce. The district's largest expenditures were compensation and employee benefits, comprising 46% and 12% of total expenditures, respectively, in fiscal 2015.

Fitch expects that the district's natural pace of spending will remain above revenue gains given expected slow revenue growth.

The limited nature of district operations, low carrying costs, and strong workforce control contribute to solid expenditure flexibility. Carrying costs associated with debt service and actuarially determined pension payments total a moderate 13.9%. Current carrying costs exclude principal payments for all three leasehold revenue bonds, which begin in fiscal year 2020, though Fitch expects that the increased debt service costs will still yield carrying costs consistent with the 'aa' category. Management retains flexibility in staffing levels given moderate prospects for population growth, and the district has no labor contracts or wage pressures.

Long-Term Liability Burden

The district's long-term liability burden is moderate relative to the district's economic resource base, with unfunded pension liabilities, direct debt and overlapping debt totaling about 12.6% of personal income. Maintenance of the long-term liability's current assessment relies to an extent upon future debt issuance by overlapping entities, which accounts for the majority of the district's overall debt. The district has no plans for future issuance. Amortization is notably slow with merely 11% of principal retired in 10 years, though the district has the resources to exercise the optional redemption on the 2010A-3 bonds, commencing in 2020.

The district participates in the Employees Retirement System of the City of St. Louis, a cost-sharing multiple employer pension system. Under GASB 67 and 68, the system's assets covered 83.5% of liabilities as of fiscal 2015, a ratio that falls to a Fitch-estimated 74.5% using a more conservative 7% return assumptions. Annual actuarially required contributions were fully funded in fiscal 2015. The district does not provide OPEB.

Of the district's direct debt, 26% is variable-rate (series 2010A-3). The interest rate on the series 2010A-3 bonds is fixed through March 15, 2020, after which it resets annually not to exceed a statutory cap of 10%. The variable rate debt is low enough that it does not weaken the 'aa' assessment for the district's long-term liability burden.

Operating Performance

The district has exceptionally strong gap closing capacity. The Fitch Analytical Sensitivity Tool suggests the city may experience very modest revenue losses in a moderate recession. Fitch notes that the scenario analysis includes inherently cyclical revenue streams, which underlie the district's revenue volatility; however, these sources comprise a small percentage of total revenues. Current reserves are sufficient to offset such a revenue loss even if policymakers took no action to raise revenues or adjust spending. The city is likely to maintain substantial reserves and financial flexibility across business cycles.

The district has demonstrated a strong commitment to enhancing its financial flexibility. Budgeting is conservative and management has been proactive in maintaining operational balance throughout economic cycles. Despite revenue raising limitation pressures, unrestricted reserves have remained ample.

In fiscal 2015, the district posted a surplus of $3.7 million, equal to 15% of spending, resulting in a strong unrestricted fund balance of $20 million, or 80.7% of spending. The fiscal 2016 budget projects a $1 million operating deficit, which management projects will be offset by transfers from the Library Foundation.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/site/re/879478

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1010883

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1010883

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings
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Barbara Ruth Rosenberg
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Fitch Ratings, Inc.
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New York, NY 10004
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Source: Fitch Ratings



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