Fitch Affirms St. Charles Parish Law Enforcement Dist, LA's Ltd Tax Bonds at 'AA'; Outlook Stable
Fitch Ratings has taken the following actions on St. Charles Parish Law Enforcement District, Louisiana:
--$13.5 million of outstanding limited ad valorem tax bonds, series 2009A & 2009B affirmed at 'AA';
--Assigns an 'AA' implied unlimited tax GO (ULTGO) rating.
The Rating Outlook is Stable.
The bonds are secured by a pledge of revenues derived from the levy of a special ad valorem tax of 17.5 mills on all taxable property within the district. The tax rate is subject to adjustment from time-to-time in order to remain revenue neutral in light of re-appraisals.
KEY RATING DRIVERS
STRONG RESULTS & BALANCE SHEET: Consistently strong financial operations have yielded healthy reserves and ample liquidity. The district's good degree of financial flexibility mitigates concerns over the district's revenue inflexibility.
PLEDGED REVENUES SUPPORT OPERATIONS: Coverage by pledged property tax revenue of maximum annual debt service (MADS) is wide. Heavy reliance on the pledged revenues for operations reduces the likelihood of material coverage dilution through additional bond issuance and supports this rating at the cap of the implied ULTGO rating.
EXTENSIVE, CONCENTRATED TAX BASE: The concentrated tax base has demonstrated a generally positive growth trajectory. Favorable economic metrics are in part due to strengthening of the cyclical energy sector, including oil refining and chemical production.
LOW DEBT: Debt levels are low relative to the district's tax base and fixed costs are affordable relative to the budget. The pace of debt retirement is average.
FINANCIAL FLEXIBILITY: Maintenance of large reserve balances is important given the district's limited revenue raising ability, highly concentrated tax base, susceptibility to hurricane risk, and risk of declining demand for jail services.
TAX BASE STABILITY: Continued stability of the district's tax base is also a key credit focus.
The district is coterminous with St. Charles Parish, a 401 square mile parish located within the New Orleans metropolitan statistical area (MSA). The St. Charles Parish Sheriff, funded by the district, provides law enforcement and corrections services within the parish and also serves as the parish property tax collector.
WELL-MANAGED FINANCES WITH ROBUST FISCAL CUSHION
Sheriff's office finances are well-managed with consistent general fund operating surpluses. The pledged property tax proceeds provided over 50% of operating revenues in fiscal 2012. Other important revenues include a 3.7 mill levy for employee salaries and benefits (not pledged to the bonds) and per diem payments from federal, state and local governments to house their prisoners in the district's correctional facility. These inmate-driven revenues made up 16% or $5.9 million of fiscal 2012 general fund revenues, of which the majority came from state and federal authorities. The prisoner agreements between the sheriff and state and federal authorities are essentially at-will. While these revenues have been historically stable, Fitch views a declining demand for prisoner housing and/or discontinuation of the prisoner agreements as an inherent revenue risk.
Property tax collections have benefited from the expansion of district taxable assessed values (TAV), enabling the sheriff's office to expand activities and continue paygo capital funding while maintaining substantial reserves. In fiscal 2012, the unrestricted general fund balance increased to $18.5 million or over 50% of general fund expenditures due to a sizable $3.6 million surplus after transfers (10.8% of spending). This impressive operating margin was primarily attributable to under-spending of the budget during the year due to attrition and maintenance savings. The district has realized positive operating margins in four of the last five fiscal years.
The fiscal 2013 $38 million operating budget was adopted with a moderate $2 million deficit (5%) after transfers. The budget includes a recurring salary increase, the first for staff since fiscal 2008, a 4% increase in staff headcount, small pension cost increases, and automobile purchases. Fitch views positively management's track record of outperforming the initial budget by year-end, which management currently expects for the current fiscal year given the annual turnover that is occurring.
Budgets in fiscal 2014 and beyond may include fund balance draw-downs primarily for capital outlays. Management informally budgets to maintain a general fund balance of 32% of expenditures to avoid cash flow borrowing due to the timing of property tax receipts. Liquidity is ample relative to current obligations. Preservation of robust financial reserves is a positive credit feature given that the district is taxing at the maximum rate and has limited ability to raise additional revenues.
LIMITED DEBT BURDEN AND AFFORDABLE FIXED COSTS
Overall debt levels are low with direct and overlapping debt at 1.4% of full value and $2,418 on a per capita basis. Amortization is slightly above average at 57% of principal within 10 years. Most capital needs have been funded on a pay-go basis equal to about 5% of annual spending.
Officials may issue additional LTGO bonds to fund construction of a new training facility sometime within the next year. The total project cost is estimated at just above $6 million and would be funded with a combination of debt and cash-on-hand. This issuance would increase debt levels only modestly. The district will determine the timeline and bond size for this debt issuance once the fiscal 2014 tax roll is provided by the appraiser, as TAV growth and/or offsetting expenditure reductions will be necessary to accommodate the debt service from the bonds in light of the inability to raise the tax rate.
Pension benefits are provided through the state-wide Sheriff's Pension and Relief Fund, a cost-sharing multiple employer plan. The plan is well-funded at 88.1% as of June 30, 2012 using a 7% investment return. The district consistently funds its actuarially-determined annual required contribution (ARC); the required contribution rate has increased modestly over the past three fiscal years to 13.25% of payroll in fiscal 2013 from 12%.
Other post-employment benefits for retiree healthcare are funded on a paygo basis; the paygo contribution equaled only 6% of the ARC in fiscal 2012. The unfunded liability was $33.1 million as of June 30, 2012 or 0.4% of full value. The district plans to continue to paygo fund its OPEB but recently made modifications to dependent coverage benefits as a small step towards addressing the UAAL. Combined carrying costs for debt service, pension ARC, and OPEB paygo consumed an affordable 13% of governmental expenditures in fiscal 2012.
CONCENTRATED, COMMODITY-BASED ECONOMY
The tax base is highly concentrated. The top 10 taxpayers constitute about 64% of fiscal 2013 TAV and consist of electric generating, oil refining and chemical manufacturing facilities, all of which represent significant assets to the regional and national economy. The top taxpayer is Entergy Louisiana, which owns the Waterford 3 nuclear plant and accounts for almost 17% of assessments. Entergy is in the midst of a $500 million initiative to replace two steam generators at the nuclear facility. The plant provides a reported 12% of the state's energy needs. Valero (rated 'BBB' with a Stable Outlook by Fitch) is also expanding with the $1.5 billion addition of a hydrocracker and renewable diesel plant.
Taxable values increased significantly in fiscal years 2012 and 2013 following a one-year contraction in fiscal 2011 caused mostly by the lower price of oil inventories at refineries within the district. The district's tax base remains susceptible to future volatility given the high concentration in commodity-based activities. Nevertheless future tax base growth is anticipated over the near-term as a number of large industrial exemptions are scheduled to expire over the next 10 years, and home price indicators for the New Orleans metro area are positive.
The area economy relies heavily upon its industrial base which provides a significant portion of parish employment. St. Charles Parish experienced a deeper loss of jobs during the recession than the metro area, state and nation but saw a return to employment growth in 2012. The parish's 5.5% unemployment rate for March 2013 also remains below state's 6% and nation's 7.6% unemployment rates. Wealth indices are generally above the state average.
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
U.S. Local Government Tax-Supported Rating Criteria
Blake Roberts, +1 512-215-3741
Fitch Ratings, Inc.
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Austin, TX 78701
Steve Murray, +1 512-215-3729
Amy Laskey, +1 212-908-0568
Elizabeth Fogerty, +1 212-908-0526