Fitch Affirms Lake Charles (LA)'s Public Improvement Bonds at 'AA-'; Outlook Stable
--$7.5 million Louisiana Local Government Environmental Facilities and Community Development Authority revenue bonds, series 2007.
In addition, Fitch has affirmed the city's Long-Term Issuer Default Rating (IDR) at 'AA'.
The Rating Outlook is Stable.
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
The 'AA' IDR reflects the city's low debt burden and its strong financial resilience that is supported by solid spending flexibility and robust reserves. Fitch views these as important offsetting factors to the city's limited revenue flexibility.
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.
Economic Resource Base
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, and taxpayer concentration is notable. 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.
Revenue Framework: 'a' factor assessment
Operating revenues from sales and property taxes have trended positively in recent years and Fitch expects long-term overall revenue growth patterns to continue at least at historical rates, if not above. The city has limited independent legal ability to raise general fund revenues.
Expenditure Framework: 'aa' factor assessment
Solid expenditure flexibility is derived from moderate carrying costs and strong control over workforce spending. Fitch expects expenditure growth to trend in line with revenues.
Long-Term Liability Burden: 'aaa' factor assessment
The burden for overall debt and net pension liabilities is low in relation to personal income and will likely remain in this range.
Operating Performance: 'aaa' factor assessment
The city's operating reserves and expenditure flexibility provide strong gap-closing capacity. Fitch expects the city's budget practices will sustain a robust financial position through a typical economic cycle.
Maintenance of Financial Position: The ramping up of petrochemical and energy interests in the area exposes the city to industry downturns; the city's strong reserves are an important mitigant to this concentration.
The city is anchored by the Port of Lake Charles, a deep water port connected to the Gulf of Mexico by the 30-mile Calcasieu Ship Channel that is the 11th busiest port in the United States. Employment growth in the region is expected to continue given a recent run-up in investments by several area refineries and other enterprises. Management reports $101 billion in industrial and commercial projects are either underway or planned for the region. Wealth indices are below state and national levels.
Gains in taxable values slowed in conjunction with the regional and national economic slowdown as well as the weakened local housing market, yet growth in the tax base has regained momentum in recent years.
Sales taxes are the primary revenue source for the city, making up roughly two-thirds of the general fund, followed by various franchise, license and gaming taxes (13%) and property taxes (12%).
General fund revenue growth for the years 2004 - 2014 averaged slightly less than U. S. GDP but above the level of inflation. Historical trends are expected to continue given development underway, yielding moderate, steady revenue growth in coming years. Additionally, the city received voter approval for a new quarter-cent sales tax in October 2015 that went into effect on Jan. 1, 2016. Estimated annual revenues from the tax will amount to $6 million; no less than 25% will be placed in a bond reserve fund and the remaining portion will be employed for public safety salary increases. If monies in the bond reserve fund are not utilized for debt service, those funds will be allocated in the following year for capital projects or other operational needs of the city.
The city has no independent legal ability to raise property or sales tax rates, so revenue flexibility is limited to increases in locally controlled franchise taxes, fees, and charges. City council does have the option to carry forward its millage rate following increases in property valuation, generating a higher tax levy.
The police and fire departments make up roughly half of general fund spending, followed by public works at 27%.
Spending in major areas has kept pace with revenues and will likely continue to trend with or slightly above revenues based on the city's current profile. Management reports areas of spending pressure exist in the area of infrastructure and more specifically in the wastewater system, for which the city is using some general fund monies among a variety of funding sources.
Lake Charles' fixed cost burden is moderate with carrying costs for debt service, pensions, and other post-employment benefits equal to 14.7% of governmental fund spending in 2015. Management's strong degree of control over workforce spending aids expenditure flexibility as the city works with unionized employees on an ad hoc basis. The state does, however, require a 2% annual longevity pay increase to civil service fire and police department personnel that the city attempts to apply to all employees.
Long-Term Liability Burden
The long-term liability burden, incorporating overall debt and net pension liability, is a modest 6.5% of personal income, and is expected to remain low based on manageable tax-supported debt plans and rapid amortization. The city also uses excess revenues from the 0.28% dedicated sales tax and gaming revenues for capital projects after debt service is reached.
The city participates in four 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 2010. OPEBs are paid as incurred and the unfunded liability of $4.7 million as of Oct. 1, 2014 equals a nominal 0.2% of personal income.
The covenant resolution identifies primary revenues for the repayment of the series 2007 bonds and series 2010 bonds (not rated by Fitch). Authorized sources include riverboat gaming revenues (up to 60% 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 (up to $500,000 annually). Maximum annual debt service (MADS) coverage by fiscal 2015 primary revenues is satisfactory at 1.9 x and there are no immediate plans to issue parity bonds. The rating reflects that should these primary revenue sources prove insufficient to cover debt service, the city may utilize any available funds that have not been dedicated to other purposes.
The city's expenditure flexibility and operating reserves provide strong gap-closing capacity through a typical economic cycle despite a revenue base heavily reliant upon economically sensitive revenues. Fiscal 2016 year-to-date sales tax collections are trending slightly higher than last year's with manufacturing the largest category of taxable sales. Reserves are historically high, representing 48% of spending at fiscal 2015 year-end, or $32 million, well in excess of the conservative 30% fund balance policy. Management reports fiscal 2016 will likely end with a $5.2 million draw on reserves for capital; the draw is primarily being utilized to supplement funds for a new sewer plant and will not have a material affect the city's financial resilience.
Lake Charles historically employs practices in support of financial flexibility, including conservative budget assumptions and allocations of excess revenues for non-recurring expenditures in the subsequent year. The fiscal 2017 proposed budget shows 5.6 % growth over the prior year's amended budget and includes minimal growth in sales taxes, a 2% across-the-board pay increase, and a $1.5 million transfer to the capital fund for sewer repairs.