OREANDA-NEWS. June 16, 2015. Fitch Ratings has affirmed the following city of St. Louis, MO (the city) outstanding general obligation (GO) bonds:

--\\$7.22 million GO bonds, series 2006, at 'AA-'.

In addition, Fitch affirms its rating on the following St. Louis Municipal Finance Corporation outstanding leasehold revenue bonds:

--\\$128.455 million (Pension Funding Project) leasehold revenue refunding bonds (taxable), series 2007, at 'A+';
--\\$8.43 million (Pension Funding Project) leasehold revenue refunding bonds (taxable), series 2008A, at 'A+';
--\\$22.01 million juvenile justice detention center leasehold revenue bonds, series 2008B, at 'A+'.

The Rating Outlook is Stable.

SECURITY
The GO bonds are backed by the city's full faith and credit and unlimited tax pledge. The leasehold revenues are a special obligation of the St. Louis Municipal Finance Corporation, paid solely from lease rentals paid to the corporation by the city, subject to annual appropriation, and other revenues pledged to the trust estate. The leasehold deeds of trust established for the series 2007 and 2008 A&B bonds provide for a leasehold interest in essential city assets.

KEY RATING DRIVERS

REVENUE SOURCE AT RISK: The earnings tax, the city's top revenue source, is subject to voter renewal every five years, jeopardizing the city's financial stability. The tax was strongly supported at the last election, and will be voted upon again in April, 2016.

WEAKENED RESERVE LEVELS: Operations have been balanced but low fund balance levels provide somewhat limited financial flexibility.

SOLID FINANCIAL OPERATIONS: The city has prudently managed operations by conservatively forecasting economically sensitive taxes that make up the majority of city revenues, continuously monitoring expenditures and making judicious cuts in its workforce.

REGIONAL ECONOMIC HUB: The city's diverse economic base and institutional anchors promote stability within the region. Development is ongoing and the city and surrounding region feature prominent businesses.

WEAK SOCIOECONOMIC BASE: Socioeconomic indicators are below average with a declining population, low wealth levels and high unemployment rates.

MIXED LONG-TERM LIABILITIES: Debt levels are above average. Unfunded pension liabilities are moderate and costs have declined significantly with a recent shift to a new plan for active and new firefighters. Carrying costs are high but going down with lowered pension costs.

RATING DISTINCTION: The one-notch rating distinction on the leasehold revenue debt from the city's GO rating reflects annual appropriation risk and essentiality of pledged assets.

RATING SENSITIVITIES

FURTHER RESERVE DECLINES: Additional reductions to fund balance would further constrict financial flexibility, particularly given the city's reliance on economically sensitive revenue sources.

TAX RENEWAL RISK: Failure by voters to renew the earnings tax in April 2016 would eliminate the city's largest revenue source and greatly weaken its financial profile.

CREDIT PROFILE
The city of St. Louis is a constitutional charter city, independent of St. Louis County. The St. Louis downtown area remains the largest employment center in the region.

REGIONAL ECONOMIC HUB
The city's economy focuses on health, education and business services, in addition to convention and entertainment enterprises. Leading employers include Washington University (14,932), St. Louis University (10,146), and BJC Health System (13,321). Notable companies with headquarters in the city include Stifel Financial, Energizer Holdings and Anheuser Busch/InBev.

Unemployment rates remain above average but have improved to 7.3% for March 2015, well below past highs but above the state and national rates of 6.1% and 5.6%, respectively. Population has been declining since 2000 with the 2010 census population indicating an 8.3% decline in the city to 319,294, while the MSA has experienced 4% growth over the same time period. The city's daytime population grows by a reported approximately 36% with commuters. The city is experiencing growth in its downtown area with various economic development projects and a redesign of the area near the arch helping to continue the development of the city's downtown.

FINANCIAL STABILITY DEPENDENT ON ECONOMICALLY SENSITIVE TAXES
The city's earnings tax, making up 35% of fiscal 2014 general fund revenues (fiscal year ending June 30), is the largest revenue source, followed by franchise (12%), sales (11%) and payroll taxes (8%). The earnings tax is 1% of gross income of residents of the city, non-residents working in the city, and net profits of businesses within the city. The earnings tax is subject to voter approval every five years, and city residents overwhelmingly approved the continuation of the tax in April 2011. However, the city's primary revenue source is still at risk of a permanent phase-out as residents will be asked every five years to maintain or repeal the earnings tax. If not renewed, the tax would be phased out in 10% increments over 10 years, and the city would be prohibited from instituting a new earnings tax. Though there has been strong approval, the risk of losing its largest revenue source to voter disapproval is unusual for a local government.

The earnings tax was up 2.3% in fiscal 2014, its fifth consecutive year of growth after a small dip in fiscal 2009, and is up 5.1% through three quarters of fiscal 2015. The payroll tax is up 5.8% through three quarters of fiscal 2015, while the sales tax is up 8.1% during the same period. The city also implemented a refuse tax in July 2010 that is expected to generate \\$14 million or 3% of general fund revenues in fiscal 2013.

Property taxes comprise only 12% of general fund revenues and are restricted pursuant to the state-imposed Hancock Amendment. Passed by the state legislature in 1980, the amendment limits increases in tax rates and the total amount of taxes that may be imposed in any fiscal year unless otherwise approved by the requisite two-thirds majority vote of the electorate. Additionally, the amendment limits growth in the tax base to real economic expansion. The city's 2014 tax rate of \\$1.4733 is below the Hancock limit of \\$1.49. After minor declines in four of the prior five years, assessed value was up 2.5% in the most recent year, and further growth is expected by Fitch because of home price appreciation and economic development activity.

Despite general growth in revenues and expenditure control, the addition of the city's police department to the general fund in fiscal 2014 led to a \\$22.2 million deficit, reducing the general fund unrestricted fund balance to \\$17.2 million or a low 3.3% of expenditures from 8.3% the prior year. In particular, the addition of the police department added \\$19.8 million of costs for workman's compensation that previously were not in the general fund. Though this fund balance level is low for the current rating category, Fitch is reassured that money in several funds outside the general fund that could approximately double the current fund balance level is available for operations if necessary. However, further declines in fund balance could put downward pressure on the rating level.

The fiscal 2015 budget was balanced, aided by a \\$13.6 million (14%) decline in pension costs from changes in the fire department's pension plan (see 'New Fire Plan Reduces Pension Costs' below). Most key revenue sources are ahead of budget. Expenditures are generally on budget except for \\$6.7 million of supplemental expenditures to pay for overtime to manage civil disturbances related to the events in nearby Ferguson. As a result, management expects to finish the year with no change in fund balance.

The city estimated a preliminary fiscal 2016 budget gap of a modest \\$6 million. Through expenditure cuts and the use of special revenue funds, the gap was closed. The budget includes moderate projected growth in tax revenues and a \\$5.1 million increase in capital spending. Pension costs are projected to further decline. The city does short-term cash flow borrowing to supplement operations due to the lumpy receipt of tax revenues. The most recent note offering was \\$65 million (12% of general fund receipts).

ELEVATED DEBT LEVEL CONSISTS OF LEASE REVENUE BONDS
The leasehold revenue bonds issued by the St. Louis Municipal Finance Corporation are rated one-notch below the city's GO rating due to the annual appropriation risk and the pledge of essential assets such as fire stations pledged for pension obligation bonds. Although not pledged to the bonds, the city has covenanted to use proceeds from its half-cent public safety sales tax to pay debt service on the series 2008A bonds.

Although the city has issued very little GO debt, increased direct debt levels in recent years reflect the city's use of lease/purchase and tax increment financing. The city charter requires a restrictive two-thirds voter approval to authorize GO debt issuance, resulting in the use of lease financings to address capital needs. In August, citizens will vote on a \\$180 million bond referendum, of which \\$50 million would likely be issued in fiscal 2016. Overall debt ratios including tax increment and lease revenue debt are \\$4,137 per capita and a high 7.7% of market value. The bond referendum would not dramatically impact debt levels.

NEW FIRE PLAN REDUCES PENSION COSTS
The city has separate pension plans for police, fire and other employees. As of Oct. 1, 2014, the police plan was about 74% funded using Fitch's 7% discount rate assumption. As of the same date, the employee plan was 73% funded using the same assumption. Until Feb. 1, 2013, firemen participated in the Firemen's Retirement System. This system was frozen on that date, and all accrued benefits going forward are now from the Firefighter's Retirement Plan. The change was challenged extensively in court but was upheld. The new plan has reduced benefits for employees, resulting in significantly lower pension costs for the city after years of rapid growth.

The city paid \\$11 million towards its \\$39 million other post-employment benefits (OPEB) annual required contribution and has an unfunded liability of \\$491 million (3% of market value) as of July 1, 2013. Total carrying costs for debt, pension and OPEB were a high 27% of government fund expenditures in fiscal 2014, though declining pension costs should moderate this expense.