Fitch Upgrades East Baton Rouge Parish, Louisiana's Sewer Sales Tax Revs to 'A+'.

AUSTIN, Texas -- Fitch Ratings has upgraded East Baton Rouge Parish, Louisiana's 1/2% public improvement sales tax revenue bonds to 'A+' from 'A'. This action affects approximately $122.3 million in outstanding series 1999A, 2001A and 2003 bonds. The Rating Outlook is Stable.

This rating action reflects consistent sales tax growth and satisfactory debt service coverage with the prospect of improvement due to recent parish population increases. The rating also takes into consideration the economically sensitive nature of the pledged revenue source and the large wastewater system capital plan.

Following Hurricanes Katrina and Rita in 2005, the parish population swelled by at least 50,000 due to the relocation of storm evacuees. This unprecedented event generated both positive and negative developments for the parish; sales tax receipts jumped more than 30% in the final quarter of 2005, while available housing essentially vanished and service demands (primarily police, fire and EMS) increased sharply. The permanent post-hurricane population gain for the parish remains uncertain, as does the implication for future revenues, service demands and traffic. Parish officials do not anticipate an increase in sewer capital needs due to the population growth.

Collections of the 1/2% sales tax increased at a roughly 2% annual pace from 1998-2004, and since the inception of the tax collections have declined in only one year (down 1% in 2001). Unaudited 2005 receipts total $33.9 million, a more than 15% jump from the prior year as a result of the storm-related population gain. Annual debt service coverage has been satisfactory in recent years, ranging from roughly 1.45 times (x) to 1.60x since 2000. Assuming no increase from post-hurricane retail activity, projected coverage levels are expected to remain at or near this range despite the prospect of additional debt. Coverage will climb to the top end of this range if only a portion of the recent spike in retail activity is permanent.

Voters approved the special 1/2% sales tax in 1988 to enable the parish to meet the requirements of a U.S. Environmental Protection Agency (EPA) consent decree for improvements to the wastewater system to correct various deficiencies. The original decree was replaced by a second consent decree entered into in 2001 by the U.S. Justice Department, EPA, the state of Louisiana and the parish. As part of the second decree, the parish agreed to spend an estimated $680 million over the following 15 years to rehabilitate various collection and treatment components of the system.

In addition to the debt that has been issued to date, $80 million in sales tax bonds is expected to be issued by 2015 to support this project and other system capital needs. Other financing sources for the capital program include approximately $300 million in wastewater system revenue bonds and more than $200 million in surplus system revenues to pay for mandated and non-mandated projects.

The magnitude of the capital plan has resulted in user fees more than doubling over the past several years. Parish officials anticipate annual rate hikes of roughly 4% through 2014 to help finance the plan. Although the capital program is very large in dollar terms, the parish appears to have a sound financing plan in place and the political determination to make the decisions necessary for implementation, as evidenced by the hefty user charge increases made so far.

General fund performance for the combined city-parish government has generally been good. Despite deficits in two of the past three years, the unreserved general fund balance for 2004 was a healthy 24.4% of expenditures and transfers out; this result was consistent with results from recent years. Preliminary 2005 results indicate a general fund surplus of more than $20 million, due to sharp storm-related increases in several operating revenue sources; the total fund balance is expected to exceed $85 million. The combined city and parish 2% sales tax, which is the primary revenue source for general fund operations, is expected to report a healthy 13% gain for the year. Despite the enormous population influx since the storms, parish officials report that expenditure pressures have been manageable.

In 1947 voters in the parish and the City of Baton Rouge (the city) approved a consolidation of most local government services for the city and the parish, one of the first local government consolidations in the United States. The structure, which was initiated in 1949, includes a mayor-president and a 12-member metropolitan council. The local economy, while characterized by some concentration in the petrochemical industry, retains a fair amount of diversity through state government, higher education, financial services and healthcare.

Fitch currently has an 'AA-' rating on both the parish's 2% public improvement sales tax debt and the City of Baton Rouge's 2% public improvement sales tax debt.

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