St. Louis is preparing for tax revenue losses from the COVID-19-induced economic shutdown and recession to reach into fiscal 2021, a concern that prompted S&P Global Ratings to move its outlook on the city's long-term rating to negative.
The city is heading into the market with a $40 million revenue anticipation note sale — a routine issue to smooth out cash flow. Stern Brothers and Backstrom McCarley Berry & Co. LLC are the underwriters. The notes mature June 1, 2021.
Ahead of the sale, S&P affirmed the city’s A-plus general obligation, and A appropriation ratings while moving the outlook down from stable. It gave the notes its top SP-1-plus short-term rating.
"The outlook revision reflects our view that the projected drop in key revenues due to economic restrictions imposed as a result of the COVID-19 pandemic will materially limit the city's ability to maintain structural balance within the current and following fiscal years," said analyst John Kenward.
“If the COVID-19 pandemic and the ongoing recession lead to steeper-than-expected declines in the city's convention and tourism sectors and in earnings and payroll taxes, resulting in a significant reduction to available reserves, we could lower the rating,” Kenward added.
Comptroller Darlene Green, whose office manages city debt issuance, sought to highlight the affirmation amid a pandemic that has prompted S&P to shift its general outlook on public finance sectors to negative.
“Together, we can continue to meet our financial obligations and provide essential city services. Even as the nation faces an uncertain economic outlook due to the COVID-19 coronavirus pandemic, the City of St. Louis is positioned to weather the financial challenges that lie ahead,” Green said in a statement.
The city lays out in the sale’s offering statement the anticipated impact on fiscal 2020 that ends June 30 and the potential impact in the coming fiscal year with a warning that the picture remains clouded.
“The economic financial, and budgetary impacts on the city and its economy from COVID-19 and the measures taken to combat the spread of COVID-19 are expected to be significant,” the city reports. It cautions that it can't at this time "project with any reasonable degree of certainty the impact on city revenues, expenditures, reserves, budget or financial position" as they will depend heavily on future events and actions by the state and federal governments.
The city received $35 million in aid for COVID-19 expenses from the Coronavirus Aid, Relief, and Economic Security Act signed in March and has applied for $35 million of additional federal emergency management aid. It expects the funds will cover pandemic-related expenses.
“Significant revenue declines” are expected for May and June in the city’s earnings, sales, and payroll taxes within the hospitality and leisure and cultural and sports categories. Hotel, restaurant and gaming taxes are expected to experience “steep declines” for the remainder of fiscal 2020.
Before the economic shutdown that began in March, the city had been on pace to collect $10 million more than the prior estimate of $519.3 million with earnings and payroll taxes performing well.
Preliminary estimates forecast a $50 million 2020 hit although $20 million is due to a delay to July in earnings’ tax filings most of which will be recouped in the next fiscal year. The city doesn’t expect to draw on reserves and is delaying hiring, reducing some spending and using special revenue funds to close the gap.
The city has lowered its fiscal 2021 operating expenses by 6.5% to $495 million to make up for expected declines in general fund revenue tax collections. The city has outlined several potential scenarios that anticipate an up to $89 million hit under a worst-case scenario. It has outlined a plan to use a mix of job cuts, furloughs, budget cuts, and reduced capital spending to address gaps. The budget is expected to pass later this month. Under the worst-case scenarios fund balances might be tapped, Fitch Ratings said.
Fitch does not rate the notes but this month it affirmed the city’s A-minus issuer default rating and BBB-plus rating assigned to lease revenue bonds and retained its stable outlook. “While St. Louis's currently available fiscal and economic data do not yet reflect significant impairment, material changes in revenues and expenditures are occurring across the country and are likely to worsen in the coming weeks and months as economic activity suffers,” Fitch wrote.
The city and state’s shutdown began March 23 and Gov. Mike Parson announced a stay at home order from April 6 to May 3. A phased-reopening began April 28 with non-essential workers returning in early May and the city lifted its orders May 18.
