Ferguson taxes bolster fiscal and ratings prospects

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CHICAGO – Ferguson, Missouri’s efforts to recover fiscally from the aftermath of a controversial police shooting has garnered the city an improved rating outlook.

Moody’s Investors Service on Friday revised the city’s outlook on its junk-level Ba3 general obligation rating to positive from negative.

The city lost its investment grade rating as it dealt with the aftermath of the August 2014 fatal shooting of Michael Brown, an unarmed African-American, by a white police officer. The shooting led to local protests and a federal probe in the city of about 21,000 just northwest of St. Louis.

The city faced rising legal expenses as it dealt with a federal probe into policing and court tactics and then the costs of a settlement, and took a hit on sales and other taxes. The city has also lost a chunk of court-fine related revenue it relied on as the state government cracked down on local government use of fine levies to balance budgets. The crackdown was prompted by complaints over how the heavy-handed use of fines drives public mistrust of the police.

After spending cuts and other management efforts, the city is expected to begin to shore up its balance sheet as voter approved tax revenues flow into city coffers.

“The positive outlook reflects the likelihood the city's materially improved fiscal condition will continue over the next two years, especially because new taxes implemented during fiscals 2016 through 2018 will lead to the greater likelihood of operating surpluses and improving reserve levels,” Moody’s wrote.

Moody's also affirmed the B1 rating on the city’s 2013 certificates of participation and the B2 rating on its 2012 COPs.

The rating reflects the city's current financial position after several years of rapidly declining reserves and uncertainty for further operating declines and incorporates a moderately sized tax base with a trend of declining assessed valuation, below average resident wealth, and above average yet manageable debt burden.

The rating remains challenged by dwindling reserves and the costs of federal consent decree measures that contributed to operating deficits in fiscal 2014 through 2017. A $312,000 deficit is expected in fiscal 2017. The fiscal 2018 budget estimates a $48,000 general fund surplus as voter approved taxes are fully phased in.

From a high in fiscal 2013, the general fund balance declined to $3.6 million or 33.5% of revenues from $10.5 million. Reserve levels remain healthy on a relative basis compared to its peer group but the city's operating flexibility is notably narrower than it has been.

The city is working towards meeting milestones and establishing policies as required in its 2016 Department of Justice consent decree. Consent decree annual expenses have declined to $500,000 from projections of $700,000 to $1.5 million. Tax hikes will generate an additional $2.9 million in annual revenue for the general fund in fiscal 2018.

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