CHICAGO – St. Louis’ narrow reserves and the city's use of those reserves to cover red ink led Fitch Ratings to shift its outlook on the city’s issuer rating to negative from stable.

The city held on to its issuer default rating of A-minus. Its appropriation-backed lease debt is rated a notch lower at BBB-plus. The city carries only $37 million of GO debt so the lease credit is its primary method of borrowing.

The Gateway Arch in St. Louis, Missouri.
Bloomberg News

Moody’s Investors Service on May 2 dropped the city’s ratings one notch to Baa1 on the GO and Baa2 on essential lease debt and Baa3 on non-essential project lease debt.

“The affirmations and revision of the outlook to negative reflect persistently narrow general fund reserves as a result of recent operating deficits and Fitch's concern that reserves have not stabilized during this period of prolonged national economic recovery,” Fitch analysts wrote in the report published Friday.

“The ability to defer capital spending is limited by a large backlog of deferred capital projects, some of which the city leadership views as critical,” analysts wrote. The city has flagged $90 million of a $324 million program as critical.

“Recent policy initiatives have made extensive use of tax incentives to spur development,” which Fitch said contributes to its belief that near-term revenue growth will remain relatively flat given the significant time lag between the revitalization of properties and the expiration of the related tax incentives, at which time the city will be able to raise new property tax revenue from the properties.

City Comptroller Darlene Green, who manages city debt issuance, said she was pleased the city remains in the A category but said Fitch’s comments on city reserves and tax incentives provide another warning for city leaders to take into consideration when weighing support for future projects.

“Last week’s announcement from Moody’s has brought about a much-needed public conversation about the city’s fiscal health,” Green said. “Our decision to dedicate 1.5% of annual payroll to rebuild reserves beginning with the 2019 budget is a step in the right direction.”

Green was referring to Moody’s comments over competition for city resources, the city’s significant reliance on economically sensitive revenue streams and its redirection of funds to support less essential purposes. One such purpose was a city financing completed this year for renovations at the city’s professional hockey arena, which Green initially fought.

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