S&P analyst says earnings-tax vote wouldn't cause immediate downgrade

2010-10-26T14:32:00Z 2010-10-29T10:00:57Z S&P analyst says earnings-tax vote wouldn't cause immediate downgradeBY DAVID NICKLAUS • dnicklaus@post-dispatch.com > 314-340-8213 stltoday.com

When I wrote Sunday's column about the bond market's view of Proposition A, I was unable to include direct comments from any of the three major ratings agencies. Fitch said it wouldn't comment before next week's election, Moody's didn't respond to my messages and the Standard & Poor's analyst who covers St. Louis was away from his office.

Fortunately, that S&P analyst returned this week, and he returned my call. Corey Friedman said S&P is unlikely to take immediate action, regardless of how next week's vote goes, but he also said the earnings-tax issue "could potentially" affect St. Louis' credit rating. S&P assigns St. Louis an A-plus rating, which is in the middle of the investment-grade range.

Proposition A, for anyone who hasn't been following the barrage of ads on St. Louis television, would require city voters to decide next spring, and every five years thereafter, whether to retain the earnings tax.

Friedman said S&P would probably wait until after the spring vote to take any formal action. "We don't want to engage in speculation that it may or may not take place," he explained.

If next spring's vote does result in a decision to phase out the tax, Friedman says St. Louis would go on the credit watch list, meaning that the agency would be considering a downgrade. He explained:

If it (a tax phaseout) does pass, we would immediately have to take a look at the rating. We'd talk with the city about what the city could do to offset it, and go from there.

The city could avoid a downgrade if it came up with a credible plan to raise new revenue or cut spending, Friedman said. He added, though, that "there's no doubt it would put some pressure on the city."

The earnings tax accounts for 30 percent of the city's general-fund revenue, and 15 percent of total revenue, which includes such things as airport fees and water bills.



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