AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA' to the following Victoria, TX's limited tax general obligation (LTGO) bonds:
--$8.6 million LTGO refunding bonds, series 2013A;
--$17.2 million LTGO refunding bonds (taxable), series 2013B.
The bonds are expected to price the week of Dec. 10. The bonds will be used to refund certain outstanding bonds for interest cost savings.
Fitch also affirms its 'AA' rating on the city's outstanding limited tax bonds and the Victoria Sales Tax Development Corporation (STDC) sales tax revenue bonds.
The Rating Outlook is Stable.
SECURITY
The bonds and outstanding limited tax bonds are secured by a limited ad valorem tax pledge levied against all taxable property in the city, limited to the constitutional tax rate of $2.50 per $100 of taxable assessed value (TAV). The city's home rule charter further limits the tax rate for all city purposes to $2.00 per $100 of TAV.
KEY RATING DRIVERS
STABLE ECONOMY & TAX BASE: The city benefits from its position as an important regional service and supply center, as well as continuing development across key taxable sectors and a fairly stable housing market.
GOOD FINANCIAL POSITION: The city maintains healthy operating reserves and ample liquidity supported by responsive financial management that has been willing to cut spending to maintain structural budget balance.
PRUDENT BUDGETING OF DOMINANT SALES TAX: Sales tax revenues, one of the city's main revenue sources, exhibited very strong gains in fiscal years 2011 and 2012 after a period of contraction. City officials continue to prudently appropriate sales tax receipts in excess of the budget for non-recurring expenditures.
MIXED DEBT PROFILE: Overall debt levels are moderate to high. Annual debt service costs consume an above average portion of the budget, but this is in part due to rapid amortization.
AVERAGE SOCIOECONOMIC INDICES: Wealth indicators are slightly below average while the city's employment picture is positive.
CREDIT PROFILE
Victoria, Texas is located 30 miles inland from the Gulf of Mexico and equidistant between the cities of Houston, San Antonio, and Corpus Christi. The 2010 census count of 62,592 reflects modest 3% population growth in the past decade.
INLAND PORT CITY WITH MODEST BUT DIVERSE ECONOMY
A barge canal connects the city and the Port of Victoria to the gulf intra-coastal waterway, allowing access to ports on the Gulf and Atlantic coasts, as well as destinations on the Mississippi River. The city is a regional center for trade as well as service and supply center for heavy industry, including petrochemical and plastics manufacturing. The development of the service, retail, and health care sectors has complemented the industrial base and added a measure of diversity and stability to the local economy.
A recent uptick in sales activity, apparent by the sharp climb in sales tax receipts in 2011 and 2012, has been in part associated with increased economic activity from oil/gas drilling in the nearby Eagle Ford shale, a large natural gas formation spanning the southern portion of Texas and edging into Victoria County.
EXPANDING TAX BASE
TAV surged 7% in fiscal 2013 to $3.5 billion as a result upward revaluation of existing commercial, industrial, and residential properties, as well as concurrent development. Absent marginal contraction in fiscal 2010, the city's TAV has steadily appreciated over the past decade. City officials anticipate moderate TAV growth to continue over the near term, a projection which Fitch views as reasonable based on review of local economic data and the development underway.
AVERAGE SOCIOECONOMIC PROFILE
Total employment in the city grew 3.6% from 2009 - 2011, a rate of growth that mirrors the state and outpaces the nation, though employment was essentially flat during the 12-month period ending September 2012. The most recent September unemployment rate dropped to 4.5% from 6.1% on a year-over-year basis, which sits comfortably below the state (6.3%) and nation (7.6%), but the improvement was due to 1.6% contraction in the labor force. Top employers are in government and manufacturing, and the expansion of a Caterpillar plant and new hospital is expected to add jobs over the next few years.
Income levels are slightly below the state and national averages, and the city's per capita market value, also a measure of wealth, is average at $63,000.
STABLE FINANCIAL PROFILE; RELIANCE ON SALES TAX REVENUES
Finances are a credit positive, with available general fund balance exceeding 25% of spending in the past five fiscal years despite pressure from declining operating revenue, particularly sales taxes, which provide over 1/3 of operating revenues. Sales tax receipts fell by a cumulative 12% from fiscal years 2008 to 2010, prompting officials to reduce spending to maintain structural balance; budget reductions included a hiring and pay freeze, delaying certain pay-as-you-go capital projects, and a hold on certain maintenance and operational discretionary budgets.
Sales tax revenues have since rebounded; fiscal 2011 receipts climbed 23.5%, or $2.8 million, from 2010. When combined with continued budget controls, a marginal increase to the tax rate, and conservative budgeting, the city realized a $2.1 million operating surplus after transfers in fiscal 2011 and improved the unrestricted general fund balance (the sum of committed, assigned, and unassigned per GASB 54) to a robust 40% of spending ($15.9 million). Liquidity in the general fund remained solid and in-line with prior years at 4.9x current liabilities.
PRUDENT USE OF 2012 SURPLUS FOR CAPITAL
Officials have added an estimated $5.6 million to available fiscal 2012 fund balance on a budget basis (Sept. 30 fiscal year), which stands in contrast to the $1.2 million draw-down originally budgeted. The positive results are attributable to a 20% gain in sales tax revenues and under-spending of the budget due to position vacancies, delays to capital expenditures, and maintenance efficiencies.
The fiscal 2013 $51.6 million general fund budget is structurally balanced while appropriating most of the prior-year surplus ($5.5 million) for non-recurring expenditures, primarily street overlay projects associated with downtown utility improvements. Sales taxes are forecast to increase 3% from fiscal 2012 actual revenues and comprise a high 40% of budgeted revenues. The expenditure side includes a recurring pay increase for city employees and additional salary adjustments based on a compensation study. Despite the draw-down, budgeted operating reserves would remain above the city's minimum fund balance target, which by policy is 22.5% of the budget.
Fitch views positively management's actions to temper the risk associated with the increasing budget reliance on inherently volatile sales tax revenues. Officials increased the city's minimum fund balance policy to 22.5% from 20% in fiscal 2012 and 15% in fiscal 2009. In addition, while not a formal policy, management routinely budgets sales tax revenues in excess of the budget for non-recurring expenditures.
PENSION BENEFITS & OPEB ADEQUATELY FUNDED
The city fully funds its annual required contribution for pension benefits, which are provided through the Texas Municipal Retirement System (TMRS), an agent multiple-employer plan. Recent system-level structural and actuarial changes to TMRS' reporting of its internal fund balances produced a significant 20% drop in Victoria's unfunded actuarial accrued liability (UAAL) to $36.7 million, which equals a modest 1% of full MV; the city's funded ratio also improved to an adequate 75.3% as of the December 2011 actuarial valuation using a 7% investment return. Other post-employment benefits for retiree health-care are funded on a pay-go basis.
MIXED DEBT PROFILE
Overall debt ratios are moderate to high at $3,727 per capita and 5.9% of full market value and the higher debt ratio largely reflects the debt of an overlapping school district. The city presently has no general obligation (GO) debt authorization, and has no plans to issue additional tax-supported debt until fiscal 2015. Funding of the remaining $60.1 million capital program through fiscal 2017 will largely come from net STDC sales tax revenues, utility system revenue bonds, available general fund resources and GO bond proceeds on hand.
The city maintains $3.9 million in outstanding sales tax bonds (rated 'AA' by Fitch). The sales tax revenue bonds are secured by the city's sales tax development corporation's 0.5% sales tax -- which is separate from the 1% sales tax accruing to the general fund. Debt service coverage is strong at 6.9x MADS in fiscal 2011 and even stronger 8.2x MADS coverage in fiscal 2012 (unaudited). In addition, the bonds have a relatively short maturity (bonds retired in 2017), no further leveraging is planned, and annual debt service is level at about $1.1 million. Excess sales tax revenues, after payment of debt service, are used for capital projects.
The annual debt burden on the fiscal 2013 budget, inclusive of GO and sales tax bonds, consumes a high 18% of recurring general fund and debt expenditures but this is in part due to the rapid pace of amortization at 70% retired in 10 years. Fitch considers the combined fixed cost burden for debt, pension ARC, and OPEB pay-go above average at 27% of general fund and debt expenditures. Beginning in fiscal 2014, a portion of the annual debt cost is expected to be offset by state transportation aid for the city's outstanding series of LTGO pass-through toll revenue bonds, though Fitch does not yet consider these reimbursements as self-supporting debt.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, and National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.