AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has downgraded the ratings on the following Robstown, Texas (the city) limited tax bonds to 'BBB' from 'BBB+':
--$505,000 limited tax general obligation (LTGO) refunding bonds, series 2003;
--$1.2 million combination tax and limited pledge revenue certificates of obligation (COs), series 2003.
The Rating Outlook is Negative.
SECURITY
The GO and COs are secured by annual property tax levy limited to $2.50 per $100 taxable assessed valuation. The COs are additionally secured by a de minimis pledge of net revenues of the city's utility system.
KEY RATING DRIVERS
DELINQUENT INTEREST PAYMENT TO BONDHOLDERS: The downgrade reflects Fitch's concerns over internal controls most notably resulting in a delayed de minimis interest payment to bondholders. Management's cited cause as an administrative error appears reasonable given Fitch's review of cash balances at and around the time of the delay.
UNANTICIPATED OPERATING DEFICIT: The downgrade also reflects the city's significantly diminished fiscal cushion following a sizeable budget variance in fiscal 2011, leaving the city with low reserve and liquidity levels. The city has also incurred persistent audit findings.
SALES TAX DEPENDENCE: The general fund relies heavily on economically volatile sales taxes. This revenue stream has increased significantly due to economic activity from natural gas drilling in the area.
LIMITED RESOURCE BASE: The city's population is small, the tax base is concentrated, and wealth levels are below average. Some commercial development is occurring but the overall economy is limited.
HIGH DEBT BURDEN: The city's debt profile is characterized by a high overall burden relative to its tax base. This ratio will remain elevated given the city's future debt plans for a new city hall replacement.
RATING SENSITIVITIES:
FISCAL TREND: The city's fiscal performance will be key to the direction of the rating. A negative variance in audited fiscal 2012 results compared to estimates and/or lack of improvement in financial cushion would likely trigger another downgrade.
UTILITY FUND OPERATIONS: The utility system's willingness and ability to continue subsidizing city general operations is key to the city's fiscal health and Rating Outlook, absent replacement revenues or equivalent spending cuts.
CREDIT PROFILE
Robstown is located in Nueces County about 15 miles northwest of downtown Corpus Christi. The estimated 2011 population of 11,590 has changed little in the last two decades.
SIGNIFICANTLY WEAKENED FINANCIAL POSITION
The city concluded fiscal 2011 with a large $425,000 operating deficit after transfers (5% of spending), which departed significantly from the balanced budget and interim forecasts by management for a small surplus. The deficit and variance from internal forecasts was caused by several factors including a 12% spending increase and aggressive budgeting of revenues and receivables that did not materialize at year-end.
Revenue shortfalls were led by lower property tax, solid waste, and emergency service revenues. In addition to the budget gap, general fund balance was adjusted downward by 20% ($170,000) to reflect prior-year payables not previously recorded. The negative fiscal 2011 results reversed the generally positive fiscal trend in fiscal years 2007-2009.
The cumulative effect of the deficit and accounting adjustment was a 70% reduction in fund balance. Fiscal 2011 general fund balance, all of which is unrestricted, dropped to $259,000 or a thin 3.1% of spending, from a comparatively healthy 11.5% of spending in fiscal 2010. General fund cash and investment balances also fell sharply, totaling only 0.9x current liabilities (14-days of operating costs) to close the fiscal year. Liquidity across governmental funds was slightly better at 1.7x current liabilities (net of deferred revenue).
Fiscal 2012 (Sept. 30 fiscal year) audit results are not yet available but are expected within the next few months. The fiscal 2012 general fund budget was balanced but again increased spending to add personnel, salary increases, and increase supply and maintenance budgets. Revenue assumptions remained fairly aggressive, particularly when compared with fiscal 2011 actual revenues, though sales tax receipts, which make up 29% of general fund revenues, came in very strong at 16% above the prior-year on a cash-basis.
Unaudited fiscal 2012 general fund results reported by management suggest near-balanced operations and little change to fund and cash balances. The accuracy of the city's forecasts is difficult for Fitch to assess given the large variance in fiscal 2011. Fitch notes that fiscal 2011 adjustments appear to be one-time in nature with similar items not evident in the fiscal 2012 unaudited statements. A further rating downgrade is likely if audited fiscal 2012 results show a negative variance from the unaudited deficit presentation.
The fiscal 2013 budget again adds staff but includes more reasonable revenue assumptions overall. Sales taxes were budgeted to increase 16%, commensurate with prior-year actuals, and are trending 13.5% above prior-year receipts through March. Fitch remains concerned that operations could be more pressured than what is presently signaled by the city given the fiscal 2011 variance.
CITY REMAINS RELIANT ON NET REVENUES OF THE UTILITY SYSTEM
The city's combined electric, water, and gas utility system supports general city operations through annual transfers totaling $850,000 or 10.7% of fiscal 2011 general fund revenue. The transfers are made per a memorandum of understanding between the city and the system set to expire in December 2013, which would at that time be considered for renewal by the system's board. The system retains ample capacity for such assistance due to its limited debt obligations, which total $2.6 million for a low-cost loan from the state for the rehabilitation of sewer lines. The system generated $1.7 million of net revenues after debt service in fiscal 2011. Absent a replacement revenue source or substantial spending cuts, a decline in the current structure of utility support for general fund operations would likely have a negative credit impact given the city's low level of financial flexibility.
SUBSTANDARD FINANCIAL AND REPORTING PRACTICES
Fitch remains concerned about a trend of weak management practices. The city's auditor provided an unqualified opinion on the fiscal 2011 audit but cited several material weaknesses and significant deficiencies regarding internal controls. The new finance director, who started in March 2012, has reportedly tightened monitoring of accruals and cash balances and has implemented new financial software (Incode) in an effort to improve monitoring and reporting practices.
The city cites internal control deficiencies as the reason for a 12-day delay in a $7,747 interest payment to bond holders in September 2012. The city's total interest payment due Sept. 1, 2012 was $165,384, and all but $7,747 was delinquent. Several factors caused the delay. The delayed interest payment had a different paying agent than the balance of interest paid, and the invoice was not received by the city due to an incorrect address. Fitch's review of cash balances prior to and after the payment due date demonstrate sufficient cash was on-hand to make this payment timely. While Fitch is comfortable that the missed payment was an administrative error, it highlights Fitch's concerns over management practices.
HIGH DEBT BURDEN BUT AFFORDABLE ANNUAL CARRYING COSTS
Overall debt relative to the city's full MV is extraordinarily high at 22%. This debt calculation includes as direct debt a $5 million federal loan for a new city hall, to be secured this year, and additional sales tax bonds issued by the city's economic development corporation, as well as the significant overlapping debt of the Robstown school district without consideration for state support. Debt ratios will likely remain elevated relative to the city's tax base, as the rate of principal amortization is below average. However, annual debt service is affordable, consuming only 9% of governmental fund spending in fiscal 2011.
The city's pension plan, provided through the Texas Municipal Retirement System, recorded a sound funded position of 93% as of Dec. 31, 2011. Other post-employment benefits are limited to supplemental death benefits in the form of one-year salary.
LIMITED BUT STABLE ECONOMY
Robstown local economy is limited, but the city's proximity to Corpus Christi (estimated population of 206,000) and the area's petroleum and chemical refineries provide residents with more abundant employment opportunities. The employment picture has also benefited from the robust drilling activity in the Eagle Ford shale, a large oil and gas play spanning south Texas and located just north of the city. The Nueces County unemployment rate in Dec. 2012 was a low 5.4%, down from 6.6%, due to both employment gains and labor force contraction.
Robstown also benefits from its location at the intersection of two major gulf coast surface, port, and rail corridors. The city's tax base has continued to expand given the addition of small to medium manufacturing concerns, though the rate of growth has slowed in recent years. A proposed 83-store outlet mall is slated to break ground in summer 2013. Much of the mall's value will be temporarily abated for city tax purposes but the project should add jobs and may spur some related development.
Wealth indicators further reflect the limited nature of the economy. Residents' median household and per capita money income levels equal only 62% and 54% of the nation' respectively, while the poverty rate is double the nation's. Per-capita market value, also a measure of tax base wealth, is a low $27,000 in fiscal 2013.
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, 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
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
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