AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns an initial 'A+' rating to the following El Paso, Texas Downtown Development Corporation (DDC) bonds:
--$38.2 million special revenue bonds, series 2013A (Downtown Ballpark Venue Project);
--$13.2 million special revenue bonds, taxable series 2013B (Downtown Ballpark Venue Project);
The bonds are scheduled to sell via negotiation as early as the first week in May. Bond proceeds will be used to finance costs related to the acquisition, construction, and equipping of the project and related professional services, capitalized interest, and costs of issuance.
In addition, Fitch takes the following rating action on the city of El Paso, TX debt:
--Approximately $564.1 million GO bonds affirmed at 'AA'; and
--Approximately $307.6 million COs affirmed at 'AA'.
The Rating Outlook is Stable.
SECURITY
The DDC special revenue bonds are secured by annually appropriated lease payments made by the city from lawfully available revenue, which includes most city revenue except property taxes, to the DDC.
The GO bonds and COs are secured by an ad valorem tax levied on all taxable property within the city, limited to $2.50 per $100 taxable assessed valuation (TAV). The COs are additionally secured by a limited $1,000 pledge of surplus revenues from the city's waterworks and sewer system.
KEY RATING DRIVERS
FINANCIAL STABILITY: The city has posted positive financial results in four of the last five fiscal years despite the economic downturn that has yielded slower revenue growth trends against ongoing service demands of a growing population. Notably, management's attention to revenue fluctuations has been timely, so far eliminating structural imbalances.
SUBSTANTIAL AND DIVERSE TAX BASE: The city's TAV is substantial at approximately $32 billion. Recent diversification of the tax base has provided some offset to contractions in the manufacturing base. TAV resumed growth in fiscal 2012 after recording no growth in fiscal 2011. The tax base is diverse with the top ten taxpayers comprising only 5% of the total TAV.
HIGH OVERALL DEBT BURDEN: Overall debt levels are moderately high. The pace of principal amortization is slightly above average at just over 50%, but is projected to slow given the city's debt issuance plans.
LARGE CAPITAL PLAN: The city's capital improvement plan (CIP) and debt issuance plans continue to grow to support the city's ongoing growth related needs and voter-approved quality of life projects. Balancing debt issuance with tax base growth and capital needs is essential to the rating given the city's growth-related capital pressures and already above average debt service tax rate.
BALLPARK PROJECT NOT ESSENTIAL TO CORE OPERATIONS: Fitch does not consider the leased asset (Ballpark) to be essential to the city's core governmental operations, leading to a two-notch distinction between the DDC special revenue bonds and the city's limited tax bonds. However, the statutory requirement that ballpark costs are the sole eligible use of receipts of the recently voter approved 2% increase in hotel occupancy tax (HOT), lessens our concerns about the city's incentive to make full and timely annual appropriations.
ECONOMIC EXPANSION AND DIVERSIFICATION: Much of the city's economic activity has come from its position in a key NAFTA trade corridor near Mexico's maquiladora assembly plants as well as the presence of Fort Bliss. Recent expansion at Fort Bliss and an emerging healthcare sector somewhat offsets credit concerns regarding historically below-average income levels and high unemployment rates.
RATING SENSITIVITIES
ESCALATING DEBT: Rapidly increasing debt burden without offsetting improvement in other credit areas could apply some pressure to the rating.
CREDIT PROFILE
HEALTHY FINANCIAL POSITION MAINTAINED THROUGH PRUDENT BUDGETARY OVERSIGHT
The city's financial position remains stable despite some modest revenue contraction and ongoing growth related operating and capital pressures. General fund reserves remain adequate at $42.3 million or 13.3% of spending in fiscal 2012. This amount includes the $16 million charter-required cash reserve, which if used must be replenished annually. Audited results for fiscal 2012 reflect a smaller $73,000 drawdown on reserves than the previously projected $350,000.
The fiscal 2013 general fund budget is balanced without the use of reserves. However, the budget is based on a modest shift to the operations and maintenance property tax levy from the debt service tax rate with the use of about $3 million in debt service reserves to maintain the total tax rate at the current $0.65 per $100 TAV. Although management has successfully withstood fiscal pressures in the current economic conditions, the city continues to be challenged to expand its revenue stream to serve the needs of a growing population.
GROWING TAX BASE
The city's $32 billion TAV has slowed after double-digit annual TAV growth between fiscals 2005 and 2008. Growth began to slow in fiscal 2009 in line with weaker economic conditions throughout the nation. In fiscal 2011, taxable value growth was flat, but resumed 3% and 4% growth in fiscal years 2012 and 2013, respectively. For purposes of capital planning and budgeting, the city has assumed a 1% annual growth rate through fiscal 2015, 2% growth in fiscal 2016, followed by annual 2.5% growth beginning in fiscal 2017. Fitch believes management's annual growth assumptions over the next five years are reasonable.
HIGH DEBT BURDEN AND LARGE CAPITAL PLAN
Overall debt levels remain above average at 5.6% of market value but are more moderate on a per capita basis at $2,916. Given the city's plans to issue additional debt for recently voter approved quality of life projects, as well as COs for transportation and public infrastructure projects, debt levels are projected to remain elevated in the near to mid-term. The city's fiscal 2013-2017 debt funded CIP, which includes some of the voter approved projects, totals $462.7 million.
In November 2012 voters passed two propositions totaling $473 million for quality of life projects (i.e. parks and recreation, zoo, open space, libraries, museum, and performing arts). The bond plan had a healthy 70% voter approval rate. The city's projected debt impact from issuance of the approved GO bonds is not expected to exceed $0.05 per $100 TAV assuming issuance over a ten year period and the aforementioned 1 - 2.5% annual tax base growth.
Fitch believes the city will need to balance ongoing capital needs against an already above-average debt service tax rate, slower tax base growth in the near term, and the area's below-average socio-economic characteristics. The currently average pace of principal amortization is projected to slow in the near term as the city refinances a large bullet maturity and issues additional debt.
PENSION PLANS
The city maintains two, single-employer pension plans: a city employee pension fund (CEPF) and a firemen and policemen pension fund (FPPF). The city issued $212 million in voter-authorized pension obligation bonds in 2007 and 2009 to address underfunding in the FPPF. The funded position for the combined plans was an adequate 71% as of fiscal 2012, adjusted for a 7% return on investment.
The city has contributed between 97% and 100% of its annual pension costs over the past three fiscal years for the CEPF. However, contributions were roughly 8% and 20% below annual pension cost for the fireman and police division, respectively, in fiscal 2012. Contributions totaled about $43 million or a manageable 9% of audited fiscal 2012 governmental spending excluding capital projects. Public safety employees agreed to a less generous, second-tier of pension benefits for new employees that should reduce this overall liability over time. A similarly-structured program was also implemented for general city employees beginning in fiscal 2012.
BALLPARK VENUE PROJECT
The current offering will finance the construction of an open-air minor league baseball ballpark and related facilities within the downtown area that will also host concerts, other sporting events and community-oriented events. The city formed a bankruptcy-remote local government corporation, the DDC, as a financing vehicle for the current transaction.
The ballpark venue will be constructed on existing real property owned by the city where city hall facilities are currently located. The current building will be demolished and city hall will be relocated to other sites within the downtown area. City management reports that the city hall related capital improvement plan included approximately $29 million in renovations and code compliance improvements.
APPROPRIATION RISK AFFECTED BY NATURE OF LEASED ASSET
Fitch does not consider the leased ballpark venue essential to the core governmental operations, which we believe somewhat reduces the city's incentive to appropriate. However, the majority of debt service is expected to be paid from proceeds of the 2% expansion HOT, which can only be used for the ballpark. This alleviates at least some of Fitch's concern about appropriation risk. Somewhat offsetting the lack of a mortgage interest for the benefit of bondholders is the requirement for the city to vacate the premises in the event of non-appropriation.
PLAN OF FINANCE
The plan of finance relies primarily on the 2% expansion HOT tax, but also includes some additional team and parking revenues with any shortage infused with general fund revenues from any lawfully available sources. The city's lawfully available revenues include sales taxes, franchise fees, and other revenues except for property taxes, which represents roughly 40% of general fund revenue. Assuming that the HOT taxes remain stagnant during the term of the lease and no other revenues are generated, the city's maximum infusion requirement would be roughly $1.4 million, or less than half a percent of total general fund spending.
ECONOMIC DIVERSIFICATION
El Paso is the sixth largest city in Texas. Its current population of over 665,000 reflects ongoing growth at an average annual rate of nearly 1.5% since the 2000 census, slightly below the state's population growth rate of just over 2% for the same time period. City income levels as measured by median household income are below average, but continue to grow at a faster clip than state and national levels. Much of the city's economic activity has historically come from its position in a key NAFTA trade corridor near Mexico's maquiladora assembly plants as well as the presence of Fort Bliss, the Army's second largest installation.
The recent expansion of the military presence at Fort Bliss as a result of the Pentagon's 2005 base realignment and closure recommendations is expected to lead to roughly 10,000 additional troops from current levels by the end of 2013. Military family members are expected to total another 40,000. About two-thirds of the additional troops are expected to live off-base. The ongoing expansion of Ft. Bliss' troop strength and military facilities has boosted residential and commercial construction citywide, although the full economic impact of the expansion is still unfolding.
Government and educational entities comprise most of the top 10 civilian employers, which provide roughly 25% of the area's employment. Major additions to the city's retail, commercial and healthcare sectors brought unemployment rates down to record lows in 2007 and 2008, although they have risen notably along with the national unemployment rate. At 8.7% in January 2013, El Paso's unemployment rate remains above the state's 6.9% and only trails the U.S. rate of 8.5%.
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 the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, and LoanPerformance, Inc.
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
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