AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AAA' rating to the following Garland, Texas' (the city) general obligation (GO) bonds and certificates of obligation (COs):
--$12.3 million GO refunding bonds, series 2013;
--$12.7 million combination tax and revenue COs, series 2013.
The GOs and COs are scheduled to sell via competitive bid on May 7, 2013. The GO refunding bonds will be used to refund certain outstanding obligations for debt service savings and pay costs of issuance. Proceeds from the sale of the COs will be used largely for improving and equipping various municipal facilities
In addition, Fitch affirms the following ratings (pre-refunding):
-- $495.2 million in outstanding GOs and COs at 'AAA'.
The Rating Outlook is Stable.
SECURITY
The GOs and COs are secured by a limited ad valorem tax pledge of the city, not to exceed $2.50 per $100 of taxable assessed valuation (TAV). The 2013 COs are additionally secured by a nominal pledge of net revenues (limited to $1,000) of the city's water and sewer system.
KEY RATING DRIVERS
STRONG FINANCIAL PROFILE: The city maintains a stable financial position and solid reserve levels, enabled by management's conservative, proactive financial practices and prudent fiscal policies. Recent financial performance has benefitted from some modest improvement in revenue trends, largely reflective of a strengthening local economy.
MATURE DALLAS METRO SUBURB: The city is part of the larger Dallas-Fort Worth-Arlington metropolitan statistical area (MSA) economy and employment base. Anchored by manufacturing and distribution, Garland's overall economic base remains sound. Year-over-year unemployment is down despite labor force gains and remains comparable to county and state levels, while below the U.S. average.
STABILIZING TAV: The city's tax base is solid and diverse. A trend of modest TAV declines halted with a return to flat-to-stable TAV in fiscal 2013. TAV is projected by the city to remain generally stable over the near term. Fitch believes this projection is reasonable given improving economic metrics and performance of economically sensitive revenues.
DEBT AND OTHER LONG-TERM LIABILITIES MANAGEABLE: Overall debt levels are above average in contrast to the city's generally favorable direct debt profile. Amortization of tax-supported principal is rapid. Other long-term liabilities of the city are moderate. Capital needs are manageable.
RATING SENSITIVITIES
Material deterioration of the city's financial position could signal a fundamental shift in its credit profile, leading to negative rating action. The Stable Outlook reflects Fitch's expectations that such a shift is unlikely as evidenced by the city's historical financial performance.
CREDIT PROFILE
MATURE CITY; STABLE MANUFACTURING CENTER
The city benefits from its favorable location within the Dallas-Fort Worth metropolitan area, surrounded by major transportation corridors. Population growth has been minimal since 2000 as the city is near full build-out with a stable population base, currently estimated at 228,000 residents. Income and wealth levels approximate the U.S. and slightly exceed the state's, although educational attainment metrics are below national averages.
The city's industrial market is the second largest in the MSA, with a diverse list of manufacturing and distribution concerns that are the primary economic engines for the city. Year-over-year unemployment declined to 6.7% in February 2013 from 7.2% in February 2012 despite a solid 2% gain in labor force over the same time period. Comparable to historical trends, the city's unemployment's rate was in line with the county's (6.9%) and state's (6.4%) for the same period, but below the U.S rate of 8.1%.
The city's tax base is primarily residential in nature despite its industrial/commercial base. Top 10 taxpayer concentration is minimal at 5.7%. Market value per capita is moderate at $52,000 in fiscal 2013, which reflects in part the city's relatively modest home values and housing stock. Recessionary pressures on property valuations saw an end to TAV gains beginning in fiscal 2010. Over fiscals 2010-2012, TAV declined modestly each year, reaching a cumulative 9.5% decline or $10.1 billion. However, TAV regained its footing in fiscal 2013 and held flat-to-stable, evidence of some area economic improvement as a lagging measurement. New construction permits improved significantly in 2012 and management projects fairly comparable TAV performance over the near term, which Fitch believes is reasonable given recently stronger economic metrics and performance of economically sensitive revenues.
Over the intermediate term, management expects development along tollway and interstate growth corridors to further strengthen taxable values. Commercial development along the George Bush Tollway to the north has enhanced the city's retail base. This includes the Firewheel Town Center Mall, and along IH-30 in the southern portion of the city, which includes the Harbor Point retail center. City officials continue to review redevelopment efforts (primarily focused on commercial/retail/office space) that could generate further tax base expansion. Planned infrastructure improvements at Town Center from a portion of this issuance are expected to support near-term, transit-oriented residential development in proximity to an existing Dallas Area Rapid Transit (DART) light rail station.
SOLID FINANCIAL PROFILE
Operations are supported by a fairly diverse revenue base, led by property taxes that provided nearly 40% of total general operating revenue in fiscal 2012, followed by sales taxes at 20%. Despite the pressures associated with its relatively mature economy and slow recovery from the recession, management's timely budget cuts and proactive oversight enabled the city to maintain a stable financial position. Notably, the city maintained this solid position without increasing the total tax rate over two fiscal years of modest TAV declines. The city posted modest net deficits in the general fund in two of the last five fiscal years, but reserves as a percentage of spending have remained stable over this period and well above the city's policy to maintain a 30-day unreserved fund balance.
Reserves strengthened modestly in fiscal 2012 with a $2.7 million addition to fund balance (equivalent to about 2% of the year's general operational spending). Unrestricted general fund reserves increased to $21.3 million or 15% of spending, assisted by the year's improved sales tax performance. The city's liquidity position remained strong; general fund cash/investments totaled $21.3 million or about 54 days of general fund spending at fiscal 2012 year-end.
For fiscal 2013, the district's $136.4 million budget was approved with a modest $2.4 million draw on reserves, primarily due to management's decision to provide one-time salary increases. The year's budget maintains reserve levels according to city policy without a property tax increase or reductions in services or workforce. Year-to-date, management reports revenues exceeding budget by about $2 million while expenditures are generally in line with budget; a reduced, $700,000 drawdown is projected at year-end.
As part of its multi-year planning efforts, the city prepares a five-year financial forecast (fiscals 2013-2018). The current look-ahead anticipates modest annual operating gaps (no more than 2% of the year's budgeted spending) in out years with draws on reserves to below the 30-day policy level under conservative revenue and expenditure assumptions. Nonetheless, Fitch recognizes the modest nature of the imbalance and 'worst case' projections while taking comfort from management's historically strong fiscal practices and budgetary oversight that have enabled the maintenance of reserves well above policy.
DEBT AND OTHER LONG-TERM LIABILIITES MANAGEABLE
The overall debt burden is above average at 6% of market value (reflective in part of recent TAV declines) and largely due to overlapping school district debt, but more moderate on a per capita basis at $3,100. This is in contrast to the city's generally favorable direct debt profile. Direct debt levels are moderate and well within the city's policy of limiting tax-supported debt to 5% of TAV. The city's debt is predominantly fixed-rate. Self-supporting debt of the city, primarily from the electric, water, and wastewater utilities, represents about 40% of total GO debt, thereby substantially reducing the impact on the city's debt service tax rate. Principal amortization of tax-supported debt is above average, with 71% retired within 10 years.
The city maintains a measured pace of tax-supported and revenue debt issuance annually in support of its capital improvement plan (CIP). A comprehensive, five-year CIP is adopted annually, much of which is driven by various utility system capital projects and is expected to be funded by self-supporting debt. Management has established the tax-supported portion of the CIP (which focuses largely on streets) at a level that allows the city to move ahead with the 2004 bond program, but at a pace that does not trigger a tax rate increase. This is despite a debt service tax rate that remains well below the increase promised voters at the 2004 GO bond election. The city maintains about $145 million in authorized but unissued GO bonds.
The city's pension plan is through the Texas Municipal Retirement System (TMRS), a statewide agent multiple-employer plan. Contribution rates are determined each calendar year. For fiscals 2010-2012, the city paid 100% of the annual required contribution (ARC), which totaled a reduced $16.8 million in fiscal 2012, down about $3 million from the prior year. Recent structural and actuarial changes to TMRS approved at the state level significantly boosted the city's funded position to a good 96.7% at Dec. 31, 2011 (using a 7% investment rate of return) from a below-average 75.9% at Dec. 31, 2009. The unfunded accrued actuarial liability (UAAL) totaled nearly $23 million at Dec. 31, 2011 or less than 1% of market value.
The city provides other post-employment benefits (OPEB) through a self-funded single-employer plan. Funding is done annually on a pay-go basis, which has covered between 55%-65% of the actuarially determined annual OPEB cost in the last three fiscal years (2010-2012). However, Fitch's concerns are largely mitigated due to the relatively small OPEB liability; the unfunded actuarial accrued liability remains modest at $82.2 million or less than 1% of market value. Carrying costs for the city (debt service, pension, OPEB costs, net of self-supporting enterprise debt) totaled a moderately high but manageable 27.2% of governmental spending in fiscal 2012 due in part to the above-average pace of debt principal amortization.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, IHS Global Insight, the National Association of Realtors, and the Municipal Advisory Council of Texas.
Applicable Criteria and Related Research:
--Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, IHS Global Insight, the National Association of Realtors, and the Municipal Advisory Council of Texas.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
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
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=789595
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