AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA+' rating to the following City of Fort Worth, Texas' obligations:
--$35.8 million general purpose refunding and improvement bonds, series 2013;
--$63.4 million combination tax and limited surplus revenue certificates of obligation (COs), series 2013A;
--$11.2 million combination tax and limited surplus revenue COs, series 2013B.
These obligations are scheduled for a negotiated sale on or about August 22. Series 2013 bond proceeds will finance street, drainage and park improvements and refund a portion of the city's outstanding tax supported debt. Series 2013A and 2013B CO proceeds will finance various infrastructure and civic improvements.
In addition, Fitch affirms the following ratings:
--$579.7 million outstanding Fitch rated general purpose bonds and COs (pre-refunding) at 'AA+';
--$19.0 million outstanding Service Center Relocation, Inc. (SCR) series 2004 lease revenue bonds at 'AA'.
The Rating Outlook is Stable.
SECURITY
General purpose bonds and COs are secured by a limited ad valorem tax levied against all taxable property in the city. COs are secured further by a limited pledge of surplus city revenues from specific operations. The SCR lease revenue bonds are secured by annual lease payments from the city to the corporation, subject to appropriation.
KEY RATING DRIVERS
SOUND FINANCES, CHALLENGES REMAIN: Despite revenue declines, the city's recent financial performance has been solid, characterized by generally positive operating margins and increasing reserves. After successfully addressing large budget gaps over the past several fiscal years, management anticipates a sizable drawdown of reserves in fiscal 2013 as expenditure growth continues to outpace revenues.
PENSION CHALLENGES: Pension funding levels are only adequate, and are weak when a more conservative estimated investment return is assumed. The city has a manageable overall bonded debt burden, and payout of tax-supported debt is rapid.
A LARGE AND DIVERSE REGIONAL ECONOMY: Fort Worth is a major anchor in the Dallas-Fort Worth regional economy with a population of roughly 6.5 million.
SCR ASSETS ESSENTIAL: The SCR series 2004 lease revenue bonds financed a consolidated service center/vehicle maintenance building, an essential facility for various city departments. However, bondholders have no security interest in the facility.
RATING SENSITIVITIES
RESOLUTION OF BUDGET IMBALANCE: The proposed fiscal 2014 budget includes a much smaller initial budget gap, indicating progress in addressing this problem. Continued progress is essential for maintenance of the current high rating.
PENSION FUNDING: The city has made changes to its pension plan for non-uniformed and police employees that should improve funding levels over time. Successful resolution of a legal challenge to certain aspects of the program revisions, and inclusion of Fort Worth firefighters in the pension reform effort will be credit considerations going forward.
CREDIT PROFILE
FINANCIAL RESERVES HEALTHY
The city's financial performance has been positive in recent years, characterized by net gains and increases in general fund reserves well in excess of the policy target level. Audited results in each of the past three fiscal years were significantly better than earlier projections (moderate drawdowns had been anticipated in each year); the city's general fund recorded net income of roughly $19 million in fiscal 2010 and further gains of $714,000 and $4.8 million in fiscal 2011 and 2012, respectively; the cumulative impact of these results was a boost to the unrestricted fund balance to $154.8 million, or 28% of expenditures and transfers out at fiscal 2012 year-end.
While management has successfully addressed large budget gaps the past several years, a structural gap between operating revenues and outlays persists. The gap appeared again in the fiscal 2013 budget, which included a roughly $48 million general fund shortfall, and the city's five-year forecast projects expenditures to outpace revenues each year. The current projection for fiscal 2013 includes a gain in sales tax and other revenues and spending generally in line with the revised budget. As a result, management now anticipates a still sizable drawdown in operating reserves of roughly $39 million at year-end.
Despite the projected drawdown, reserves will still be large and will remain comfortably above the city's minimum 10% unreserved fund balance policy. Fiscal 2014 is expected to see a continuation of financial pressures, although the proposed budget includes a 2.4% ($14 million) reduction in general fund spending from the fiscal 2013 budget and a more manageable $7 million initial budget gap. Fitch will continue to monitor the city's progress in addressing the structural imbalance, noting that continued erosion of reserves beyond the level currently projected would not be consistent with the current rating.
MANAGEABLE DEBT BURDEN, PENSION CHALLENGES
The city's overall bonded debt burden is moderate, with the total reflecting the large number of school districts located within the city's boundaries. Principal amortization is rapid, with more than two-thirds of tax supported debt retired within ten years. The current offerings will finance various infrastructure and civic improvements and refund a portion of the city's outstanding tax supported debt for interest savings. With no general purpose bond authorization remaining, officials are contemplating a spring 2014 bond election and are currently soliciting citizen input regarding project priorities.
The city maintains a single employer defined benefit retirement system that covers all regular full-time employees of the city. As of Jan. 1, 2012 the funded ratio was roughly 71% and the unfunded actuarial accrued liability was $748 million, or roughly 1.5% of fiscal 2013 market value. The actuarial assumptions include an investment return of 8.25%; using a more conservative 7% return assumption, the estimated funding ratio is weaker at less than 65%.
Since 2011 the city has made a number of adjustments to civil and police retiree benefits, targeting primarily employees hired after July 1, 2011. These changes, including increasing the retirement age, removing overtime from the compensation base and eliminating COLAs, should improve funding levels over time. The city still must address pension reform with firefighters, and pending litigation regarding benefit changes to existing police employees could affect the city's plans if an adverse ruling is handed down. Fitch will continue to monitor the city's progress in its efforts to shore up pension funding levels.
The city also offers other post-employment benefits for healthcare (OPEB), and the unfunded liability as of Jan. 1, 2012 was sizable at $926 million. The city has established an OPEB trust and has initiated contributions to the trust; management previously adopted a 20-year funding strategy for the OPEB liability. Total carrying costs (debt payments and benefit contributions) were midrange at 21% of governmental spending in fiscal 2012.
POPULATION AND ECONOMY CONTINUE EXPANSION
With an estimated 2013 population of about 767,000, Fort Worth's population continues to grow (up more than 3% annually since 2000). In addition, the city's extra-territorial jurisdiction is sizable and provides opportunity for future annexation and growth. The metropolitan area employment base is extensive, and while military-related spending still accounts for a significant part of the economy, recent gains in other sectors, such as services, construction, and trade have diversified the labor force. In addition, mining (natural gas), ranching, manufacturing, technology, education, and aerospace are significant components of the Fort Worth economy and serve to diversify economic activity.
The city has not been immune to negative economic factors, as evidenced by the bankruptcy filing by AMR Corporation (parent of American Airlines with Fort Worth corporate headquarters). A major north Texas employer, AMR announced 13,000 layoffs in February 2012. The proposed merger between AMR and US Airways suggested an exit route from bankruptcy, but the recent announcement by the U.S. Justice Department to challenge the merger on antitrust grounds casts doubt on this prospect.
The defense sector concentration in the local economy has exposed employers to sequestration-related cutbacks, and Bell Helicopter earlier this year announced 140 layoffs at its Fort Worth plant; the company reportedly employs 7,000 in Tarrant County. Conversely, Lockheed Martin recently announced it may add 2,400 more workers over the next several years in Fort Worth as production of the joint strike fighter plane ramps up. The company employs 14,000 in the city.
Despite AMR and other isolated layoffs, the city has steadily added to employment totals, even during the recent economic downturn. For May 2013, the city's unemployment stood at 6.5%, down from 6.8% a year ago and below the national average of 7.3% for the month. City wealth levels generally are below the region and state; however, housing prices remain relatively low in comparison to other large cities in the state, pointing to a lower cost of living. Taxable values have held up well over the past five years, registering only one modest decline (-2.0%) in fiscal 2011, indicating a relatively stable housing market.
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, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, and the 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
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=800052
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