AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has taken the following rating action on the city of Seguin, Texas' limited tax obligations:
--$19.7 million of limited tax general obligation (LTGO) bonds affirmed at 'AA';
--$13.6 million of combination tax and limited pledge revenue certificates of obligation (COs) affirmed at 'AA'.
The Rating Outlook is Stable.
SECURITY
The GOs and COs are secured by a limited ad valorem tax levied against all taxable property in the city. The COs are secured further by a limited, de minimis pledge (not to exceed $1,000) of the net revenues of the city's combined electric, waterworks, and sewer system.
KEY RATING DRIVERS
SOUND FINANCIAL PROFILE: The city consistently achieves general fund surpluses and has added to its fund and cash balances over a period of several years. Management demonstrates conservative budgeting practices and regularly outperforms budget forecasts.
HEALTHY, GROWING ECONOMY: Development activity in the city has been strong coming out of the recession and the economic base is fairly diverse. The city also benefits from its location in the robust San Antonio metropolitan statistical area (MSA) economy.
MODERATE DEBT BURDEN: Overall debt levels are moderate and amortization is average, but annual carrying costs for long-term liabilities are slightly elevated. Future borrowing plans by the city and local school district may increase the overall debt burden on taxpayers, although this risk is tempered by the good tax base growth prospects.
WELL-FUNDED PENSION PLAN: City pensions are soundly-funded and the annual required contribution (ARC) is stable.
CONTINGENT LIABILITY FOR LOCAL HOSPITAL: The city has a contingent liability for 50% of long term obligations and operating deficits at the city-county hospital. Although the city and county maintain significant oversight over hospital operations and budget and the city has never been required to transfer funds to cover a shortfall, the hospital experienced a deficit in fiscal 2012.
RATING SENSITIVITIES
SHIFT IN FUNDAMENTALS: The rating is sensitive to shifts in the city's credit fundamentals, including the sound fiscal profile and healthy economy. The Stable Outlook reflects Fitch's view that such shifts are unlikely.
HOSPITAL OPERATING RISK: Self-sufficiency of the city-county hospital remains key to offsetting credit concerns over the city's exposure to this contingent liability.
CREDIT PROFILE
Seguin is located in Guadalupe County, approximately 35 miles northeast of San Antonio along Interstate Highway 10. The city's 2012 population of 26,000 reflects 18% growth since 2000.
DIVERSE LOCAL ECONOMY FAVORABLY POSITIONED NEAR SAN ANTONIO
The local economy is fairly diverse in manufacturing, government, healthcare, and education. The city also benefits from easy access to the extensive and broad employment base of San Antonio via major highways, including a recently completed toll road that connects San Antonio with Austin. The favorable location, highway access, and management's economic development efforts, including the use of tax abatement incentives, have facilitated economic development in the city, particularly in manufacturing.
Major Seguin employers include a number of manufacturers: Continental AG (formerly Motorola, 'BBB'/Stable Outlook), CMC Steel Texas, Tyson Foods Inc. ('BBB'/Positive Outlook), and Caterpillar Inc. ('A'/Stable Outlook). Continental AG is in the midst of a $113 million plant expansion to its Seguin site. Caterpillar opened in 2011 and currently employs just over 1,000; the plant received a 100% tax abatement from the city through 2020. Other long-standing employers include a local medical center and Texas Lutheran University, a 1,400 enrollment liberal arts college.
More recently, the natural gas sector has spurred economic and job growth in the region due to the Eagle Ford shale, a highly profitable natural gas play that stretches to just south of Seguin. As such, the city and San Antonio MSA's July unemployment rates each improved year-over-year to 6.4% and 6.5%, respectively, which are below state and national averages.
Residents' income levels are slightly below average, in part due to the university presence. However, market value per capita is solid at $87,000 in fiscal 2013, up from just $53,000 in fiscal 2008, reflecting growth in the manufacturing base.
TOP TAXPAYER NOW TAX-EXEMPT; PILT FUNDS MITIGATE BUDGET IMPACT
The Rio Nogales Power Plant, formerly the city's top taxpayer at 5% of fiscal 2011 TAV, was purchased by San Antonio's municipally-owned City Public Service (CPS) Energy in April 2012, at which time the plant became tax-exempt. The city's TAV declined by 4.4% in fiscal 2014 as a result, marking the first TAV decline in some time. As part of the purchase CPS Energy paid to the city a one-time payment-in-lieu-of-taxes (PILT) of $9.6 million for lost future tax revenues, relative to the estimated tax yield from the plant of $0.7 million in 2012.
The tax base is now without concentration and retains a good mix of residential and commercial/industrial properties. Prospects for future TAV growth appear favorable given the positive economic metrics, development that is occurring, and tax abatements that are scheduled to expire on a rolling basis over the medium- to long-term. Seguin's housing market is stable and property tax collection rates remain strong.
STRONG FINANCIAL MANAGEMENT PRACTICES AND PERFORMANCE
General fund revenues, led by sales and property taxes, have demonstrated strong 6.4% compound average annual growth coming out of the recession (fiscal years 2008-2012), compared to average annual expenditure growth (before capital transfers) of 5.3%, indicating structural budget balance. Sales taxes in particular have performed well, increasing by an annual average of 4.8% since fiscal 2008 and surging 23% in 2012, largely due the upswing in gas drilling activity. Fitch recognizes the volatility associated with economically sensitive sales taxes, particularly when derived from highly cyclical oil and gas activities, and views as prudent management's use of a portion of surplus revenues for non-recurring capital outlays, as well as the city's continued adherence to its formal policy of maintaining fund balance at or above 30% of spending.
The city ended fiscal 2011 with a strong unrestricted fund balance of $8.7 million, or more than 50% of spending. Fund balance jumped to $19.7 million or 114% of spending in fiscal 2012 after receipt of the $9.6 million PILT payment for the power plant. General fund results before considering this one-time payment were again positive. The PILT funds are classified as unassigned fund balance on an audit basis, although for budgeting purposes the city considers these funds to be distinct from the general fund and available for operational, debt service, and capital needs. Management plans to draw down on these funds over the next several years for ongoing expenses, reducing the need for property tax increases. The city plans to transition away from this use of reserves for ongoing spending as the funds are depleted, timed to coincide with the expiration of large tax abatements in out-year budgets.
GOOD FISCAL CUSHION MAINTAINED IN 2013 & 2014
Fiscal 2013 estimated results are again expected to be slightly positive. The budget incorporated a partial year of the power plant's tax exemption. As such, management utilized $0.7 million of general fund balance (the PILT funds) evenly between general operations and debt service while leaving the tax rate unchanged. The projections notably incorporate a mid-year transfer of surplus sales tax revenues for capital purposes. Management expects a $0.9 million operating surplus without considering the use of fund balance as a revenue source; on a GAAP basis Fitch expects that general fund balance will increase very slightly.
The fiscal 2014 $23.1 million general fund budget reflects the first full year of the power plant tax-exemption. The budget adds some new staff and provides pay raises while again tapping the PILT funds for operations and debt service. A $1 million deficit is forecast, which is consistent with prior-year budgets and with the city's plan for the use of the PILT funds. Fitch expects that the city will maintain its positive financial performance over the near-term based on its strong track record.
WELL-FUNDED LEGACY COSTS
The city participates in the Texas Municipal Retirement System (TMRS) for its retirees' pension program, and its annual contributions have been at or above the required amounts in recent years. Recent system-wide restructuring of internal fund balance reporting and actuarial assumptions benefitted many cities contributing to the system, including Seguin. Seguin's funded position improved to a sound 86.4% as of Jan. 1, 2012 from an estimated 72% in 2008 (using an investment return assumption of 7%). Other post-employment benefits for retiree healthcare are funded on a paygo basis. The OPEB plan is closed to new employees and the UAAL is a de minimis 0.1% of market value.
MODERATE DEBT BURDEN
Fitch considers key debt ratios to be moderate at 4.5% of market value and $3,307 per capita. The city plans to approach voters for $19.8 million of general obligation debt authority in November 2013 to fund the construction of a new library and park improvements. The debt service associated with the bonds would require up to a 6% (3-cent) tax rate increase.
The city's multi-year capital plan identifies an additional $44.8 million in spending, with funding likely to come from a mix of additional debt, paygo, enterprise revenues, state appropriations, and grants. The local school district has also called a bond election in November 2013 for $84 million, about half of which would be added to the debt burden of city taxpayers. Overall debt ratios may increase to the high range, although Fitch expects the magnitude of the increase to be tempered by the good TAV growth prospects.
Fixed carrying costs for debt service, pension ARC (excluding the pension costs funded in excess of the ARC), and OPEB ARC made up a substantial 21.4% of fiscal 2012 governmental expenditures. Carrying costs on outstanding debt will rise slightly in the next few years and may rise further given the aforementioned debt issuance plans.
CONTINGENT LIABILITY FOR COUNTY-CITY HOSPITAL
The city and Guadalupe County (the county) each have a 50% contingent liability for operating deficits and shortfalls regarding long-term obligations of the Guadalupe Regional Medical Center (the hospital). To date, the city has never made a subsidy payment to the hospital, other than indigent care costs for which the city is contractually responsible. Hospital operations have historically been positive, although the hospital incurred a deficit in fiscal 2012. This was the first deficit in some time and was funded from internal hospital balances. Fitch would be concerned if hospital deficits exerted financial pressure on the city but views the adoption of a balanced 2013 budget and a reportedly favorable year-to-date operating trend as a positive.
The hospital has $93.4 million in mortgage revenue bonds outstanding, issued in 2007 for an expansion project. The bonds are insured by the Federal Housing and Urban Development Program (Section 242) and are special and limited obligations of the hospital, HUD, and FHA. HUD has significant oversight authority for the hospital. The risk of the contingent liability is further mitigated by the fact that both the city and county maintain significant oversight of the hospital, including the appointment of board members, budget approval, and review of the hospital's audit.
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, 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=803657
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