AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating to the following Bexar County, Texas (the county) obligations:
--$17.1 million unlimited tax (ULT) refunding bonds, series 2013;
--$20.8 million limited tax (LT) refunding bonds, series 2013;
--$13.9 million pass-through revenue and limited tax refunding bonds, series 2013A (Culebra Road Project);
--$17.9 million pass-through revenue and limited tax refunding bonds, series 2013B (Blanco Road Project).
The bonds are expected to price via negotiated sale during the week of Nov. 18, 2013. Proceeds of the bonds will be used to refund outstanding debt for interest cost savings.
In addition, Fitch affirms the following ratings:
--Approximately $32.6 million in outstanding ULT bonds at 'AAA';
--Approximately $1.452 billion in outstanding LT bonds at 'AAA'.
The Rating Outlook is Stable.
SECURITY
ULT bonds are secured by an unlimited annual property tax levied against all taxable property within the county. The LT bonds are secured by an annual property tax levied against all taxable property within the county, limited to $0.80 per $100 taxable assessed valuation (TAV) for operations and debt service. The pass-through toll revenue and unlimited tax bonds are additionally secured by payments received by the county pursuant to a pass-through toll agreement between the county and the Texas Department of Transportation.
KEY RATING DRIVERS
Sound Financial Management: The county's solid financial position has benefited from prudent stewardship during the recent economic slowdown as evidenced by a multi-year approach to controlling expenditure growth and limiting the scale of structural imbalances.
WEAK DEBT PROFILE, SATISFACTORY PENSION POSITION: The county's debt profile is characterized by a high overall debt burden and slow principal amortization. However, the county fully funds the annual pension contribution requirement, its debt service tax rate is modest, and carrying costs do not present an undue burden on resources.
STABLE ECONOMY: Population growth remains rapid. Although the local economy has diversified notably, the military remains a major economic factor which could be affected negatively by the unfolding sequestration of federal funds. The local economy is benefitting from rapid employment gains, enabling the county's unemployment rate to remain well below state and national averages despite robust labor force increases.
TAX-BASE STABILIZED: Slower residential building activity and modest tax base declines stalled previously rapid tax base growth but have now stabilized. Fitch expects that the area's affordable home prices, ample developable land, and surging oil and gas activity at the nearby Eagle Ford Shale will aid the area's ongoing recovery.
RATING PARITY: The LT bonds are rated on par with the ULT bonds due to the significant rate-raising flexibility under the rate limitation supporting the LT bonds. The county currently levies a combined $0.29 operations and debt service tax rate compared to the limit of $0.80.
RATING SENSITIVITIES
GROWING DEBT BURDEN: Rising debt beyond current expectations could pressure the rating.
CREDIT PROFILE
Bexar County, with an estimated 2013 population of 1.7 million, is home to San Antonio (general obligation bonds rated 'AAA' with a Stable Outlook by Fitch), the seventh largest city in the U.S.
MILITARY STILL IMPORTANT WITHIN DIVERSE ECONOMY
Military and government sectors are prominent with four large military installations located within the county. Fitch views such military reliance cautiously, although the county has benefitted substantially from recent realignment and base closure decisions. Relative to the larger economy, the projected impact of federal sequestration on civilian military employment is modest. However, the impact of sequestration on military contracts with the area's defense industry is still unfolding. Other leading employment sectors include domestic and international trade, convention and tourism, medical and health care, financial services, and telecommunications.
EAGLE FORD SHALE IMPACTS EMPLOYMENT BASE
The ongoing recovery from the last recession has been aided by recent employment hikes in the leisure/hospitality and construction/mining sectors, fueled by surging oil and gas activity within the nearby Eagle Ford Shale. As a result, the county's August 2013 unemployment rate of 6% still compares favorably to state and national averages of 6.3% and 7.3%, respectively, for the same period.
TAX BASE STABILIZED
Tax base growth flattened in fiscal 2011 following numerous years of double-digit growth, due to the steep building downturn and falling base values during the last recession. The modest 1.6% decline in fiscal 2012 was recovered in fiscal 2013 and compares favorably to management's conservative forecast of a second 1.6% decline. TAV growth of 5.5% in fiscal 2014 is attributed mostly to reappraisal gains (61% of fiscal 2014 growth), with the remainder comprised of $2.1 billion of new construction (39% of growth). County officials are conservatively projecting modest rates of TAV growth beyond fiscal 2014. About 70% of general fund revenue is derived from ad valorem taxes.
STRONG FINANCIAL PROFILE
The county's financial position remains strong, boosted by a multi-year strategy to control growth or reduce general fund expenditures starting in fiscal 2009 in order to minimize any budget gaps by fiscal 2011. This proactive approach enabled the county to maintain its reserves above its 10% fund balance policy level despite sluggish tax-base trends during the economic slowdown.
The county posted a solid operating surplus after transfers in fiscal 2012 equal to 2% of general fund spending, and increased its unrestricted fund balance to $62.2 million or 19% of spending. Fiscal 2012 results were aided by the county's practice of budgeting contingency appropriations. Notably, the fiscal 2012 budget included a net reduction of 228 positions (4.8% of county workforce) and included contingency appropriations equal to 3.6% of total appropriations.
Public safety expenses dominate the general fund budget with 50% of appropriations for law enforcement and jail operations. Fitch views favorably the county's success in controlling expenses starting in fiscal 2009. Notably, fiscal 2012 expenditures returned to fiscal 2008 levels. General fund revenues continued to grow, averaging 1.6% annual growth since fiscal 2008.
The adopted fiscal 2013 budget is funded with a level tax rate, increases general fund appropriations by a manageable 2.4% over budgeted fiscal 2012 expenditures, includes a $14.4 million (4.2% of appropriations) use of fund balance and continues the practice of appropriating meaningful contingencies ($14.6 million or 4.3% of total appropriations). Appropriation increases are led by a new collective bargaining agreement (effective through fiscal 2015) with the Deputy Sheriff's Association, totaling $5.2 million in fiscal 2013 (accounting for 63% of the total budget increase). All other county employee pay is determined annually and a 3% cost of living adjustment was adopted for fiscal 2013. Unaudited fiscal 2013 results are not yet available but preliminary projections show the county outperforming budget with only a $3 million draw on fund balance. However, Fitch expects audited results to positively exceed management expectations given the county's track record of conservative financial practices.
The adopted fiscal 2014 budget is aided by aforementioned AV growth and maintains a level tax rate. The budget again includes both a draw on fund balance ($11.7 million or 3.2% of appropriations) and sizeable contingencies ($30.9 million or 8.4% of appropriations) which Fitch expects will support balanced results. A 3% cost of living increase and market adjustments for non-exempt employee is also included in the budget.
LARGE DEBT PLANS ACCELERATED
The county accelerated its debt plans as the court recently authorized the issuance of up to $455 million in non-voted certificate of obligations (COs), comprising the $350 million June 2013 offering for flood control projects. Previously, the county had planned to issue $300 million in flood control COs through 2016. The completion of the design phases and right-of-way acquisition for many of the flood control projects spurred the county to accelerate its debt schedule.
The county's overall debt burden is high at $6,009 per capita and 8.9% of market value. Direct debt includes a rising level of bonds secured by hotel occupancy taxes and motor vehicle rental taxes s (venue project revenue bonds rated 'A+' by Fitch) which now comprise 18% of the county's debt portfolio. However, overall debt levels have risen mostly from substantial debt issuances by the county's large number of overlapping jurisdictions, which include 15 school districts. The principal amortization of property tax-supported debt remains well below-average at 21% in 10 years.
This year's numerous new money offerings are not projected to require an increase in the county's modest combined debt service and flood control tax rate of $0.076 per $100 AV. The county's plan of finance is based on TAV growth of 2%-3% annually, which Fitch considers conservative, and includes support for the CO debt service by Texas Department of Transportation reimbursements for outstanding pass-through toll road bonds and revenues derived from the county-wide advanced transportation district sales tax receipts.
The county's future debt plans are modest, comprised of $47 million and $56 million of pass-through toll revenue and property tax road bonds projected for issuance in fiscal 2014 and fiscal 2015, respectively. An additional $50 million of CO's for the county's regular CIP needs is also anticipated in fiscal 2015. Continued large debt issuances beyond these expectations, without offsetting tax base growth, could result in negative rating pressure given the county's high overall debt burden.
MANAGEABLE PENSION AND OPEB COSTS
The county and all of its full-time employees contribute to a statewide agent multiple-employer defined benefit pension plan administered by the Texas County and District Retirement System (TCDRS). The county fully funds the annual required contribution (ARC), leading to a solid 83.7% funded position as of Dec. 31, 2011. Adjusted to reflect Fitch's assumption of a 7% rate of return, the funded position is still adequate at an estimated 75%. The county's other post-employment benefits (OPEB) are modest and funded on a pay-as-you-go basis. Carrying costs for the county's debt service, pension ARC and OPEB payments is moderate at 15.9% of total fiscal 2012 governmental spending.
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, Zillow.com, 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=808593
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