AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has upgraded the rating on the following Littlefield, Texas (the city) bonds:
--$0.5 million in combination tax and revenue certificates of obligation (COs), series 1997 to 'BBB-' from 'BB+'.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a limited ad valorem tax pledge of $2.50 per $100 taxable assessed valuation (TAV) levied against all property within the city, and are additionally secured by a limited, de minimus pledge of net revenues of the city's water and sewer system.
KEY RATING DRIVERS
IMPROVED FINANCIAL FLEXIBILITY: The upgrade is based on demonstrated prudent budget actions that have increased revenues and control spending, resulting in positive operating margins and improved governmental fund balances and liquidity. However, the city remains reliant on its utility enterprise system to meet its debt service obligations for the detention center and for operating support.
SUSTAINABLE MIX OF RESOURCES FOR DEBT SERVICE: Financial resources to make debt service payments on outstanding parity COs come from a variety of sources, including net utility fund revenues, property taxes, and a portion of economic development sales tax revenues. The utility system continues to exhibit very strong financial performance.
LARGE LIABILITY FOR NON-ESSENTIAL AND UNUSED ASSET: The 'BBB-' rating incorporates the ongoing credit pressure applied by the significant debt burden of an unsold, vacant, city-owned detention center. Efforts by the city to find a buyer or lessee for the facility have been unsuccessful to date.
WEAK ECONOMY AND RESOURCE BASE: The city's rural, limited economy centers on agriculture, government, manufacturing, and trade. The city's TAV has been fairly stable but top taxpayer concentration is high and socio-economic indices are weak.
RATING SENSITIVITIES
DECLINE IN FINANCIAL FLEXIBILITY: Deterioration of general fund and/or enterprise system performance and liquidity would contrast with Fitch's current expectations of stability and would likely trigger negative rating action.
SALE OF DETENTION CENTER: A successful sale or lease of the detention center would be a positive credit consideration, allowing the city to apply proceeds from the sale or lease towards debt reduction/retirement, considerably lessening pressure on finances.
CREDIT PROFILE
Littlefield, the county seat of Lamb County, is a small, rural community located 35 miles northwest of Lubbock and 120 miles southwest of Amarillo. The current population is just below 6,500 and is essentially flat from the 2000 census.
VARIOUS RESOURCES PAYDETENTION CENTER DEBT SERVICE
The city continues to service the debt for the Bill Clayton Detention Center (BCDC) with a mix of net utility system enterprise revenues, property tax revenues, and economic development (4B) sales taxes. BCDC annual debt service is level through fiscal 2019 at roughly $780,000 before increasing moderately; final maturity is 2030.
The BCDC opened in 2006 but has sat vacant since January 2009 when agreements between the city and various counterparties for prisoner-housing services fell through. The prisoner contract revenues were until that time being used to pay the debt service on series 2000 and 2001 COs (not-rated by Fitch but on parity with the series 1997 COs) that were sold to finance the BCDC construction.
Following the loss of prisoner housing revenues, the city levied a dedicated debt service property tax for the BCDC bonds. Voters also approved the creation of a second economic development corporation (4B) that, in addition to existing 4A sales taxes, redirected proceeds from a 0.5% sales tax to fund the BCDC's debt service; sales tax collections for this purpose began midway through fiscal 2011. The city does not presently use 4A sales taxes for debt service but these funds remain available for that purpose if needed.
Finally, management allocated its available surplus net utility system revenues to pay BCDC debt service; together these various sources have provided the revenues necessary to make the annual payments. Fitch views the city's obligation to pay debt service for an inherently non-essential and unused asset as an ongoing credit risk incorporated into the current rating.
STRONG UTILITY SYSTEM PERFORMANCE
City officials have prudently raised water rates to ensure the continued strong performance of its utility system and availability of system net revenues for governmental debt service and operations. The base rate for residential and commercial units was raised by 37% and 23%, respectively, from fiscal years 2010 to 2012 and the city initiated smaller rate increases in fiscal 2013.
The utility system consistently reports satisfactory liquidity and healthy coverage of outstanding system obligations; net revenues covered debt service for utility-sponsored debt (including the series 1997 bonds but excluding the BCDC bonds) 3.7x in fiscal 2013 and the system's cash-on-hand equaled 243 days of operating costs. The system produced net revenues of $977,000 in fiscal 2013 (after payment on COs) that was available for BCDC debt service and general fund operating support. The recent rate increases appear sufficient to allow the utility to continue to make transfers to support the BCDC debt payments and general fund operations while maintaining an adequate fiscal cushion.
GENERAL FUND FLEXIBILITY LIMITED BUT IMPROVING
The city has achieved balanced operations after transfers in each of the last three fiscal years. This performance is attributable to revenue growth, a curtailment of spending, enterprise transfers, and use of other one-time funds. The general fund remains reliant on the utility fund to achieve budget balance, although unexpected revenue variances in fiscal years 2012 and 2013 allowed the city to forego or lessen the budgeted transfers.
The general fund concluded fiscal 2013 with a $362,000 unrestricted fund balance (7.5% of spending). Fund balance has improved from essentially zero in fiscal 2010. Liquid general fund assets remained very thin at 15 days of operations in fiscal 2013; however, liquidity is buoyed by cash balances in other city funds.
The fiscal 2014 general fund budget totals $4.15 million and includes a $0.35 million operating deficit that is made whole by the planned transfer from the utility enterprise; the transfer represents about 10% of budgeted revenues. Spending was reduced 2.8% from the prior year adopted budget, in part due the creation of an internal refuse collections department which allowed the city to end its more costly contract with a third-party operator. Other changes to key line items include pay raises to staff, a nominal increase in FTEs, and stable pension contributions.
Sales taxes have made up 12%-14% of general fund revenues in the past five fiscal years. These revenues were budgeted to decline 3% from prior-year actual receipts in fiscal 2014, but year-to-date receipts are lagging 9% behind last year's collections. However, the city outperformed its conservative expenditure assumptions last year and Fitch believes this practice provides a cushion against a potential revenue shortfall.
RURAL AND LIMITED ECONOMY WITH WEAK DEMOGRAPHICS
Littlefield has a limited economic base focused in agriculture, government and some manufacturing. Employment indicators for Lamb County are weak and reflect slow but steady declines in residents and jobs. The county experienced contraction in jobs and labor force participation of 2.2% and 2.1%, respectively, in the past decade. The county's jobless rate stood at 6.2% in November 2013 but this figure incorporates a 5% decline in both jobs and labor force participation for the 12-month period ended December 2013.
Wealth indicators are also weak. Full value per capita is a very low $29,000 in fiscal 2014. Residents' income levels are significantly below state and national norms and the county's poverty rate is 1.8x the U.S. average.
The city's TAV trajectory is stable, having increased 3.7% in fiscal 2014 and 0.5% in fiscal 2014. These gains followed very modest contraction in fiscal 2011 and fiscal 2012. The tax base remains concentrated: Bayer Crop Science makes up 6.8% of fiscal 2014 TAV. However, there is generally a good mix of industries making up the roster of top 10 payers.
LIMITED ABILITY TO FUND CAPITAL NEEDS
Another credit concern is the city's limited ability to finance capital needs due to the large burden on the budget from existing debt. Officials presently have no major needs identified and continue to fund smaller initiatives with cashflow. However, larger needs for utility system and street improvements are looming and could pressure finances over the near-to-medium term.
Annual debt service on outstanding COs is level at $1.1 million through fiscal 2017 before declining slightly. Much of the debt service is funded with utility fund revenues; as a result, net debt service after considering the enterprise fund support made up a very low 3.8% of fiscal 2013 governmental fund expenditures (but a high 23% of spending when utility fund support is not considered).
The city's pension plan was soundly-funded at 90.6% as of the Dec. 31, 2012 using a 7% investment return. Debt service and pension ARC together equaled an affordable 7.5% of fiscal 2013 spending considering the utility fund support (but a high 26% of spending without utility fund support).
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=822980
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