AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has taken the following rating action on Zapata County, Texas' (the county) bonds:
--$11.2 million unlimited tax (ULT) road bonds, series 2006, affirmed at 'A+';
--$5.3 million limited tax (LT) refunding bonds, series 2005, affirmed at 'A'.
The Rating Outlook is revised to Negative from Stable.
SECURITY
The ULT bonds are secured by an unlimited property tax levy. The LT bonds are secured by a property tax levy limited to $0.80 per $100 of taxable assessed value (TAV) for operations and maintenance and debt service on the bonds.
KEY RATING DRIVERS
NEGATIVE OUTLOOK REFLECTS STRESSED FINANCIAL STATE: Declining property tax collections have resulted in the county's inability to produce a structurally balanced budget. Limited options for both revenue raising and expenditure reductions further restrict the county's flexibility.
AMPLE RESERVES: Reserves are expected to remain high in the near term, despite anticipated use to fund operating deficits.
NATURAL GAS DOMINATES THE ECONOMY: Massive natural gas reserves have resulted in very high taxpayer concentration. Positively, the county has sustained above average employment growth.
PRIMARY REVENUE SOURCE LINKED TO VOLATILE INDUSTRY: Property tax collections, which represent a high proportion of county revenues, vary widely during times of natural gas price fluctuations and subsequent valuation adjustments.
SUB-PAR ECONOMIC INDICATORS: Low wealth levels and a high incidence of poverty are typical of rural communities along the U.S.-Mexico border.
FAVORABLE DEBT PROFILE: Overall debt and carrying costs are low, even with rapid amortization. Pensions are well-funded.
RATING SENSITIVITIES
FAILURE TO ACHIEVE STRUCTURAL BALANCE: Further tax base declines, with the resulting drop in property tax collections, sustained structural imbalance, or a notable drop in reserves may lead to further negative rating action.
CREDIT PROFILE
Zapata County is located on the U.S.-Mexico border near the southern tip of Texas, with a 2012 population of approximately 14,290.
SEVERE ASSESSED VALUE DECLINES PRESSURE REVENUES
The county has posted double-digit declines in TAV in each of the last four fiscal years (2010 to 2013), resulting in a sharp cumulative contraction of 61%. The tax base is highly concentrated in extractive industries, representing 45.1% of market value (down from 72.5% in fiscal 2009), and natural gas and mineral valuations fell by a notable 38% in the same period.
Property taxes, representing 76.6% of the fiscal 2012 revenue base, declined in response to the TAV's volatility. Fiscal 2012 property tax revenues of $12.7 million represented a cumulative 36.4% drop since fiscal 2009. The fiscal 2013 budget assumed a further decline in the revenue, to $10.7 million. Two tax rate increases in the past few years were insufficiently large to achieve revenue neutrality.
AMPLE RESERVES DESPITE SUSTAINED STRUCTURAL IMBALANCES
The county was able to achieve positive operating margins through fiscal 2011, with reserve draw-downs funding capital projects. A variety of expenditure reductions, including the decrease of notable pay-as-you go capital funding, elimination of vacant positions, and across-the-board departmental cuts, were unable to counteract fully the fiscal 2012 drop in property tax collections. The county's operating deficit for the year was relatively mild at 2% of spending. The fiscal 2012 unrestricted fund balance equaled $15 million or a high 88.3% of spending.
The county's $16.4 million fiscal 2013 budget incorporated a $2.5 million deficit. Careful expenditure controls are anticipated to reduce the actual reserve draw-down to $1 million. Preliminary budget considerations include another $2.5 million fund balance appropriation in fiscal 2014. Even if the full appropriation were utilized, reserves would remain ample.
Fitch believes that the county has limited options to address the imbalance over the near term. The fiscal 2013 O&M and debt service tax rates total $0.756 per $100 of TAV, resulting in little remaining capacity under the $0.80 tax cap. Other existing revenue raising capabilities cannot offset the sizable structural gap, and expenditure flexibility is limited by the significant spending reductions already implemented.
CONCENTRATED, VOLATILE ECONOMIC BASE
The natural gas industry's economic prominence is visible in the top 10 taxpayers. All are oil and gas firms and represent a very large 42% of fiscal 2010 TAV (down from 59% in 2006), led by ConocoPhillips (IDR of 'A', Stable Outlook) at 13.2% of TAV. At the present time, the county reports that there is no significant new natural gas production, although management is hopeful that the cyclicality of prices and on-going industrial developments will spur increased production in the future. The county's economy also incorporates the potentially volatile sectors of ranching, agriculture, and tourism (fishing).
The economy has supported consistent employment growth well-above national averages, despite large labor force increases. The county's 6.6% May 2013 unemployment rate compared favorably to the nation's 7.3%. Wealth levels are subpar, with income indicators ranging from 50% to 55% of national averages. The county's poverty rate is 2.5x higher than the nation's. These factors are offset to a degree by the county's relatively low cost of living.
POSITIVE DEBT CHARACTERISTICS
The overall debt burden is modest, as reflected in a low debt per capita of $1,775. Debt as a percentage of market value is somewhat artificially low at 1%, as the preponderance of gas reserves inflates the market value above ranges typically seen in communities with a similar economic profile. Debt service is an affordable 8.6% of spending, despite a rapid amortization rate of nearly 80% of principal retired within 10 years.
Future new money issuance is expected to be minimal. The county may opt to refund the non-taxable series 2005 LT bonds, which refunded bonds used for jail construction, if a current IRS review deems that revenue received for housing non-local inmates violates private use restrictions. The IRS's decision is expected in a few months. Fitch will monitor if a possible issuance of refunding bonds, which could incorporate funds to pay any possible fines, alters the debt profile materially.
The county's pension plan is provided through the Texas County and District Retirement System (TCDRS), an agent multiple-employer plan. The county's portion was well-funded at 92.8%, which approximates 83.6% when using Fitch's assumption of a 7% investment return. The fully funded annual required contribution is a low 3.7% of governmental spending, excluding capital outlays. Fitch believes this will facilitate the county's ability to absorb proposed contribution increases. The county's audit does not disclose any other post-employment benefit (OPEB) liability, although management reports that a limited number of retirees participate in the county's health insurance plan.
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, Winstead PC, 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=798577
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