AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned its 'AA+' rating to the following Abilene, Texas (the city) obligations:
--$65 million certificates of obligation (COs), series 2013.
The COs are scheduled to sell via negotiation the week of Oct. 21. Proceeds from the COs will be utilized for water and sewer system improvements and to pay issuance costs.
In addition, Fitch affirms the ratings on the following outstanding obligations:
--$56.6 million general obligation (GO) bonds at 'AA+';
--$40.8
million outstanding COs at 'AA+'.
The Rating Outlook is Stable.
SECURITY
The GO bonds and COs are secured by a continuing direct ad valorem tax levied against all taxable property within the city, subject to a $2.50 per $100 assessed valuation limitation prescribed by law. The COs are secured further by a pledge of the net revenues of the city's water and sewer system, not to exceed $2,500.
KEY RATING DRIVERS
PRUDENT FINANCIAL MANAGEMENT: The city's management demonstrates conservative stewardship and adherence to policies and practices that contribute to the city's strong financial position.
SALES TAX DEPENDENCE: High reserve levels temper risks associated with the city's heavy reliance on sales tax revenues for operations.
MODERATE DEBT BURDEN: Overall debt levels are low, assisted by substantial self-support for enterprise system debt. Direct debt is rapidly amortized and near-term general purpose capital needs are manageable. Total carrying costs are moderate and the funding position for the combined pensions is adequate.
STABLE LOCAL ECONOMY: Located in West Texas, the city serves as a commercial, educational, and cultural hub. The area economy demonstrated resiliency during the recession as growth, although modest, resumed and taxable assessed valuation (TAV) gains were recorded in each of the last five years. Unemployment rates typically are lower that state and national levels but wealth levels trail the state and nation.
RATING SENSITIVITIES
MAINTENANCE OF STRONG FINANCIAL POSITION: The rating is sensitive to shifts in fundamental credit factors. Preservation of the system's solid financial profile is a key consideration.
CREDIT PROFILE
STRONG FINANCIAL POSITION ENABLED BY PRUDENT MANAGEMENT
The city's financial profile is sound with strong general fund balance levels currently well in excess of the city's formal policy. The city maintains a minimum 20% reserve policy with an optimum target at 25%.
Economically sensitive sales tax receipts typically comprise around 40% of total revenues in the general fund. In fiscal year 2011, the city's receipts jumped roughly 17% from the prior year level. However, this hike was identified as non-recurring and the revenue increase was prudently reserved for non-recurring capital projects. The reserves in excess of policy level were used during fiscal 2012 to fund two years' worth of capital projects instead of issuing COs as previously planned. Similar sales tax receipts were generated in fiscal 2012. Accordingly, the increment identified as non-recurring is being reserved for pay-go outlays. The sales tax receipts for fiscal 2013 have declined from prior year, but are above what was budgeted.
Despite the use of fund balance for capital projects, the unrestricted general fund balance at fiscal 2012 year-end was a solid $25.7 million or 33.5% of spending and transfers out. The fiscal 2013 adopted budget was structurally balanced, but unaudited results point to another moderate surplus (roughly $3 million, or 4% of spending) resulting from favorable variances in both revenues and expenditures. The fiscal 2014 budget is balanced.
LOW DEBT LEVELS WITH MANAGEABLE CAPITAL NEEDS
Abilene has a modest overall debt burden at just under 2% of market value (MV) and less than $1,000 per capita. These ratios benefit from the availability of excess sales tax revenues to fund recent capital projects and water and sewer enterprise system support for utility-related capital investments. Principal amortization of direct debt is above average at over 60% in 10 years including the COs now offered.
The city's general purpose 2012-2016 capital plan is a manageable $10 million. The current issuance will fund capital projects related to a water reuse project that was recently accelerated due to the current drought conditions in the area. The total cost of the project is estimated at $81 million. The city plans to return to market with another $16 million to $26 million bond sale in early 2014 to complete this project and to make other system improvements necessary to expand potable water resources. In conjunction with the current issuance, city council has approved a large 19% rate increase for the average residential customer to support the additional debt service. Despite the rate hike, Fitch believes the city's rates remain affordable and compare favorably to similarly sized Texas systems.
The city participates in the Texas Municipal Retirement System (TMRS) for pension benefits to civil employees, with a robust funded position at 93% for fiscal year 2012, based on a conservative assumed 7% investment rate of return. Pension benefits for firefighters not covered by TMRS are provided through the Abilene Firemen's Relief and Retirement Fund, a single-employer defined benefit plan. The funded ratio for fiscal 2012 in this plan is weak at 50% assuming Fitch's adjusted 7% rate of return. The combined plans are funded adequately at 80.5%.
The only other post-employment benefit (OPEB) the city provides is supplemental death insurance. This benefit is also administered by TMRS; the annual contribution is nominal at $50,000 or less in each of the last three years. The city's carrying costs, including debt service, pension and OPEB contributions are considered moderate at 18% of fiscal 2012 spending.
TAX BASE GROWTH
The city's tax base is diverse and grew by a compound annual growth rate of nearly 3% between fiscals 2008 and 2014 despite the economic slowdown and without any decline. Some of the increase in TAV was driven by commercial investment (most notably in the healthcare sector), as well as residential valuations that held up well in Abilene. Additionally, located just outside of the city is the Horse Hollow Wind Energy Center, considered to be the world's largest wind development with 421 turbines spread across roughly 60,000 acres. This development has attracted various wind energy companies to set up manufacturing and support operations within the city.
ECONOMIC HUB IN RURAL AREA
Abilene is located 150 miles west of Fort Worth, along Interstate 20, in Taylor County. The estimated city population is 119,000, including about 5,400 military and civilian personnel stationed at Dyess Air Force Base. The city's primary employment sectors are government, education, healthcare, and retail. The city is home to two public hospitals and six higher education institutions. While the city's wealth levels are below the state and nation, the unemployment rate (5.6% for July 2013) is typically better than that of the state and U.S.
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, and the Municipal Advisory Council of Texas.
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=805076
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