AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA' rating to the following El Paso, Texas general obligation (GO) bonds:
--$110.5 million GO refunding bonds, taxable series 2014.
The bonds are scheduled to sell via negotiation as early as the first week of December. Bond proceeds will be used to refund the series 2009 pension obligation bonds and to pay issuance costs.
In addition, Fitch affirms the following El Paso, TX debt:
--$484.2 million GO bonds at 'AA' (pre-refunding);
--$387.7 million certificates of obligation (COs) at 'AA';
--$60.8 million El Paso Downtown Development Corporation (DDC) special revenue bonds at 'A+'.
The Rating Outlook is Stable.
SECURITY
The GOs and COs are secured by an ad valorem tax levied on all taxable property within the city, limited to $2.50 per $100 taxable assessed valuation (TAV). The COs are additionally secured by a limited $1,000 pledge of surplus revenues from the city's waterworks and sewer system. The DDC special revenue bonds are secured by annually appropriated lease payments made by the city from lawfully available revenue, which includes most city revenue except property taxes, to the DDC.
KEY RATING DRIVERS
RELATIVE FINANCIAL STABILITY: The city has posted positive financial results in four of the last five fiscal years despite the economic downturn and ongoing service demands of a growing population. Management's attention to revenue fluctuations has been timely but budget balance has been slightly dependent on temporary solutions.
ECONOMIC EXPANSION AND DIVERSIFICATION: Much of the city's economic activity has come from its position in a key NAFTA trade corridor near Mexico's maquiladora assembly plants, as well as the presence of Fort Bliss. Recent expansion at Fort Bliss and an emerging healthcare sector somewhat offset contractions in the manufacturing sector.
HIGH OVERALL DEBT BURDEN; GROWING FIXED COSTS: Overall debt levels are high relative to market values. The pace of principal amortization is average, but is projected to slow given the city's debt issuance plans. Fitch expresses concern over the city's underfunding of annual required contributions (ARC) and growing unfunded liability for the police and fire pension plans.
LARGE CAPITAL PLAN: The city's capital improvement plan (CIP) and debt issuance plans continue to increase to support the city's ongoing growth-related needs and voter-approved quality of life projects. Balancing debt issuance with tax base growth and capital needs is essential to the rating given the already above-average debt service tax rate.
RATING SENSITIVITIES
ESCALATING DEBT: A continually increasing debt or pension burden without offsetting improvement in other credit areas could apply downward pressure to the rating.
DETERIORATION OF RESERVES: Given the city's growth pressures and high debt burden, further reduction in the city's reserves or use of non-recurring means to achieve budget balance could apply downward pressure to the rating.
CREDIT PROFILE
WEAKENING FINANCIAL OPERATIONS
The city's financial position has been affected by modest revenue contraction and ongoing growth-related operating and capital pressures. General fund reserves were adequate at $42.3 million or 13.3% of spending in fiscal 2012. This amount includes the $16 million charter-required cash reserve, which if used must be replenished annually. For fiscal 2012, the city posted a very modest net deficit, but had the city fully funded its annual pension requirement, these results would have shown roughly a $5 million operating deficit.
The fiscal 2013 adopted general fund budget was balanced without the use of reserves. However, two subsequent developments are projected to reduce reserves by $4 million (1.2% of fiscal 2013 budget), resulting in a still adequate financial cushion equal to about 10.4% of projected spending.
The majority of the projected drawdown ($3 million) consists of relocation costs of city hall offices as part of the ballpark venue project which is being built on the former site of city hall.
The balance of the projected drawdown ($1 million) is the net impact of a $3 million refund to the city's largest taxpayer, Western Refining Company LP. Prompt implementation of budget reductions are expected to diminish the impact by roughly $2 million.
The proposed fiscal 2014 budget is balanced and incorporates the reduced taxable value of Western Refining. The proposed general fund budget represents a 5.3% increase over the adopted fiscal 2013 budget and includes funding for police and fire collective bargaining agreements, the police academy, public safety vehicles, and non-departmental increases. Sales tax revenues are projected to increase by 4.4%, following 3.9% budgeted growth the year prior, which Fitch believes may be optimistic. The budget also includes a two cent increase to the property tax rate to $0.68 per $100 TAV.
The city continues to be challenged to expand its revenue stream to serve the needs of a growing population. Given the city's growth pressures and high debt burden, with growing unfunded pension liabilities, further reduction in the city's reserves could apply downward pressure to the rating.
MODEST TAX BASE GROWTH
Increases in the city's $32 billion TAV have slowed after double-digit annual TAV growth between fiscals 2005 and 2008. Growth began to slow in fiscal 2009 in line with weaker economic conditions throughout the nation. In fiscal 2011, taxable values were flat, but growth resumed at 3% and 4% in fiscal years 2012 and 2013, respectively.
Fiscal 2014 taxable value grew negligibly by 0.3% with new construction offsetting a substantial $460 million or 59% reduction in Western Refining's taxable value. For purposes of capital planning and budgeting, the city has assumed a 1% annual growth rate through fiscal 2015, 2% growth in fiscal 2016, followed by annual 2.5% growth beginning in fiscal 2017. Fitch believes management's annual growth assumptions over the next five years are reasonable.
HIGH DEBT BURDEN AND LARGE CAPITAL PLAN
Overall debt levels are high relative to market value at 6.9%, but are more moderate on a per capita basis at $3,719. Given the city's plans to issue additional debt for recently voter-approved quality of life projects, as well as COs for transportation and public infrastructure projects, debt levels are projected to remain elevated in the near-to mid-term. The city's fiscal 2014-2018 debt funded CIP, which includes some of the voter-approved projects, totals $144.4 million. The city plans to issue approximately $14 million GO bonds in the spring of 2014.
In November 2012, voters passed two propositions totaling $473 million for quality of life projects (i.e. parks and recreation, zoo, open space, libraries, museum, and performing arts). The bond plan had a healthy 70% voter approval rate. The city projects the debt impact from issuance of the approved GO bonds will not exceed $0.05 per $100 TAV assuming issuance over a 10-year period and the aforementioned 1%-2.5% annual tax base growth.
Fitch believes the city will be challenged to balance ongoing capital needs against an already above-average debt service tax rate, slower tax base growth in the near term, and the area's below-average socio-economic characteristics. As expected, the current issuance slows the amortization rate, to an average rate of 50% in 10 years, as this issuance refinances a large bullet maturity.
ADEQUATE PENSION FUNDING LEVELS DESPITE ANNUAL UNDERFUNDING
The city maintains two single-employer pension plans: a city employee pension fund (CEPF) and a firemen and policemen pension fund (FPPF).
The city issued $212 million in voter-authorized pension obligation bonds in 2007 and 2009 to address underfunding in the FPPF. The funded position for the combined plans is estimated at an adequate 71% as of fiscal 2012, adjusted for a 7% return on investment. The city has contributed between 97% and 100% of its ARC over the past three fiscal years for the CEPF. However, contributions were roughly 8% and 20% below the ARC for the fireman and police divisions of the FPPF, respectively, in fiscal 2012. Pension payments totaled about 7.7% of audited fiscal 2012 governmental spending, compared to 9% had the city paid the required amount. Fitch expresses concern over the city's underfunding and would expect a return to full funding over the near term.
Public safety employees agreed to a less generous, second-tier of pension benefits for new employees that should reduce growth in the overall liability over time. A similarly structured program was also implemented for general city employees beginning in fiscal 2012. Carrying costs for debt service, retiree healthcare and required pension payments were moderately high in fiscal 2012 at 23.7% of governmental spending.
BALLPARK PROJECT NOT ESSENTIAL TO CORE OPERATIONS
The DDC special revenue bonds are secured by annually appropriated lease payments made by the city from lawfully available revenue, which includes most city revenue except property taxes, to the DDC. Fitch does not consider the leased asset (Ballpark) to be essential to the city's core governmental operations, leading to a two-notch distinction between the DDC special revenue bonds and the city's limited tax bonds. However, the statutory requirement that ballpark costs are the sole eligible use of receipts of the recently voter-approved 2% increase in hotel occupancy tax (HOT), lessens Fitch's concerns about the city's incentive to make full and timely annual appropriations.
ECONOMIC DIVERSITY
El Paso is the sixth largest city in Texas. Its current population estimate of over 685,000 reflects ongoing growth at an average annual rate of nearly 1.5% since the 2000 census, slightly below the state's population growth rate of just over 2% for the same time period. City income levels as measured by median household income are below average, but continue to grow at a faster clip than state and national levels. Much of the city's economic activity has historically come from its position in a key NAFTA trade corridor near Mexico's maquiladora assembly plants as well as the presence of Fort Bliss, the Army's second largest installation.
The expansion of the military presence at Fort Bliss as a result of the Pentagon's 2005 base realignment and closure recommendations led to the expansion of troops with corresponding relocation of military family members. The ongoing expansion of Fort Bliss' troop strength and military facilities has boosted residential and commercial construction citywide, although the full economic impact of the expansion is still unfolding.
Government and educational entities comprise most of the top 10 civilian employers, which provide roughly 25% of the area's employment. Major additions to the city's retail, commercial and healthcare sectors brought unemployment rates down to record lows in 2007 and 2008, although they have risen notably along with the national unemployment rate. At 8% in August 2013, El Paso's unemployment rate has improved from the prior year, but remains above the state's 6.3% and the U.S. rate of 7.3%.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, and LoanPerformance, Inc.
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=809225
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