AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned a 'AA-' rating to the following Dallas County Utility and Reclamation District (DCURD or the district), TX unlimited tax (ULT) bonds:
--$154.3 million ULT refunding bonds, series 2016.
Fitch also upgrades the following DCURD ratings:
-- Issuer Default Rating (IDR) upgraded to 'AA-' from 'A-';
-- $246.1 million ULT bonds upgraded to 'AA-' from 'A-'.
The Rating Outlook is Stable.
The bonds are scheduled to sell during the week of October 17 via negotiation. Proceeds will be used to refinance outstanding debt for interest cost savings.
SECURITY
The bonds are payable from an unlimited property tax levied against all taxable property within the district.
KEY RATING DRIVERS
The upgrade of the IDR and ULT bond rating reflects application of Fitch's revised criteria for U.S. state and local governments, which was released on April 18, 2016. The criteria highlight the district's ample financial flexibility in meeting its limited operations given its strong revenue growth prospects and unlimited revenue raising authority. Carrying costs are very high, due to the district's narrow scope of operations, which is not unusual for districts formed for the primary purpose of financing infrastructure improvements. The liability burden is also high.
Economic Resource Base
The district is comprised of 3,600 acres within the Las Colinas development, a 12,000-acre mixed-use project located in Irving, adjacent to the city of Dallas. Substantial residential development in recent years has diversified the district's primary sectors of office, commercial, and retail.
Revenue Framework: 'aaa' factor assessment
The district's general fund revenues are expected to continue a strong growth trajectory as a result of ongoing and planned development trends. The district's independent legal ability to raise property tax revenues is unlimited, providing ample flexibility in adjusting to cyclical tax base swings.
Expenditure Framework: 'aa' factor assessment
The district's solid expenditure flexibility is derived from management's prudent budgeting practices and the narrow scope of operations. Carrying costs are very high which is typical of special districts formed to finance infrastructure improvements. Fitch expects growth-related spending demands to be matched by solid revenue gains, keeping their trajectories in line with one another.
Long-Term Liability Burden: 'a' factor assessment
The long-term liability burden is high relative to personal income due to the small population that resides within the mixed-use district. The liability burden is also high relative to market value but trending down. Fitch expects the liability burden to decline gradually given the district's lack of future debt plans and growing residential base.
Operating Performance: 'aaa' factor assessment
The district's superior financial resilience is derived from its unlimited revenue raising authority and limited operational responsibilities.
RATING SENSITIVITIES
Strong Financial Flexibility: The district's ample financial flexibility is the key strength in the 'AA-' rating. Although not anticipated, the rating is sensitive to shifts in the relative strength of this key factor over time.
Reduced Liability Burden: A material reduction in the district's elevated long-term liability burden could result in positive rating consideration.
CREDIT PROFILE
Strong development continues within the district across all sectors. Numerous high-end single-family and multi-family projects are currently underway or planned, spurred by the expansion of the Dallas Area Rapid Transit (DART) light rail service to the district in 2012. Major commercial projects include a $110 million hotel (adjacent to the Irving Convention Center) and a $175 million entertainment, restaurant, and office complex known as the Music Factory. Due to its small geographic size, the district's top 10 taxpayers do represent an above-average 23% of total assessed value (AV), led by an office building at 7%. The district is approaching full maturity with about 78% of its total acreage now developed. Management reports that occupancy rates have improved considerably for all of its property types. Its largest sector, Class A office space, posted an 83% occupancy rate through mid-2016, below the national average of 87% but well above the district's lowest rate of 70% in 2010. Taxable values posted double-digit gains in four of the last five years and recessionary pressures resulted in only a modest 4.9% cumulative loss over a two-year period.
Revenue Framework
Property taxes comprise a high 89% of total general fund revenues.
Historical tax base growth from fiscal 2004-2014 averaged 7.2%, in excess of the level of inflation and U.S. GDP growth, fueled by strong reappraisal gains and new construction. Fitch expects the county's property revenues to continue this trend given ongoing new construction and strong demographic trends. AV increased by 13% and 12% in fiscal years 2016 and 2017, respectively, due to reappraisal gains and new construction. AV is used as a proxy for operating revenues due to numerous and significant policy actions (tax rate changes). All new construction is eligible to apply for significant tax abatements from the district which are granted for 50 years and 20 years for residential and non-residential properties, respectively.
The district is legally authorized to levy an unlimited property tax levy for both operations and maintenance (O&M) and debt service. If a proposed tax rate results in an 8% year-over-year levy increase (based on the prior year's values), the rate increase may be subject to election if petitioned by voters.
Expenditure Framework
The district's scope of operations is limited, led by infrastructure maintenance (9% of spending), followed by operations of the district's personal transit system (4%) which transports people between office buildings. The district's payroll is modest, comprised of 33 employees. Large transfers to the debt service fund dominate total governmental spending.
The pace of spending growth absent policy actions is likely to be generally in line with revenue growth. Spending pressure is modest given the maturity of the district and its focus on infrastructure maintenance.
The district's expenditure flexibility is derived from the narrow scope of operations, strong control of labor costs, and substantial pay-as-you-go capital spending which can be adjusted during economic downturns. Management has full legal control over workforce spending. Carrying costs for direct debt and pension contributions is very high at 77% of governmental spending as expected given the district's primary mission to finance and maintain infrastructure assets.
Long-Term Liability Burden
The district's long-term liability burden is elevated at 9.6% of market value. Relative to personal income, the liability burden is also elevated at 33% of personal income due to the relatively small but growing residential component of the primarily commercial district. The liability burden is attributed primarily to direct debt. Limited direct debt plans and Fitch's expectation that overlapping issuance will be accompanied by gains in wealth indicators should result in the maintenance of an elevated burden. The 10-year principal amortization rate of direct debt is rapid at 66%.
District employees participate in a single-employer defined benefit plan. The district typically meets the actuarially-determined pension contribution and the net pension liability is negligible at $203,000.
Operating Performance
The district's superior financial resilience is derived from very strong growth prospects, despite high expected revenue volatility, and ample expenditure flexibility.
The district maintained ample financial reserves in the wake of the last economic downturn without the aid of deferred spending on capital or pension contributions. Management projects balanced results for fiscal 2016 and the adopted fiscal 2017 budget is also balanced. It's the district's practice to maintain a financial cushion of $1 million (14% of operating expenditures) for capital improvements and at least $1.4 million (21% of operating expenditures) as a contingency for property tax protests and refunds.
Property tax revenues for both operations and debt service were moved to the general fund in fiscal 2011. To achieve a more typical accounting presentation that excludes debt service spending, the analysis nets out the large annual transfers to the debt service fund, resulting in a considerably higher adjusted unrestricted fund balance of 45.9% of spending in fiscal 2015, well above the 'aaa' financial resilience assessment. Fitch's analytical sensitivity tool (FAST) projects district revenues will decline moderately in an economic downturn before resuming growth. Fitch expects management's expenditure flexibility and unlimited revenue raising authority will enable the district to maintain adequate reserves for the 'aaa' assessment
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.
Applicable Criteria
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
https://www.fitchratings.com/site/re/879478
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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012999
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012999
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https://www.fitchratings.com/regulatory
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