Fitch Rates Sugar Land, TX's Series 2015 GOs & COs 'AAA'; Outlook Stable
--\$13.5 million general obligation bonds (GOs), series 2015;
--\$17.5 million combination tax and revenue certificates of obligation (COs) series 2015. .
The bonds will be used for the purchase of land, improvements to municipal facilities, streets and parks, as well as to pay the costs of issuance.
The bonds will be sold via competitive sale April 7.
The Rating Outlook is Stable.
SECURITY
The GOs and COs are secured by a pledge of ad valorem taxes limited to \$2.50 per \$100 taxable assessed valuation (TAV). The series 2015 COs are additionally secured by a nominal pledge of a subordinate lien on the net revenues of both the city's water and wastewater system.
KEY RATING DRIVERS
STRONG SOCIOECONOMIC BASE: Steady population gains, above-average wealth characteristics, and the high educational attainment of city residents underpin the city's strong demographic profile.
REGIONAL ECONOMY PARTICIPANT: The city is part of the expansive Houston MSA economy, which continues to outpace the nation in job and income growth due to a strong energy sector and diversification in other sectors. The local and regional economy remains vulnerable to energy price changes.
ELEVATED AND GROWING DEBT BURDEN: Key debt ratios are very high for the 'AAA' rating category and may increase further given the additional debt issuance that is planned. Retiree liabilities are soundly funded.
STRONG FINANCIAL PERFORMANCE & POSITION: The city retains ample reserves and liquidity due to historically positive operating margins and conservative budgeting practices. These reserves provide a good fiscal cushion against unforeseen budget challenges and flexibility to fund capital outlays and one-time initiatives with general fund resources. The city maintains extensive financial policies and procedures, and also practices multi-year forecasting for budgeting and capital purposes.
SALES TAX EXPOSURE MITIGATED: The general fund's heavy reliance on economically sensitive sales tax revenues is mitigated by the strong fund balances and low property tax rate.
RATING SENSITIVITIES
The superior 'AAA' rating is predicated upon the city's financial, demographic and economic strengths, which mitigate to a degree concerns over the high debt burden. A change in these factors and/or material increases in overall debt levels beyond the increases currently anticipated by Fitch could place downward pressure on the rating.
CREDIT PROFILE
Sugar Land is a suburban community located about 20 miles southwest of Houston (LTGOs rated 'AA', Stable Outlook by Fitch) in Fort Bend County. The city's 2014 population is estimated at 86,500.
AFFLUENT SUBURB OF HOUSTON WITH STABLE RESOURCE BASE
Sugar Land is located in the broad Houston MSA and residents have direct access to Houston's central business district via a major highway. Energy and petrochemical manufacturing remain the principal industries of the Houston economy. However, the area economy has also diversified into biomedical research, healthcare, aerospace, and international trade via the Port of Houston. The MSA is home to 26 Fortune 500 corporate headquarters.
The roster of top Sugar Land employers also reflects an energy industry presence, as five of the top 10 are energy firms: Fluor Corporation, Schlumberger, Nalco/Champion, Baker Petrolite Corp., and Fairfield Nodal. The city also has a notable healthcare sector, and the University of Houston operates a branch campus in the city. Management reports additional investment is underway with planned expansion by some of its top employers, including Methodist Hospital, Memorial Hermann Healthcare Systems, the relocation of Nalco/Champion headquarters, and a new Texas Instruments research & development facility. Fitch expects these developments will further strengthen the city's employment and tax base over time.
The city's workforce is highly educated, which has continued to attract business investment. The percentage of residents possessing a bachelor's degree is nearly double the national standard. The local unemployment rate exhibited a narrow band of movement during the recession, peaking at a relatively low 6.5% in 2010 and declining steadily since then. The city's jobless rate of 3.4% in January 2015 is low and below the MSA (4.5%), state (4.6%), and U.S. averages (6.1%). Wealth and income levels are high, with median household income equal to 2x that of the nation. The poverty rate is exceptionally low and market value per capita is a strong \$150,000.
The Houston MSA economy made a robust post-recessionary recovery given many of the aforementioned major drivers that contributed to recent population and employment gains. However, Fitch believes the recent plunge in oil prices is likely to dampen the pace of growth over the near term. It is also Fitch's opinion that the state's various petrochemical centers should benefit from lower energy prices, which may serve as a partial offset to any economic softening. (See Fitch press release, 'Oil Price Decline Likely to Have Targeted Effect on Local Texas Economies & Revenues', dated Jan. 13, 2015).
TAV GAINS STRENGTHEN
TAV growth slowed but notably remained on a positive trajectory throughout the national recession. TAV gains have steadily strengthened; the city realized a solid 7% TAV gain in fiscal 2015, which increased TAV to \$11 billion. The expansion of key roadways has enhanced access and spurred robust development in recent years. Ongoing mixed-use developments such as Lake Pointe Town Center, Imperial Redevelopment, and Telfair--in addition to the aforementioned corporate expansions--support the city and Fitch's forecasts for continuing TAV growth over the near- and intermediate-term. Fitch believes TAV has some sensitivity to oil prices, although a level of modestly positive TAV growth also appears feasible to Fitch over the near term given an active housing market, ongoing retail and commercial investment, and historical tax base performance.
SALES TAX RECEIPTS CONTINUE TO STRENGTHEN
Sales taxes provide the largest share of operating support at roughly one-half of general fund revenues. As a reminder of the economic vulnerability of this revenue source, sales tax revenues dropped by 5% in fiscal 2010 before rebounding by a cumulative 14% over fiscals 2011-2012 and then stalled with a modest 2% decline in fiscal 2013. Sales taxes posted another strong year in fiscal 2014 with a 9.3% year-over-year gain. Fitch believes the city's extensive financial planning efforts and conservative budgeting practices, as well as the allocation of 10% of base sales tax revenue to non-recurring expenses, mitigate much of the risk associated with sales tax concentration and volatility.
FINANCIAL FLEXIBILITY MAINTAINED
Consecutive years of operating surpluses after transfers from fiscal years 2005-2010 yielded healthy general fund reserves. Officials more recently have used reserves to fund pay-as-you-go capital improvements, pursuant to a city policy that allows the use of reserves exceeding the city's prudent fund balance policy minimum of 25% of recurring operating expenditures.
The general fund concluded fiscal 2014 with a modest \$1.6 million operating surplus after transfers (2.2% of spending) that reflects \$5.6 million of transfers to fund larger capital projects as well as fleet and equipment replacement. Year-end results improved upon budget given strong sales tax performance. Unrestricted general fund balance totaled a high 39% of spending (\$28 million). Liquidity also improved slightly. Year-end cash and investment balances in the general fund provided slightly more than four months of cash-on-hand, which was in the five-year historical range of between four-five months.
The adopted \$78.4 million fiscal 2015 budget is up roughly \$3.6 million or 4.5% from the adopted fiscal 2014 budget and forecasts a \$1 million use of fund balance for capital and non-recurring items. The budget includes a 4% merit-pay raise pool for staff, 15 new positions, and sustained levels of capital outlay. On the revenue side, sales taxes are forecast to increase a reasonable 2% from fiscal 2014 year-end projections. Management reports sales tax and building permit revenues are running above budget year to date and a \$1 million increase to fund balance at year-end is presently estimated.
The property tax rate remains one of the lowest in the state for cities in this population range at just under \$0.32 per \$100 TAV (despite the roughly \$0.01 increase in support of voter-approved GO debt issuance over the near term). Using current forecasts, the general fund balance would decline to a still solid 26% of spending on a budgetary basis at fiscal 2015 year-end.
Fitch views positively the city's track record of conservative budgeting and year-end results that outperform original forecasts. Additionally, Fitch views as reasonable the city's out-year budget projections through fiscal 2019 which demonstrate adherence to the 25% minimum reserve target.
RETIREE LIABILITIES WELL-FUNDED
All city employees participate in the Texas Municipal Retirement System (TMRS), a state-wide, joint contributory, hybrid defined benefit pension plan. The city's pension funded position has improved in recent years as a result of full-ARC funding and TMRS' recent methodology changes to its fund accounting and actuarial assumptions. The unfunded pension liability totals \$26.7 million or less than 1% of full market value with an assumed investment return rate of 7%. The city's other post-employment benefits (OPEB) are modest and funded on a pay-as-you-go basis.
DEBT BURDEN TO REMAIN ELEVATED OVER THE MEDIUM TERM
Debt ratios are very high for the rating category at 7.3% of full market value and \$10,800 per capita, largely reflective of the overlapping debt of Fort Bend ISD (ULT bonds rated 'AA+'; Stable Outlook by Fitch) and municipal utility districts. The city's high debt load warrants attention and will remain a key credit focus in Fitch's future review cycles. Affordability concerns over the high per capita debt levels are somewhat mitigated by residents' above-average income levels and the plan to repay a portion of the outstanding debt with dedicated facility rental payments that are not expected to be part of general operations.
The fixed-cost burden for debt service, pension ARC and OPEB pay-go remained manageable at 20% of governmental expenditures in fiscal 2014. This calculation excludes the debt service costs of outstanding COs that are repaid with dedicated enterprise revenues, which Fitch considers to be self-supporting. The rate of principal amortization for tax-supported debt has slowed somewhat with recent issuances for the performing arts center, but it remains fairly rapid at 60% in 10 years.
The city's five-year capital spending plan calls for adding up to \$148 million of tax-supported debt issuance through 2019 to the current \$400 million, which remains in line with last year's formal capital improvement plan (CIP). The city's fairly rapid pace of debt retirement, coupled with the strong prospects for continuing TAV and population gains, would substantially but not completely absorb the additional debt.
Nearly \$102 million in tax-secured debt was planned for issuance in fiscal 2015, inclusive of these two series. The year's borrowings will fund a variety of capital projects, including a 6,500-seat performing arts center project (to be funded by cash contributions, dedicated sales tax debt, hotel occupancy taxes, and facility rental payments), streets and drainage projects, and park improvements. The planned tax-supported debt issuance is presently estimated to require a total tax rate increase of \$0.03 per \$100 TAV over fiscals 2015-2019, which is slightly below previous projections.
Комментарии