Fitch Affirms Highland Village, Texas' GOs and COs at 'AA'; Outlook Stable
--\$9.8 million outstanding limited tax general obligation bonds (GOs), series 2006, 2008, and 2011;
--\$9 million outstanding combination tax and revenue certificates of obligation (COs), series 2006, 2008, and 2009.
The Rating Outlook is Stable.
SECURITY
The GO bonds and COs are payable from annual property tax levy limited to \$2.50 per \$100 taxable assessed valuation (TAV). The COs are additionally payable from net revenues of the city's combined water, sewer and electric utility system.
KEY RATING DRIVERS
SOUND FISCAL PROFILE: Financial results typically exceed budget expectations, contributing to stable fund balances in excess of policy targets.
RETAIL GROWTH: The city's retail base has expanded as a result of the completion of several major transportation projects which have spurred new retail developments.
WEALTHY SUBURB OF DALLAS-FORT WORTH: The primarily residential district benefits from its proximity to the broad Dallas-Fort Worth employment base and socioeconomic indicators are well in excess of state and national metrics.
HIGH OVERALL DEBT, MANAGEABLE CAPITAL NEEDS: The city's overall debt is above-average, reflecting sizable overlapping school district issuances. The city reports only modest future capital needs due to near build-out status.
RATING SENSITIVITIES
ELEVATED DEBT LIMITS RATING: The rating is limited by the high debt levels. However, a decline in the debt burden over time along with continued strength in other credit factors could lead to positive rating action.
CREDIT PROFILE
Highland Village is an upscale, lakefront residential community located in southeastern Denton County, roughly 20 miles north of downtown Dallas. The city has a 2013 estimated population of roughly 16,000, which represents a robust 31% increase from 2000.
PART OF EXPANSIVE DALLAS-FORT WORTH ECONOMY
The city is primarily a bedroom community with residential properties accounting for roughly 85% of TAV. New retail construction increased notably over the past several years, spurred by expansions of major transportation thoroughfares across the city's southern and western borders.
The 6% increase in 2015 certified values marked the second year of growth after some slight volatility post-recession, bringing the tax base up to \$1.8 billion. Management conservatively anticipates modest growth in property values in the near term. This projection appears reasonable given the maturity of the housing stock in the city, the relative strength of the regional economy, and expected residential development as the city reaches build-out.
Wealth levels in the city are well above state and national averages. Market value per capita is strong at \$120,000. Per capita money income is 186% of the Texas average and 172% of the U.S. average, and median household income is roughly 250% of state and national averages.
The unemployment rate in Denton County has trended downward after spiking in 2010. The county's January 2015 rate of 3.9% was well below both the Texas (4.3%) and U.S. averages (5.6%) for the month.
STRONG FINANCIAL POSITION
The city's financial profile is stable, marked by historically break-even results and the maintenance of healthy general fund reserves. Audited fiscal 2014 results continued this trend, upholding unrestricted general fund balance at \$4.5 million, or 33% of spending. The 2015 adopted budget is structurally balanced, but shows a modest use of reserves for planned capital outlays.
The city's revenue sources exhibit some diversity, with property taxes comprising 56% and economically sensitive sales taxes comprising 17% of general fund revenues. Sales tax revenue was stable during the recession, and growth has been strong over the past two fiscal years, increasing 7% in fiscal 2013 and 11% in fiscal 2014. Year-to-date sales tax collections for fiscal 2015 indicate a continuation of the recent positive trend, up 8% from the prior fiscal year.
HIGH DEBT BURDEN; HEALTHY PENSION FUNDING
Overall debt levels are elevated at 6.7% of fiscal 2015 market value. The high debt burden is mainly driven by substantial borrowing by Lewisville Independent School District (GO debt rated 'AA+' by Fitch), which overlaps the city. The pace of city tax-backed debt retirement is rapid at 67% in 10 years. Management reports no immediate tax-supported debt plans as proceeds from recent sales are expected to meet capital needs for the next several years.
City employees participate in an agent multiple employer defined benefit pension plan administered by the Texas Municipal Retirement System (TMRS). The city routinely funds 100% of its actuarially-determined annual required contributions; funding levels were healthy at 83% (assuming a 7% investment rate of return) as of Dec. 31, 2013.
Other post-employment benefits (OPEB) are also provided by the city through TMRS but are limited to group-term life insurance benefits, which may be terminated by city council, thus the city reports no unfunded liability. Carrying costs related to long-term debt, pension and OPEB liabilities are manageable at 19% of fiscal 2014 governmental spending.
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