Fitch Rates Garland, Texas’ Series 2015 COs ‘AAA’; Outlook Stable
By Business Wire News
By Business Wire News
Fitch Ratings has assigned an ‘AAA’ rating to the following Garland, Texas (the city) bonds:
–$17.8 million certificates of obligation (COs), series 2015.
The COs are scheduled to sell via competitive sale June 2. The certificates will be used to fund various capital projects city-wide and pay costs of issuance.
The Rating Outlook is Stable.
The COs are secured by a limited ad valorem tax pledge of the city, not to exceed $2.50 per $100 of taxable assessed valuation (TAV).
KEY RATING DRIVERS
STRONG FINANCIAL PROFILE: The city maintains a stable financial position and solid reserve levels, enabled by management’s conservative, proactive financial practices and prudent fiscal policies. Recent financial performance has benefitted from some modest improvement in revenue trends, largely reflective of a strengthening local economy.
MATURE DALLAS METRO SUBURB: The city is part of the larger Dallas-Fort Worth-Arlington (DFW) metropolitan statistical area (MSA) economy and employment base. Anchored by manufacturing and distribution, Garland’s overall economic base remains sound. Year-over-year unemployment is down despite labor force gains and remains comparable to county and state levels, while below the U.S. average.
TAV STRENGTHENS: The city’s tax base is solid and diverse. TAV continued to strengthen modestly in fiscal 2015 after a period of recessionary declines. Further modest TAV growth is anticipated over the near term, which Fitch believes is reasonable given various development projects underway.
DEBT AND OTHER LONG-TERM LIABILITIES MANAGEABLE: Overall debt levels are above average in contrast to the city’s generally favorable direct debt profile. Amortization of tax-supported principal is rapid. The pension funded position is strong.
MAINTENANCE OF FINANCIAL POSITION: Material deterioration of the city’s financial position could signal a fundamental shift in its credit profile, leading to negative rating action. The Stable Outlook reflects Fitch’s expectations that such a shift is unlikely as evidenced by the city’s historical financial performance.
The city is located approximately 14 miles northeast of downtown Dallas, surrounded by major transportation corridors. Population growth has been minimal since 2000 as the city is near full build-out with a stable population base, currently estimated at 233,000 residents
MATURE CITY; STABLE MANUFACTURING CENTER
The city’s industrial market is the second largest in the MSA, with a diverse list of manufacturing and distribution concerns that are the primary economic engines for the city. Year-over-year unemployment declined to 4.3% in February 2015 from 6.1% in February 2014 despite a solid 2.5% gain in labor force over the same time period. The city’s unemployment rate remained generally in line with the state and MSA for the same period, but below the U.S rate of 5.8%. Income and wealth levels as measured by median household income approximate the U.S. and slightly exceed the state’s, although educational attainment metrics are below national averages.
The city’s tax base is primarily residential in nature despite its industrial/commercial base. Top 10 taxpayer concentration is minimal. Recessionary pressures on property valuations saw a break in TAV gains beginning in fiscal 2010 with the city realizing modest 2%-4% annual TAV declines through fiscal 2012. However, TAV regained its footing in fiscal 2013 and has continued to strengthen modestly since then.
The city realized a 3% TAV gain to $10.5 billion in fiscal 2015 due to ongoing improvement in the city’s relatively modest home values and housing stock as well as some new development. Preliminary estimates of additional 5.5% TAV growth for fiscal 2016 appears reasonable to Fitch given the steady permitting activity and various development projects previously reported by management. Larger projects include new and expanding manufacturing and warehouse facilities as well as further redevelopment in downtown Garland.
SOLID FINANCIAL PROFILE
Operations are supported by a fairly diverse revenue base, aided by formula-driven transfers to the general fund from the city-owned enterprises. Property taxes provided about 26% of total general operating revenue in fiscal 2014, followed by payments in lieu of taxes/franchise fees from enterprises (24%) and sales taxes (16%). Management’s timely budget cuts and proactive oversight enabled the city to maintain a stable financial position despite the pressures associated with its relatively mature economy and slow recovery from the recession. The city posted modest net operating deficits after transfers in the general fund in two of the last six fiscal years, but reserves as a percentage of spending have remained stable over this period and well above the city’s policy to maintain a 30-day unrestricted fund balance.
Conservative revenue estimates and below-budget spending in fiscal 2014 contributed to the $1.5 million net operating surplus after transfers and a slightly improved unreserved general fund balance of $25.6 million or about 17% of spending, comfortably above the policy minimum. Sales tax trends remained solid in fiscal 2014 and the city realized about 5% year-over-year growth or roughly $1.1 million in sales tax revenues above fiscal 2013 actuals. The city’s typically solid liquidity position further improved in fiscal 2014. General fund cash/investments rose from approximately $27 million in fiscal 2013 to $29 million or just over two months of general fund spending at fiscal 2014 year-end.
The adopted fiscal 2015 $146.3 million general fund budget maintains focus on a measure of catch-up from the restraint of the recession on competitive employee salaries (a roughly $1 million recurring pay increase) and additional pay-go capital funding for streets. To that end, the year’s budget anticipates a $3.2 million use of fund balance while maintaining reserves slightly above policy without a property tax increase for the sixth consecutive year. The continuation of modest sales tax growth above budget (3.5% through March 2015) and annual expenditure savings should reduce this expected drawdown, however, and provide enough flexibility to contribute an additional $1 million to bolster the city’s internal health insurance fund. Also, Fitch believes it is likely management’s historically strong fiscal practices that include a measured pace of pay-go capital spending will offset a portion of the projected drawdown by year’s end. To date, general operating revenue and expenditure trends are running slightly better than budget according to management.
DEBT AND OTHER LONG-TERM LIABILITIES MANAGEABLE
The overall debt burden is above average at 4.8% of fiscal 2015 market value and largely due to overlapping school district debt but more moderate on a per capita basis at about $2,700. This is in contrast to the city’s generally favorable direct debt profile. Self-supporting debt of the city, primarily from the electric, water, and wastewater utilities, represents about 40% of total GO debt, thereby substantially reducing the impact on the city’s debt service tax rate. Principal amortization of tax-supported debt is rapid, with roughly 78% retired within 10 years.
The city maintains a measured pace of tax-supported and revenue debt issuance annually in support of its capital improvement plan (CIP). A comprehensive, five-year CIP is adopted annually, much of which is driven by various utility system capital projects and is expected to be funded by self-supporting debt. Streets are a key capital priority for the city. To that end, the most recent CIP (fiscals 2015-2020) included a re-prioritization of various capital projects in order to accommodate the funding of various street projects (up to $4.5 million/year) through both pay-go capital spending and debt while maintaining a flat debt service tax rate. This is in addition to the approximately $120 million that remains outstanding in authorized but unissued GO bonding authority. Management has established the tax-supported portion of the CIP at a level that allows the city to move ahead with its remaining 2004 bond program but at a pace that does not trigger a tax rate increase. This is despite a debt service tax rate that remains well below the increase promised voters at the 2004 GO bond election.
WELL-FUNDED PENSION PROGRAM
The city’s pension plan is through the Texas Municipal Retirement System (TMRS), a statewide agent multiple-employer plan. Contribution rates are determined each calendar year. For fiscals 2012-2014, the city paid 100% of the annual required contribution (ARC), which totaled a reduced $14.7 million in fiscal 2014.
Structural and actuarial changes to TMRS approved at the state level significantly boosted the city’s funded position in recent years, which remained an excellent 90% at actuarial date Dec. 31, 2013 (estimated using a 7% investment rate of return) from a below-average 75.9% at Dec. 31, 2009.
The city provides other post-employment benefits (OPEB) through a self-funded single-employer plan. Funding is done annually on a pay-go basis, which has covered between 60%-67% of the actuarially determined annual OPEB cost in the last three fiscal years (2012 to 2014). Fitch’s concerns related to not funding the full annual actuarial liability are largely mitigated due to the relatively small unfunded actuarial accrued liability remains modest of $85.5 million or less than 1% of market value. Carrying costs for the city (pension, OPEB costs, and debt service, net of self-supporting enterprise debt) totaled a moderately high but manageable 22% of governmental spending in fiscal 2014 due in large part to the above-average pace of debt principal amortization.
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, IHS Global Insight, the 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
U.S. Local Government Tax-Supported Rating Criteria
Rebecca C. Moses
Fitch Ratings, Inc.
111 Congress Ave.,
Austin, TX, 78701
Elizabeth Fogerty, +1 212-908-0526