MRO Magazine

Fitch Rates Lewisville, TX GOs ‘AAA’; Outlook Stable


May 17, 2016
By Business Wire News

AUSTIN, Texas

Fitch Ratings has assigned a ‘AAA’ rating to the following obligations of Lewisville, Texas (the city):

–$15.7 million (est.) general obligation (GO) refunding and improvement bonds, series 2016;

–$8.9 million tax notes, series 2016.

The bonds and notes are scheduled for a negotiated sale the week of June 6, 2016. Bond proceeds will be used to refund a portion of the city’s outstanding tax-supported debt for interest savings and finance various infrastructure improvements, and tax note proceeds will finance public safety facilities and improvements.

In addition, Fitch affirms the following ratings:

–$75.7 million GO bonds and certificates of obligation outstanding (pre-refunding) at ‘AAA’;

–the city’s Issuer Default Rating (IDR) at ‘AAA’.

The Rating Outlook is Stable.

SECURITY

The bonds and notes are payable from an ad valorem tax limited to $2.50 per $100 of taxable assessed valuation (TAV).

KEY RATING DRIVERS

Lewisville has a stellar financial track record, maintaining healthy reserves throughout the recent recession and recording operating surpluses each of the past five fiscal years. Revenue prospects are positive, and recurring and fixed cost pressures are expected to remain manageable. Economic trends for the city and region should continue on a positive trajectory.

Economic Resource Base: Lewisville is located northwest of Dallas along Interstate Highway 35E in both Dallas and Denton counties. The city’s population is roughly 101,000. Manufacturing, distribution and service businesses comprise the core of its commercial sector.

Revenue Framework: ‘aaa’ factor assessment

Growth prospects for revenue appear positive, based on solid post-recession gains in both taxable values and sales tax receipts as well as ongoing economic development. The property tax rate is relatively low for Texas cities and remains well below constitutional and city charter caps.

Expenditure Framework: ‘aa’ factor assessment

The pace of spending is expected to be generally in line with revenue growth as population-driven service demands grow. Carrying costs are affordable and are not expected to shift materially due to moderate borrowing needs.

Long-Term Liability Burden: ‘aa’ factor assessment

Debt levels are manageable, and the combined debt and pension burden as a percentage of personal income is comfortably within the ‘aa’ category range.

Operating Performance: ‘aaa’ factor assessment

Revenue and spending flexibility provides exceptional gap-closing ability through a typical business cycle. A normal downturn is not expected to impair the city’s ability to maintain healthy reserves, and no deferral of spending would like occur. Economic recovery would see prompt replenishment of any depleted reserves.

RATING SENSITIVITIES

Financial Flexibility: The rating is sensitive to maintenance of strong financial flexibility consistent with the ‘AAA’ rating.

CREDIT PROFILE

The city is home to various manufacturing, distribution, and service concerns. Local unemployment rates historically have been lower than regional, state and national averages. The city’s March 2016 unemployment rate of 3.2% was down slightly from the same period last year and below the state and nation. Income and wealth trend above the Texas average and generally are on par with U.S. averages.

TAV has continued a recent trend of solid annual gains, registering a 7.8% increase for fiscal 2016 to $7.96 billion. The tax base is without concentration and continues to realize residential and commercial growth. The city estimates that it is about two-thirds built out and expects the tax base to grow another 7%–9% for fiscal 2017. This projection is consistent with healthy building permit increases reported by management so far this year, which are handily exceeding original budgeted amounts.

Revenue Framework

Property and sales taxes are the dominant operating revenue sources for Lewisville, together comprising roughly two-thirds of general fund revenues. Each source has exhibited solid annual increases following a brief recessionary decline in fiscal 2009. Performance historically has generally exceeded overall business cycles, reflecting ongoing local and regional economic expansion.

The expectation is that future revenue growth will either match or exceed overall business trends, given the positive growth prospects for the Dallas-Fort Worth region as a whole. The recent positive trend in both property tax and economically sensitive revenues should continue as Lewisville expands and ultimately approaches buildout. Lewisville sales tax collections have averaged healthy 7% annual increases over the past five years, although management is projecting slower growth rates over the near term.

Lewisville retains a significant margin below constitutional and city charter property tax limitations, providing notable flexibility in terms of legal ability to increase operating revenues.

Expenditure Framework

The city has managed spending pressures associated with growth well over the past several years, retaining flexibility through its conservative budgeting practices. As is the case with many cities, public safety is the largest general fund cost driver.

Fitch expects spending growth will largely track revenue trends over the near term. Anticipated additional revenue growth from an expanding population and area economy will fund increased service demands.

Recent operating results have demonstrated a significant level of expenditure flexibility, aided by conservative sales tax revenue assumptions and annual pay-as-you-go spending for streets and drainage that can be adjusted as needed. Carrying costs of 17% in fiscal 2015 are manageable, and a favorable workforce environment (significant management control over wages, work rules and staffing levels) brings additional positive considerations.

Long-Term Liability Burden

Lewisville’s governmental debt profile is comprised of borrowings for basic infrastructure improvements, and the overall burden is manageable. Capital needs appear affordable, with annual borrowings planned to complete the remaining $130 million 2015 GO authorization (following this sale) by around 2025. The city contributes to state-sponsored pension plans for retirees, with annual employer contribution amounts meeting actuarial requirements. The combined debt and pension liability is moderate at 14% of total personal income.

Operating Performance

Operating reserves should remain substantial through a typical business cycle, even in the absence of any policy action. The city retains significant expenditure flexibility, and Fitch expects management would make the necessary adjustments to maintain a position consistent with the current rating.

The city budgets conservatively, which typically results in positive year-end performance results. Management currently anticipates an operating surplus for fiscal 2016 consistent with recent performance. Budgeted annual capital spending of $4 million for streets and drainage (roughly 6% of fiscal 2015 general fund outlays) provides additional spending flexibility, and management reports capital outlays will be increased beginning in fiscal 2017. Times of economic recovery/expansion provide the city a good opportunity to replenish any depleted reserves and bolster its financial position.

Additional information is available at ‘www.fitchratings.com‘.

In addition to the sources of information identified in Fitch’s 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/creditdesk/reports/report_frame.cfm?rpt_id=879478

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1004617

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004617

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings
Primary Analyst
Steve Murray
Senior Director
+1-512-215-3729
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Rebecca Meyer
Director
+1-512-215-3733
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com