MRO Magazine

Fitch Rates Pasadena, TX GO Bonds ‘AA’; Outlook Stable


May 10, 2016
By Business Wire News

AUSTIN, Texas

Fitch Ratings has assigned an ‘AA’ rating to the following Pasadena, TX limited tax bonds:

–$17.2 million general obligation (GO) refunding bonds, series 2016.

The bonds are scheduled to sell via negotiation during the week of May 16th. Bond proceeds will be used to refund outstanding debt for interest cost savings.

Fitch also affirms the following ratings of the city:

–Issuer Default Rating at ‘AA’;

–$123 million GO bonds at ‘AA’.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an annual property tax levy on all taxable property within the city limited to $2.50 per $100 assessed valuation (AV).

KEY RATING DRIVERS

Ample revenue flexibility, diversity between downstream and upstream oil and gas business activity, and the expansion of maritime trade at the Port of Houston should help maintain stable revenue trends. Modest population growth pressures help preserve solid expenditure flexibility. Prudent budgeting and large financial reserves leave the city well-positioned to weather an economic downturn.

Economic Resource Base: Pasadena, with a population of about 153,000, is located along the Houston Ship Channel and is part of the larger Houston MSA. The local economy benefits from its proximity to downtown Houston and the Port of Houston. Major sectors include oil and gas exploration and refining, petrochemicals, manufacturing, maritime shipping, aerospace, and healthcare. The Bayport Industrial District, one of the nation’s largest chemical processing complexes, borders the city and is a major employment center.

Revenue Framework: ‘aa’ factor assessment

Pasadena’s trend of solid revenue growth is likely to continue despite contraction of the city’s energy sector. Ongoing investments in downstream users of oil and gas and growing trade activity at the Port of Houston should help stabilize the city’s taxable resources. Strong revenue-raising capacity is supported by a property tax rate well below the statutory cap.

Expenditure Framework: ‘aa’ factor assessment

The city’s pace of expenditures is in line with revenue growth. Expenditure flexibility is aided by the moderate carrying costs, complete legal control over workforce costs and modest growth pressures due to the city’s maturity and modest population pressures.

Long-Term Liability Burden: ‘aaa’ factor assessment

The city’s long-term liability burden is low at 8.4% of personal income. Fitch expects the burden to remain modest based on limited debt plans, rapid principal amortization, and modest net pension liabilities.

Operating Performance: ‘aaa’ factor assessment

Expenditure and revenue flexibility, coupled with ample reserves, should enable the city to maintain a strong financial position during an economic downturn. The city consistently maintains a substantial financial cushion.

RATING SENSITIVITIES

High Economic Concentration: The rating is sensitive to fundamental changes within the expansive industrial sector (primarily petrochemical manufacturing), which anchors the city economy. A noncyclical decline in activity at these facilities could have significant negative impacts on city finances and lead to downward rating action.

CREDIT PROFILE

A major expansion at the Panama Canal, which is projected to increase maritime traffic at the Port of Houston, has led to the growth of various distribution and support service businesses in the city. Facility expansion is also occurring among some of the city’s large industrial/commercial enterprises, particularly petrochemical refineries that continue to benefit from low oil prices. Other economic expansion opportunities for Pasadena are limited, as the city is fully developed and landlocked.

The area economy leans heavily on manufacturing, petrochemical and allied industry employment, but has expanded somewhat with retail and commercial development in the southern part of the city.

The tax base has expanded at an increasing rate since fiscal 2012, averaging 5% annually, after a moderate 12% contraction post-recession. More than 50% of the $7.2 billion fiscal 2016 taxable assessed valuation (TAV) was made up of industrial and commercial properties with the remainder in residential properties. The top 10 account for a moderate 9.3% of AV.

The city receives payments-in-lieu-of-taxes (PILOT) on properties within the expansive Bayport Industrial District per long-term agreements. The AV of the district equals a large $4 billion, adding a substantial 53% to the effective tax base of the city. The current PILOT agreements with individual property owners were approved in 2003 and expire in 2018. The city expects substantially all of the contracts to be renewed under the same terms whereby fees are based on 100% of AV on land and 73% of AV on improvements and personal property. District property is levied at the city’s annual property tax rate. In exchange, the city agrees not to annex properties within the district and provides limited services.

The top 10 taxpayers within the industrial district account for a high 29.5% of the district’s AV, led by Chevron Phillips Chemical at 5.1%. The AV of the industrial district has grown by a compound annual average of 3.7% since fiscal 2011, including an 8.8% gain in fiscal 2016. Combined with the city’s AV, the aggregate top 10 taxpayers account for a more moderate 11% of city and district AV.

Revenue Framework

Property taxes and industrial district fees comprise almost one-half of general fund revenues, followed by sales taxes at 22%.

The city’s general fund revenue growth has been solid, trending above inflation but just below U.S. GDP growth. Recent AV growth has been robust but future AV trends may level off or decline due to ongoing energy sector contraction. However, large ongoing or planned investments in downstream petrochemical projects and international trade-related businesses should help mitigate the potential AV losses of upstream oil and gas companies.

Ample property tax rate margin remains under the $2.50 per $100 AV statutory cap given the city’s current rate of $0.57.

Expenditure Framework

Public safety spending accounts for almost one-half of the city’s general fund spending.

Pasadena’s pace of spending growth is expected to be in line with revenues. Growth pressures are manageable given the city’s maturity and modest population growth.

Management’s control over headcount and compensation, moderate carrying costs for debt, pension, and OPEB, and a rapid principal amortization rate provide solid expenditure flexibility.

Long-Term Liability Burden

The city issues GO bonds and non-voter-approved certificates of obligation for infrastructure improvements, some of which are self-supporting from enterprise funds. The city’s long-term liability burden for overall debt and the unfunded pension liability, nearly all of which is the former, is low at 8.4% of personal income. A reliance on pay-go funding for capital projects, limited debt plans, and a low net liability should keep the long-term liability burden affordable.

Operating Performance

The city has maintained a strong financial cushion despite recessionary pressures. The city retains adequate revenue and expenditure flexibility to manage well through economic downturns. The practice of funding capital projects with current resources provides additional flexibility during periods of revenue pressure.

Prudent budgeting allowed the city to further bolster its large financial reserves during the economic recovery.

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

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=1004248

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004248

Endorsement Policy

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

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY’S PUBLIC WEBSITE ‘WWW.FITCHRATINGS.COM‘. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE ‘CODE OF CONDUCT’ SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings
Primary Analyst
Jose Acosta
Senior Director
+1-512-215-3726
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Rebecca Moses
Director
+1-512-215-3739

or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com