Fitch Rates Seguin, TX’s COs ‘AA’; Outlook Stable
By Business Wire News
Fitch Ratings has assigned an ‘AA’ rating to the following Seguin, Texas (the city) bonds:
–$12.9 million combination tax and limited pledge revenue certificates of obligation (COs),series 2016.
The bonds are scheduled for negotiated sale the week of Jan. 18, and proceeds will be used for various capital projects.
Fitch has also affirmed the ‘AA’ rating on the following outstanding obligations of the city:
–$19.9 million general obligation (GO) bonds, series 2006, 2008, and 2014;
–$25.6 million GO refunding bonds, series 2011, 2014, and 2015;
–$12.9 million combination tax and limited pledge revenue certificates of obligation (COs), series 2010 and 2011.
The Rating Outlook is Stable.
The GOs and COs are payable from a property tax limited to $2.50 per $100 of taxable value. The COs are additionally secured by a de minimis pledge of net utility system revenues, not to exceed $1,000.
KEY RATING DRIVERS
SOUND FINANCIAL PROFILE: The city consistently achieves operating surpluses due to conservative budgeting and prudently employs excess revenues for one-time capital spending.
HEALTHY, GROWING ECONOMY: The city benefits from its location in the robust San Antonio metropolitan statistical area (MSA) economy and well-located transportation networks. Development activity and job growth focused in manufacturing has been strong coming out of the recession.
MIXED DEBT PROFILE: Debt levels are slightly elevated following recent issuances by the city and local school district. Carrying costs for debt service and retiree costs remain manageable and current debt plans are affordable.
CONTINGENT LIABILITY FOR LOCAL HOSPITAL: The city has a contingent liability for 50% of any operating deficits by the Guadalupe Regional Medical Center (revenue bonds rated ‘BB’ by Fitch). The city and Guadalupe County (county) maintain significant oversight over hospital operations and budget and neither has ever been required to transfer funds to cover a shortfall.
FISCAL PERFORMANCE: The maintenance of a balanced operating profile and strong reserves is necessary to offset the city’s reliance on inherently volatile sales tax revenues.
HOSPITAL OPERATING RISK: Self-sufficiency of the city-county hospital remains key to offsetting credit concerns over the city’s exposure to this contingent liability.
Seguin is located in Guadalupe County, approximately 35 miles northeast of San Antonio along Interstate Highway 10. The city’s estimated 2014 population of 26,700 reflects 21% growth since 2000.
The local economy is somewhat concentrated in manufacturing though government, healthcare, and education add diversity. The city benefits from easy access to the extensive and broad employment base of the San Antonio MSA via major highways, including a recently completed toll road that connects San Antonio with Austin. The favorable location, highway access, and management’s economic development efforts, including the use of tax abatement incentives, have facilitated economic development in the city.
The energy boom that occurred in south Texas also spurred economic and job growth in the area. Seguin’s role as a hub for business and retail activity has mitigated the downside risk associated with the current slump in energy prices, as evidenced by a low unemployment rate of 3.7% as of November 2015. Demographic indices remain mixed and include lower income and educational attainment levels and a higher poverty rate relative to state and national norms.
The only year of tax base contraction in the city’s recent history was the result of the conversion of the largest taxpayer to tax-exempt status through its purchase by the municipally-owned City Public Service Energy (CPS). However, CPS Energy made a one-time payment-in-lieu-of-taxes (PILOT) to the city of $9.6 million for lost future tax revenues, relative to the estimated tax yield from the plant of $700,000 in fiscal 2012.
The 4% contraction in fiscal 2014 was more than made up by the cumulative gain of 7.3% in fiscals 2015-2016, bringing TAV to almost $1.5 billion. Future prospects for growth are favorable given the positive economic metrics, current development underway, and tax abatements that are scheduled to expire on a rolling basis over the medium to long term. Seguin’s average new home price is increasing along with values of existing properties, and tax collection rates remain strong.
STRONG FINANCIAL PERFORMANCE
General fund revenues, led by sales and property taxes, have exhibited strong 7% compound average annual growth coming out of the recession (fiscals 2008-2014). Sales tax performed particularly well, increasing by an annual average of 9.5% from fiscals 2009-2014, although this period also includes significant volatility. Fitch recognizes the volatility associated with economically sensitive sales taxes, particularly when derived from highly cyclical oil and gas activities. Management’s prudent use of surplus revenues for non-recurring capital outlays, as well as the city’s continued adherence to its formal policy of maintaining fund balance at or above 30% of spending, helps mitigate that risk.
Fiscal 2014 operating results ended with a $1 million deficit after transfers, due in part to a $2.5 million transfer to the capital projects fund for one-time spending. Unrestricted reserves of $18.9 million (89% of spending) at year end were well in excess of the policy floor.
The city’s unaudited 2015 results were break-even, better than the budgeted $2.8 million deficit due to several factors including higher than projected tax revenues. General fund reserves still contain $5.3 million of the $9.6 million PILOT payment, which management will continue to draw down for general fund operations, debt service, and capital spending. The city plans to transition away from this use of reserves for ongoing spending as the funds are depleted, timed to coincide with the expiration of large tax abatements in out-year budgets.
The fiscal 2016 adopted budget is balanced and includes a 5.4% increase in general fund revenues, driven primarily by property tax revenues and sales tax collections. Excess revenues will be used for a 2% cost of living increase as well as capital improvement projects. Management reports year-to-date sales tax revenues are up 17% from this time last year (versus the 6.5% budgeted increase).
MIXED DEBT PROFILE
The city’s overall debt is high at 7.2% of market value. The obligations will fund various capital projects, including street improvement and an animal services facility. Current debt plans appear affordable given their modest nature and potential for further tax base growth in the city. Carrying costs for debt service, pension ARC, and OPEB paygo made up a moderate 21.1% of fiscal 2014 governmental expenditures, and are not expected to rise as the debt service schedule is mostly flat. Amortization is average with 52% retired in 10 years.
WELL-FUNDED LEGACY COSTS
The city participates in the Texas Municipal Retirement System (TMRS) for its retirees’ pension program, and its annual contributions have been at or above the required amounts in recent years. Recent system-wide restructuring of internal fund balance reporting and actuarial assumptions benefitted many cities contributing to the system, including Seguin. Seguin’s funded position improved and the current pension UAAL stands at less than 1% of market value. Other post-employment benefits for retiree healthcare are funded on a paygo basis. The OPEB plan is closed to new employees and the UAAL is a de minimis 0.1% of market value.
CONTINGENT LIABILITY FOR COUNTY-CITY HOSPITAL
The city and county each have a 50% contingent liability for any operating deficits. Hospital operations have historically been positive, and although the hospital incurred a deficit in fiscal 2012, operating margins have been positive thereafter as utilization and revenues improved. Fitch would be concerned if hospital deficits exerted financial pressure on the city, but to date, the city has never made a subsidy payment to the hospital, other than indigent care costs for which the city is contractually responsible.
Additional information is available at ‘www.fitchratings.com‘.
Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by the end of the first quarter of 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.
In addition to the sources of information identified in Fitch’s applicable criteria specified below, this action was informed by information from Lumesis and the Municipal Advisory Council of Texas.
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
Dodd-Frank Rating Information Disclosure Form
Leslie Ann Cook
Fitch Ratings, Inc.
111 Congress Ave, Ste. 2010
Austin, TX 78701
Peter Fitzpatrick, +44 20 3530 1103, London