Fitch Rates Williamson County, TX LT Rfdg Bonds ‘AAA’; Outlook Stable

AUSTIN, Texas

Fitch Ratings has assigned an ‘AAA’ rating to the following Williamson County, Texas (the county) bonds and certificates of obligations:

–$15.175 million limited tax (LT) refunding bonds, series 2015;

The refunding bonds are scheduled for a negotiated sale the week of Oct. 26, 2015. Proceeds will be used to redeem certain outstanding obligations for savings.

In addition, Fitch affirms the ‘AAA’ rating on the following county bonds (pre-refunding basis):

–Approximately $298 million outstanding unlimited tax obligations;

–Approximately $653 million outstanding limited tax, COs and pass-through toll revenue obligations.

The Rating Outlook is Stable.

SECURITY

The unlimited tax bonds are payable from an unlimited ad valorem tax levied against all taxable property in the county. The limited tax obligations are payable from the county’s $0.80 constitutional ad valorem tax rate. The certificates are payable from the $0.80 tax rate and a limited pledge of surplus revenues from the county’s landfill operations.

The outstanding pass-through toll revenue and limited tax bonds are payable from payments received by the county pursuant to a pass-through toll agreement between the county and the Texas Department of Transportation (TxDoT) and additionally from the county’s $0.80 ad valorem tax rate.

KEY RATING DRIVERS

STRONG MANAGEMENT, CONSISTENT PERFORMANCE: A history of extensive planning and conservatism has allowed the county to provide infrastructure sufficient to meet increasing service levels while maintaining balanced operations and robust reserves.

FLEXIBLE FINANCIAL FRAMEWORK: The county’s relatively low ad valorem tax rate provides flexibility to meet future obligations. Projected growth in key spending areas is aligned with reasonable revenue projections.

MODERATING DEBT BURDEN: Overall debt is high, reflecting rapid regional growth, but moderating due to healthy tax base growth in the past several years. Modest pension and other post-employment benefits (OPEB) keep the fixed-cost burden on the budget from becoming unmanageable.

PRIME LOCATION & STRONG DEMOGRAPHICS: A strong transportation infrastructure provides easy access between the county’s affordable developable property and Austin’s broad employment base. Growth prospects are also supported by the county’s highly educated workforce and above-average income levels which Fitch expects to attract ongoing commercial and industrial development.

RATING SENSITIVITIES

FINANCIAL FLEXIBILITY; MANAGEABLE DEBT: The rating assumes the county’s ability to maintain a strong financial profile and affordable debt burden in an anticipated high-growth economy.

CREDIT PROFILE

Williamson County occupies a sizable 1,135 acres in central Texas with a population of roughly half a million, which has doubled over the past 15 years. The county lies just north of Austin along the well-traversed interstate 35.

DIVERSIFIED ECONOMY WITH POSITIVE OUTLOOK

Williamson County’s economic activity includes technology, manufacturing, government, education, retail and agribusiness. The county benefits from an abundance of high technology firms, including the corporate headquarters of Dell Computer. A diversified employment base and the stabilizing influence of education, government and health care among top employers make the county less susceptible to technology cycle downturns. Strong employment growth averaging 3.5% annually over the past decade also lessens the impact of structural layoffs common to the competitive technology sector.

The county’s low unemployment rate of 3.3% as of August 2015 compares favorably to the national average of 5.2% for the same period, reflecting above-average levels of educational attainment. Median household income trends 35% above the U.S. average.

The county continues to see new business entrants and expansion, particularly in the medical and education sectors. IHS Global Insights expects near-term job growth to continue on a trajectory consistent with the recent past with the greatest growth in the business services and construction sectors. The local economy has no material exposure to the oil & gas sector, and Fitch believes it stands to benefit from freed up labor and materials capacity associated with the recent slowing of growth in other parts of the state due to low energy prices.

HEALTHY AND DIVERSIFIED TAX BASE

The county’s $46 billion taxable assessed valuation (TAV) has more than tripled since 2000 as a result of strong residential growth, rising home prices, and an expanding commercial and manufacturing base. Low levels of available housing stock have contributed to the post-recessionary rise of TAV by 6.1% in fiscal 2014, 10.1% in fiscal 2015 and a robust 12.3% in fiscal 2016.

The Williamson County Appraisal District expects strong fiscal 2017 tax base growth based on current market conditions and development underway. Prospects for ongoing growth are strong considering the large number of new areas platted for development including a notable expansion to Sun City, Texas, the county’s 7,000-home active retirement community currently underway with an eventual build-out to 10,000 homes. The tax base is without concentration. Top taxpayers account for a modest 2.8% of fiscal 2016 TAV.

STRONG FINANCIAL FLEXIBILITY

The county’s conservative financial profile is exemplified by general fund reserve levels well in excess of policy targets. A fiscal 2014 unrestricted general fund balance of $74.7 million (53.5% of spending) reflects strong revenue performance and prudent cost management consistent with the county’s history.

Officials report fiscal 2015 unrestricted reserves of $74.3 million (an estimated 52% of spending), reflecting strong revenue performance and strategic application of reserves for capital projects consistent with policy guidelines. The year-end reserves also include $3 million in deferred projects and a $3 million legal settlement.

The county applies up to 25% of surplus general funds in excess of its unrestricted fund balance policy target (35% of budgeted expenditures) to fund capital projects. Officials anticipate this funding source to generate up to $8 million annually for capital projects and defray the cost of debt service while continuing to provide healthy reserve levels.

MODERATING DEBT

Fitch anticipates the county’s high overall debt equal to 6.9% of market value to remain elevated based on long-term population growth projections for the region, although debt levels have moderated over the past several years based on strong tax base growth. The county has a history of providing infrastructure, particularly road improvements, to support regional growth. General fund-supported capital expenditures and early debt retirements funded through the tax levy help to curb growth of the high debt burden.

Williamson County received strong support from voters in November 2013 authorizing $275 million in ULT road bonds and $40 million in LT bonds for parks and recreation development and improvements. Fitch anticipates the potential for additional authorization in the next year to support the county’s ongoing capital program, focused on transportation infrastructure to keep pace with regional growth needs. Transportation projects are identified through coordinated regional planning efforts with the Capital Area Metropolitan Planning Organization (CAMPO).

AFFORDABLE PENSIONS

The county provides pension benefits through the Texas County and District Retirement System (TCDRS). Funding levels are satisfactory at nearly 86% (78% using a more conservative 7% investment return assumption), and the county routinely funds 100% of its annual required contribution (ARC) to TCDRS. With modest unfunded pension and other post-employment benefits (OPEB) liabilities, the impact of the county’s combined debt service, pension and OPEB on its budget is sizable at 24% of governmental spending. The county provides OPEB through a self-funded single-employer plan. The unfunded actuarial accrued liability is very low at $41 million, representing less than 0.1% of the county’s market value.

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 fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 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 the applicable criteria specified below, this action was informed by information from CreditScope, IHS Global Insight, The Municipal Advisory Council of Texas, and Zillow Group.

Applicable Criteria

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=992690

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

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