News Column

Fitch Rates Garland, Texas' Series 2014 COs 'AAA'; Outlook Stable

May 12, 2014

AUSTIN, Texas--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AAA' rating to the following Garland, Texas (the city) certificates of obligation (COs):

--$13.4 million combination tax and revenue COs, series 2014.

The GOs are scheduled to sell via negotiation May 19, 2014. The bonds will be used to fund various capital projects city-wide and pay costs of issuance.

In addition, Fitch affirms the following rating:

--$471 million in outstanding general obligation bonds (GOs) and COs at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The GOs and 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). The COs also carry a nominal pledge (limited to $1,000) from the net revenues of the city's water and sewer system.

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 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.

STABLE TAV: The city's tax base is solid and diverse. TAV has remained stable and grew very modestly in fiscal 2014 after a period of modest recessionary TAV declines. 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. Other long-term liabilities of the city are moderate. Capital needs are manageable.

RATING SENSITIVITIES

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.

CREDIT PROFILE

MATURE CITY; STABLE MANUFACTURING CENTER

The city benefits from its favorable location within the Dallas-Fort Worth MSA, 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 nearly 232,000 residents. 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 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 edged down slightly to 5.9% in December 2013 from 6.1% in December 2012 despite a solid 2% gain in labor force over the same time period. The city's unemployment's rate remained generally in line with the MSA's (5.4%) and state's (5.6%) for the same period, but below the U.S. rate of 6.5%.

The city's tax base is primarily residential in nature despite its industrial/commercial base. Top 10 taxpayer concentration is minimal at 5.7% in fiscal 2014. Market value per capita is moderate at $51,000 in fiscal 2014, which reflects in part the city's relatively modest home values and housing stock.

Recessionary pressures on property valuations saw an end to TAV gains beginning in fiscal 2010. Over fiscals 2010 - 2012, TAV reached $10.1 billion, declining by a modest 2% - 4% annually. However, TAV regained its footing in fiscal 2013 and held flat-to-stable, evidence of some area economic improvement and home value recovery as a lagging measurement. TAV subsequently improved further with a modest increase of about $63 million or just under 1% in fiscal 2014.

Stronger economic metrics such as higher year-over-year levels of building permits and various development projects underway point to the likelihood of some additional TAV growth over the near-term. New retail and big-box redevelopment projects as well as higher-end, apartments/condominiums in proximity to City Center and an existing Dallas Area Rapid Transit (DART) light rail station are underway according to management. Fitch believes management's assumption of 3% TAV growth in fiscal 2015 is reasonable given improved commercial valuations. Development activity is also expected to offset any associated loss from the recently announced relocation of a top city employer (Raytheon). Location of the new plant in a neighboring city is anticipated to provide minimum disruption for those employees who are currently residents of Garland.

Management expects development along tollway and interstate growth corridors to further strengthen taxable values over the intermediate term. Commercial development along the George Bush Tollway to the north has enhanced the city's retail base. This includes the Firewheel Town Center Mall, and along IH-30 in the southern portion of the city, which includes the Harbor Point retail center. City officials continue to review redevelopment efforts (primarily focused on commercial/retail/ office space) that could generate further tax base expansion.

SOLID FINANCIAL PROFILE

Operations are supported by a fairly diverse revenue base, led by property taxes that provided nearly 40% of total general operating revenue in fiscal 2012, followed by sales taxes at 20%. 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. Notably, the city maintained this solid position without increasing the total tax rate over two fiscal years of modest TAV declines. The city posted modest net operating deficits after transfers in the general fund in two of the last five 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 unreserved fund balance.

Reserves strengthened modestly in fiscal 2012 with a $2.7 million addition to fund balance (equivalent to about 2% of the year's general operational spending). Unrestricted general fund reserves increased to $21.3 million or 15% of spending, assisted by the year's improved sales tax performance. For fiscal 2013, year-end results reflect a nearly full reversal of the $2.4 million budgeted draw on reserves by year-end. Conservative revenue estimates and some pull-back of pay-go capital spending contributed to the $2.2 million operating surplus and a slightly improved unreserved general fund balance of $22.7 million or about 15.6% of spending, comfortably above the policy minimum. The city's typically solid liquidity position further improved in fiscal 2013. General fund cash/investments rose from $21.3 million in fiscal 2012 to $27 million or just over 2 months of general fund spending at fiscal 2013 year-end.

The approved fiscal 2014 $139.4 million general operating budget is up modestly from the prior year's by about $3 million or 2.2% of fiscal 2013 spending in large part for both one-time and recurring salary increases. Revenue estimates incorporate roughly 4% year-over-year growth in sales taxes and a modest $1.4 million or about 1% drawdown on reserves is anticipated. Closer to break-even results may be realized by year-end according to management as sales tax collections for the first six months of fiscal 2014 are outperforming budget by about 5% or $605,000 while expenditures reportedly remain comparable to initial projections. The year's budget maintains reserve levels according to city policy without a property tax increase for the fifth consecutive year or reductions in services or workforce.

As part of its multi-year planning efforts, the city prepares a five-year financial forecast (fiscals 2013-2018). The current look-ahead anticipates modest annual operating gaps (no more than 2% of the year's budgeted spending) in out years with draws on reserves to below the 30-day policy level under conservative revenue, expenditure, and economic assumptions. Nonetheless, Fitch recognizes the modest nature of the imbalance and 'worst case' projections while taking comfort from management's historically strong fiscal practices and budgetary oversight that have enabled the maintenance of reserves well above policy.

DEBT AND OTHER LONG-TERM LIABILITIES MANAGEABLE

The overall debt burden is above average at 5.7% of market value and largely due to overlapping school district debt, but more moderate on a per capita basis at about $2,920. This is in contrast to the city's generally favorable direct debt profile. Direct debt levels are moderate and well within the city's policy of limiting tax-supported debt to 5% of TAV. The city's debt is predominantly fixed-rate. 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 above average, with 74% 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. The most recent CIP (fiscals 2013-2018) reflects some growth in the city's tax-supported capital plans, which are up by about $18 million due to additional fire equipment, municipal facility and park improvement needs, but nonetheless reflect a still manageable level at $57 million in total.

Streets are a key capital priority for the city. Voters strongly approved $26 million for street improvements in a November 2013 referendum that effectively approves a $0.02 tax rate increase for this purpose. Plans for debt or pay-go capital spending from this measure have yet to be determined according to management. This approved measure is in addition to the approximately $145 million that remains outstanding in authorized but unissued GO bonds. 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.

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 2011-2013, the city paid 100% of the annual required contribution (ARC), which totaled a reduced $14.9 million in fiscal 2013, down about $2 million from the prior year. Recent structural and actuarial changes to TMRS approved at the state level significantly boosted the city's funded position to a good 98.6% at Dec. 31, 2012 (using a 7% investment rate of return) from a below-average 75.9% at Dec. 31, 2009. The unfunded accrued actuarial liability (UAAL) totaled about $9.8 million at Dec. 31, 2012 or less than 1% of market value.

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 50% - 65% of the actuarially determined annual OPEB cost in the last three fiscal years (2011 - 2013). However, Fitch's concerns are largely mitigated due to the relatively small OPEB liability; the unfunded actuarial accrued liability remains modest at $86 million or less than 1% of market value. Carrying costs for the city (debt service, pension, OPEB costs, net of self-supporting enterprise debt) totaled a moderately high but manageable 23.1% of governmental spending in fiscal 2013 due in part to the above-average pace of debt principal amortization.

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.

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

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

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

U.S. Local Government Tax-Supported Rating Criteria

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=829711

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Fitch Ratings

Primary Analyst

Rebecca C. Moses, +1 512-215-3739

Director

Fitch Ratings, Inc.

111 Congress Ave.,

Austin, TX, 78701

or

Secondary Analyst

Gabriela Gutierrez, +1 512-215-3731

Director

or

Committee Chairperson

Arlene Bohner, +1 212-908-0554

Director

or

Media Relations:

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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