News Column

Fitch Affirms Huntsville TX's LTGO Refunding Bond Ratings at 'AA'; Outlook Stable

June 11, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the following Huntsville, Texas (the city) ratings:

--$20.6 million in limited tax general obligation (LTGO) bonds and combination tax and revenue certificates of obligation (COs) at 'AA'.

The Rating Outlook is Stable.

SECURITY

The LTGOs and COs are secured by an ad valorem tax pledge limited to $2.50 per $100 taxable assessed valuation (TAV) levied on all taxable property within the city. The COs are further secured by a limited pledge of $1,000 of the city's water and wastewater system net revenues.

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: The city has maintained consistently positive operating margins, strong fund balances, and ample liquidity.

RELIANCE ON SALES TAX RECEIPTS: Strong reserves mitigate somewhat the general fund's moderate reliance on sales tax receipts from a limited, low-income economic base. After slipping due to recessionary pressure, sales tax revenues have climbed consistently for the past four fiscal years with continued growth projected.

MANAGEABLE DEBT AND CARRYING COSTS: Overall debt levels are moderate despite the city's low wealth levels. Carrying costs, including debt service and retiree benefits, are expected to remain manageable, given conservative future debt plans.

LIMITED BUT STABLE ECONOMY; LOW WEALTH: The local economy is limited, with employment anchored by the state prison system headquarters and a large state university. Employment metrics have shown stable growth, though area wealth indicators are low, skewed somewhat by the inclusion of a large prison inmate and student population in the census count.

RATING SENSITIVITIES

The rating is sensitive to shifts in the city's strong financial management practices, including maintenance of high reserve levels as an offset to the city's volatile revenue base. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely.

CREDIT PROFILE

The city, located on Interstate 45, about 70 miles north of Houston and 170 miles south of Dallas, serves as the county seat for Walker County and home of the Texas prison system headquarters and Sam Houston State University (SHSU). The city has a small population of 39,795, which has grown modestly over the past decade.

LIMITED ECONOMY ANCHORED BY STATE GOVERNMENT

A large state government presence, led by the Texas prison system headquarters and Sam Houston State University (SHSU), drives the local economy. The Texas prison system headquarters employs a stable base of administrative personnel and anchors the seven state prisons in the Huntsville area, which employ nearly 6,800 workers and house over 13,000 inmates. SHSU has shown strong growth in recent years with increases in both total employment and student enrollment, employing over 3,300 personnel, with enrollment of roughly 20,000. Fitch views favorably the strong presence of government institutions as a source of stability for the otherwise weak local economy.

The local employment base has remained stable, with modest recessionary losses followed by recent growth. The city's low unemployment rate of 4.5% as of April, 2014, is in line with the state (4.7%) and below the nation (5.9%) and consistent with historical trends. The city's wealth metrics remain approximately 50% below the state and nation, with an individual poverty rate greater than twice the national average, though the local prison and student populations skew these figures.

The city's TAV remained firm during the economic downturn, posting growth for all but one of the last five fiscal years due mostly to new retail development, which has a significant impact on the city's relatively modest tax base. TAV declined modestly in fiscal 2014, though the city is projecting 3.6% TAV growth for fiscal 2015 due to increases in the value of existing property, as per the county. Fitch considers this projection realistic, given the city's stable recessionary tax base performance.

STRONG FINANCIAL PROFILE

The city has posted positive results in all but one of the last five fiscal years, yielding exceptionally high liquidity and strong reserves, well above the city's formal minimum fund balance policy of 25% of budgeted expenditures. Reserves in excess of this amount are made available for transfers to the capital projects fund. The city reported an unrestricted general fund balance of $10.5 million, or an ample 63% of general fund spending, in fiscal 2013.

The city relies somewhat on economically sensitive sales tax revenues (37% of general fund revenues in fiscal 2013), but this reliance is largely offset by the city's high fund balances and ample liquidity. After declining by approximately 7% in fiscal 2010, sales tax receipts have shown consistent growth in the last three fiscal years due to new retail stores and the improving economic environment.

For fiscal 2014, management conservatively budgeted $6.6 million in sales tax receipts, a modest decline of 1.8% from fiscal 2013. Actual results through May 2014 exceed budget by $285,000 (6.5%), an increase of 5.8% over the same period in fiscal 2013. Overall, the fiscal 2014 operating budget is balanced with a budgeted $2.9 million drawdown of reserves for capital projects and one-time expenses related to retiree benefits. The city currently projects to close fiscal 2014 better than budget with a projected fund balance use of approximately $1.5 million due to conservative cost estimation. Fitch views positively the city's prudent use of reserves for one-time expenses, and notes that even with the projected drawdown reserves would remain healthy at $9.1 million, or a still-high 49% of general fund expenditures.

MANAGEABLE DEBT AND OTHER LONG-TERM LIABILITIES

Fitch views the city's overall debt ratios as moderate at $1,362 per capita and 3.8% of market value, driven by overlapping school district debt which receives a high degree of state support (not accounted for in Fitch's debt burden calculation). Debt service costs are affordable, at $2.1 million (8.5% of governmental fund spending) in fiscal 2013, despite the city's rapid principal amortization rate of 80% in 10 years. General government capital needs are manageable and will be met primarily through continued pay-as-you go spending with no new tax-supported borrowing expected over the next two years.

Pension benefits are provided through the Texas Municipal Retirement System (TMRS), an agent multiple-employer plan. The plan has an estimated funded ratio of 85% as of Dec. 31, 2012, based on the 7% investment rate of return used by Fitch. The annual required contribution (ARC) was $1,519, or 6.3% of governmental fund spending, in fiscal 2013.

The city historically paid other post-employment befits (OPEB) on a pay-as-you-go basis, but has contributed approximately $2 million to an OPEB trust established in 2011. The OPEB unfunded liability totaled $18.2 million or 1.3% of market value in fiscal 2013. The city budgeted $960,000 in fiscal 2014 to establish employee healthcare savings accounts to curb future retiree benefit costs, which Fitch views favorably. Total carrying costs, including debt service, pension ARC, and OPEB spending, represent a manageable 18.5% of governmental fund spending in fiscal 2013.

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

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates.

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=834183

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

George M. Stimola

Analyst

+1-212-908-0770

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Rebecca Moses

Director

+1-512-215-1568

or

Committee Chairperson

Amy R. Laskey

Managing Director

+1-212-908-0568

or

Media Relations

Elizabeth Fogerty, New York, +1-212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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