News Column

Fitch Rates San Antonio, TX's Limited Tax Bonds and Tax Notes 'AAA'; Outlook Stable

July 24, 2014

AUSTIN, Texas--(BUSINESS WIRE)-- Fitch Ratings assigns an 'AAA' to the following San Antonio, Texas bonds:

--$230.7 million general improvement and refunding bonds, series 2014;

--$6.3 million tax notes, series 2014B.

The bonds and notes are scheduled to sell via negotiation during the week of July 28, 2014. Proceeds will be used for various public improvements and to refund outstanding bonds for interest cost savings.

In addition, Fitch affirms the following ratings:

--$1,002.7 million limited tax bonds at 'AAA';

--$324.6 million combination tax and revenue certificates of obligation (COs) at 'AAA';

--$14.8 million tax notes at 'AAA';

--$20.9 million (Starbright Industrial Development Corporation [IDC]) contract revenue refunding bonds at 'AA+';

--$34.4 millionSan Antonio municipal facilities corporation (MFC) lease revenue bonds at 'AA+';

--$550.4 million public facilities corporation (PFC) improvement and refunding lease revenue bonds (convention center refinancing and expansion project) at 'AA'

The Rating Outlook is Stable.

SECURITY

The limited tax bonds, COs, and tax notes are secured by an annual property tax levy, limited to $2.50 per $100 taxable assessed valuation (TAV). The COs are additionally payable from a limited pledge of net revenues of the city's municipal parks system.

The contract revenue bonds are special obligations of the San Antonio Starbright IDC and are payable from pledged contract payments from the city comprised of payments from its electric and gas utility, CPS Energy. The city is unconditionally obligated to pay debt service on the contract revenue bonds from the revenues it receives from CPS.

The MFC lease revenue bonds are secured by annually appropriated lease payments made by the city to the MFC.

The PFC lease revenue bonds are secured by annually appropriated lease payments made by the city to the PFC.

KEY RATING DRIVERS

STRONG FINANCIAL FLEXIBILITY: San Antonio's financial performance has been pressured recently although its reserves have remained solid. Fitch favorably views the city's recently enhanced reserve policies and its two-year budget strategy, which has expanded its planning horizon.

MIXED DEBT PROFILE; LARGE CAPITAL PLANS: The city's debt profile is mixed, characterized by a high overall debt burden, balanced against moderately rapid limited tax bond amortization and ample and growing debt service capacity within the current tax rate. The city's capital plan is aggressive but will allow the city to address its sizeable deferred capital needs.

MILITARY REMAINS KEY SECTOR: Although the local economy has diversified notably, the military remains a major economic factor. This is evidenced by very large recent investments and additions to troop strength resulting from base realignment and closure decisions that have benefited the city.

STABLE ECONOMY: The recessionary contraction of the local economy has reversed course and the city's unemployment rate continues to be well below state and national averages. Population growth remains rapid, aided by affordable home prices and ample developable land.

HIGH STARBRIGHT DEBT SERVICE COVERAGE: CPS (electric and gas system revenue bonds rated 'AA+' by Fitch) payments to the city provide very high debt service coverage for the Starbright IDC's contract revenue bonds. Additionally, the sources of the electric and gas payments to the city are considered strong, the bonds' contract terms and legal covenants are sound and no additional leveraging is planned.

PFC LEASE REVENUE BOND DIFFERENTIAL: Although important to the city's economy, the leased asset (the convention center) financed by the city's PFC lease revenue bonds is not considered essential to the city's core governmental operations according to Fitch Ratings' published criteria. Its non-essential nature leads to a two-notch distinction between the PFC lease revenue bonds and the city's limited tax bonds.

RATING SENSITIVITIES:

SHIFT IN FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics including the city's strong, albeit reduced, financial reserves. Additional significant reductions in reserves, even if planned, could result in negative rating pressure.

CREDIT PROFILE

San Antonio is the second largest city in the state and seventh largest in the U.S., with an estimated population of 1.4 million for 2014. Prominent sectors in the local economy are military and government employment, domestic and international trade, convention and tourism, medical and health care, financial services, and telecommunications.

LARGE FINANCIAL RESERVES

The city's financial profile remains solid as evidenced by the maintenance of unreserved fund balances in excess of 20% of spending since fiscal 2006, well above its 9% fund balance policy level. Additions to fund balance had been enabled by strong sales tax growth and positive CPS (electric and gas utility rated 'AA+' by Fitch) payment trends, along with management's aggressive cost controls in the form mainly of annual personnel reductions. In recent years, however, the moderate planned use of reserves to balance budgets has reduced the city's financial cushion. Fitch expects any future planned drawdowns to trend downward.

TWO-YEAR BUDGET STRATEGY

The city's two-year budget strategy, in which a portion of reserves in excess of its fund balance policy are designated for the next year's spending (the two-year reserve), has expanded its planning horizon. A sizeable $68 million of such reserve was budgeted for use in fiscal 2013, equal to 6.8% of spending. Greater than projected sales tax receipts and significant budget carry-forwards allowed the city to utilize only $31.3 million or slightly less than half of the allocation.

Sales tax receipts grew by a solid 5.2% in fiscal 2013, exceeding the budget's 1% growth estimate above fiscal 2012 actuals. As a result of use of a portion of the two-year reserve, the unrestricted fund balance declined to a still strong $178.2 million or 18.4% of operating expenditures and transfers out. A portion of this fund balance, $88.2 million, is designated as the city's 9% reserve. Another $47.2 million of the fiscal 2013 fund balance is designated as the city's two-year reserve.

CURRENT YEAR'S PROGRESS AND FISCAL 2015 BUDGET

The fiscal 2014 budget increases general fund spending by less than 1% above the fiscal 2013 budget. The budget is balanced at a level property tax rate, assumes a modest sales tax gain of 1.7% (above actual fiscal 2013 receipts) and is aided by the appropriation of $6.8 million of the two-year budget reserve (equal to less than 1% of appropriations). Sales tax receipts for the first six months are 5.5% above the year prior and CPS revenues are up by a large 8.9% for the same period, fueled by a very cold winter and a rate increase. Due to these positive revenue variances, the city now projects a modest general fund surplus for fiscal 2014.

The proposed fiscal 2015 budget, still under development, will incorporate a higher 10% financial reserve ($102 million) and is also expected to include a two-year budget reserve equal to 2% - 3% of appropriations (approximately $20 million to $30 million). Based on a $30 million two-year reserve, the city is currently facing a $27 million budget gap (a manageable 2.6% of appropriations) which the city expects to narrow as the fiscal year advances. Fitch considers this reasonable given past performance.

LARGE CAPITAL NEEDS

Part of the current offering represents the third installment of the $596 million general obligation bond authorization approved by voters in May 2012. As the largest bond authorization in the city's history, it is intended to address the city's substantial deferred capital needs. According to management, all future debt will be sized and timed to maintain the city's current debt service tax rate assuming modest tax base growth. The city plans to seek similarly sized authorizations every five years.

OVERALL DEBT PROFILE PRESSURED

The impact of the 2012 bond program on the city's direct debt profile should be manageable given its declining debt service schedule, average pay-out rate, and expansive tax base. The city's overall debt burden remains elevated at $5,860 per capita and 9.5% of market value. After this issuance of $160 million in new money bonds, the city's remaining bond authorization totals $238 million. The city does not anticipate issuing additional new money bonds in the next 12 months.

STARBRIGHT BONDS' HIGH COVERAGE LEVELS EXPECTED

The contract revenue bonds, whose proceeds financed the acquisition and conveyance of the site for a Toyota manufacturing plant, comprise a modest part of the city's debt portfolio. The 'AA+' rating on these bonds reflects the strength of the revenue stream from which bond repayments are made, the very high debt service coverage, and the solid contract and legal covenants of the transaction. CPS' annual payment to the city's general fund is pledged for repayment of the contract revenue bonds.

Audited fiscal 2013 pledged revenues totaled $293.3 million and covered the bond's maximum annual debt service by a very high 177 times (x). Because the city relies on CPS payments (accounting for 32% of expenditures and transfers out in fiscal 2013) for operations, Fitch expects coverage to remain very high.

PFC LEASE REVENUE BOND DIFFERENTIAL

The PFC lease revenue bonds, issued in 2012, financed a major expansion of the city's convention center. The leased asset, the convention center, is not considered essential to core governmental operations by Fitch and serves as the basis for the two-notch distinction from the city's 'AAA' rating on its limited tax bonds. Also, the bonds' somewhat weak legal provisions do not include a mortgage interest for the trustee in the event of non-appropriation.

The non-appropriation of base rental payments requires the city to vacate the leased asset by the end of the last fiscal year for which lease payments were funded. Fitch notes that the primary planned repayment source, the 2% expansion hotel occupancy tax (HOT), can only be used for convention center expansion costs by state statute, minimizing the incentive for the city to withhold any annual appropriation.

WELL-FUNDED PENSION PLANS

Civilian and certain public safety employees participate in an agent multiple employer defined benefit pension plan administered by the Texas Municipal Retirement System (TMRS). Recent changes to TMRS' valuation methodology and the elimination of automatic repeating cost of living adjustments increased the pension's funded ratio to a high 86.9% as of Dec. 31, 2013. TMRS' valuation is based on a 7% discount rate which Fitch considers reasonable. Fire fighters and police participate in a single employer defined benefit pension plan which was similarly well-funded at an estimated 87% as of Oct. 1, 2013 using a Fitch-adjusted 7% investment return assumption.

Retiree health benefits for civilians are provided by the city and are funded on a pay-go basis. Retiree health benefits for fire fighters and police have been financed on a pre-funded basis since 1989, resulting in a notable funded position of 40% as of Oct. 1, 2013. The combined carrying costs for the city's tax-supported debt, pension, and OPEB obligations totaled a moderate 17.3% of fiscal 2013 governmental expenditures. Fitch notes that a healthcare and benefits taskforce has recommended that the city review public safety healthcare and retirement benefits for potential cost savings.

MILITARY STILL KEY WITHIN BROAD ECONOMY

Recent employment gains have been led by the leisure/hospitality and construction sectors. Energy sector employment has also expanded considerably due to surging oil and gas activity within the nearby Eagle Ford Shale. As a result, the city's unemployment rate declined to 4.7% in May 2014, down from the 5.8% level recorded in May 2013. The city's unemployment rate compares favorably to state and national averages of 5.1 % and 6.1%, respectively, for the same period.

After posting strong annual gains through fiscal 2009, the city's taxable values remained flat through fiscal 2013 as new improvement values were offset by reappraisal losses on existing properties. AV rebounded with a 4.6% increase in fiscal 2014 and preliminary AV results for fiscal 2015 point to a solid 5.8% gain. The city projects annual new construction will increase taxable values from 1.8% - 2.5% annually over the next five years which Fitch considers reasonable.

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 informed by information from CreditScope, University Financial Associates, S&P/Case Schiller Home Price Index, HIS Global Insight, Zillow.com, and National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria', dated Aug. 14, 2012;

--'U.S. Local Government Tax-Supported Rating Criteria', dated 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=841464

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, Suite 2010

Austin, TX 78701

Secondary Analyst

Rebecca Moses

Director

+1-512-215-3739

Committee Chairperson

Karen Ribble

Senior Director

+1-415-732-5611

or

Media Relations

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

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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