News Column

Fitch Affirms Heath, TX's GOs and COs at 'AA'; Outlook Stable

August 6, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'AA' rating on the following Heath, TX's (the city) limited tax bonds:

--$5.7 million general obligation (GO) bonds series 2010;

--$10.0 million combination tax and limited surplus revenue certificates of obligation (COs) series 2007.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by an ad valorem tax pledge levied against all taxable property with the city of Heath, limited to $2.50 per $100 of taxable assessed value (TAV).

The COs are additionally secured by a limited, nominal pledge of the net revenues of the city's water and wastewater system, not to exceed $1,000.

KEY RATING DRIVERS

SMALL, AFFLUENT BEDROOM COMMUNITY: Heath's lakeside location and close proximity to the extensive Dallas-Fort Worth employment base has attracted high-end residential development and fueled rapid population growth. City residents have above average income levels and the area employment picture is positive.

STABLE FINANCIAL PERFORMANCE: The city has maintained solid reserve levels and retains ample taxing margin due to a below average tax rate for the state.

SOLID REVENUE BASE: Operations are principally funded from property tax revenue. Collection rates are strong and the tax base shows signs of strong growth after some stagnation post-recession.

HIGH AND INCREASING DEBT LEVELS: Overall debt levels are now exceptionally high driven by sizable overlapping debt and recent tax-supported issuances by the city. Debt levels are likely to remain high given average amortization of direct debt.

RATING SENSITIVITIES

SOLID CREDIT PROFILE: Sound reserves, financial flexibility, and superior wealth levels are key offsets to the city's high overall debt. A change in these mitigating factors would place downward pressure on the rating.

CREDIT PROFILE

AFFLUENT LAKEFRONT COMMUNITY NEAR DALLAS

This small and affluent bedroom community is situated on the banks of Lake Ray Hubbard within commuting distance of Dallas. The city's population has almost doubled since 2000, presently estimated at roughly 8,000, and the accompanying residential development has primarily consisted of high-end single family homes. Per capita income levels are very high at 230% of the state and 210% of the national averages. Per capita market value is also high at $171,000.

The city's proximity to the broad Dallas-Fort Worth metro economy provides residents with extensive employment opportunities and the region has continued to lead the nation in employment growth coming out of the recession. Data are not available for the city, but Rockwall County's unemployment rate fell to 4.3% in May 2014, improving over a percentage point year-over-year due to employment gains outpacing labor force expansion.

Local development slowed with the economic downturn, arresting the double-digit rate of growth in the city's TAV seen pre-2009. The city's assessed value contracted marginally from fiscals 2011-2013, cumulatively 1.5%. TAV began recovering in 2014 marked by 4.3% growth and 2015 certified values showed a second year of strong growth at 6.5%.

STABLE FINANCIAL PERFORMANCE

The city historically achieves break-even operating results after transfers and ended fiscal 2013 with a moderate surplus of $172,000 (4% of spending) and an unrestricted general fund balance of $2.6 million (almost 60% of spending). Projected results for 2014 show a smaller than budgeted draw on fund balance of $400,000 for one-time capital expenditures. Estimated 2014 year-end reserve levels of $2.2 million remain well above the city's stated policy that targets maintaining reserves at 25% of operating expenditures but no less than 20%.

Operations are reliant on property tax revenues (approximately 60% of budget) and exposure to economically sensitive sales tax revenue is minimal. The 2014 tax rate of $0.3433 per $100 TAV is considered low compared to other Texas cities and has remained unchanged for the last 20 years. The top ten taxpayers approximate 4% of TAV, and property tax collections remain solid at 99% or better on a total basis.

The 2015 proposed operating budget includes a 12% increase in revenues driven by property taxes, and a marginal fund balance draw of $122,000. Fitch does not view the budgeted rate of growth as a concern given the residential and retail development currently underway.

HIGH DEBT LEVELS

Debt levels are very high at 13,000 per capita and 8.9% of market value, partly driven by overlapping school district debt. Direct debt has increased notably over the last two years, and the rate of principal amortization has declined to average, at 50%, from prior rapid rates.

The city's future capital needs are largely associated with residential development and related infrastructure, namely for the water-sewer system and roads. The city does not have any immediate-term debt plans, yet given the residential and retail development on the horizon Fitch believes there will be demand for additional infrastructure.

WELL-FUNDED PENSION LIABILITY

The city's pension and other post-employment benefits (OPEB) are provided through the Texas Municipal Retirement System (TMRS), a statewide agent multiple-employer plan. Recent structural and actuarial changes to TMRS approved at the state level significantly boosted the city's funded position to a strong 86.9% at Dec. 31, 2013 (using a 7% investment rate of return), up from a below-average 66.7% at Dec. 31, 2009.

Carrying costs for the city (debt service, pension and OPEB costs) are estimated at a moderate 23.8% of governmental spending in fiscal 2013 yet are expected to almost double in the near-term given the additional debt service from the recent issuances. Fitch views carrying costs at this level as extremely high, yet believes the city has sufficient financial flexibility to accommodate the added debt.

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, S&P/Case-Shiller Home Price Index, IHS Global Insight, and the National Association of Realtors.

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=846155

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

Leslie Ann Cook, +1 212-908-0507

Analyst

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Rebecca Meyer, +1 512-215-3733

Director

or

Committee Chairperson

Amy Laskey, +1 212-908-0568

Managing Director

or

Media Relations:

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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