AUSTIN, Texas--()--Fitch Ratings has assigned an 'AA+' rating to the following Fort Worth, Texas limited tax obligations:
--$139.6 million general purpose refunding and improvement bonds, series 2012;
--$85.8 million combination tax and revenue certificates of obligation, series 2012.
The GO bonds are scheduled for a negotiated sale the week of Aug. 6. Proceeds will finance street and drainage improvements and refund a portion of the city's outstanding tax-supported debt. The COs will be sold competitively on Aug. 14, and proceeds will finance the construction of a new police/fire training facility and purchase public safety equipment.
In addition, Fitch affirms the following ratings:
--$400.4 million outstanding GOs and COs at 'AA+';
--$19.5 million Service Center Relocation Inc. (SCR) lease revenue bonds, series 2004 at 'AA'.
The Rating Outlook is revised to Stable from Positive.
The GOs and COs are secured by an ad valorem tax levied against all taxable property in the city, subject to a $1.90 per $100 of taxable value limitation as prescribed by city charter. The COs are additionally secured by a limited pledge (not to exceed $1,000) of surplus net revenues of the city's waterworks and sewer system. The SCR lease revenue bonds are payable from annual payments from the city to the corporation, subject to annual appropriation; the corporation has assigned its rights in the lease to the trustee.
KEY RATING DRIVERS
SOUND FINANCES, CHALLENGES REMAIN: Despite revenue declines, the city's recent financial performance has been strong, characterized by generally positive operating margins and increasing reserves. After successfully addressing large budget gaps over the past two fiscal years, primarily through aggressive spending reductions, management anticipates a drawdown of reserves in fiscal 2012 as expenditure growth continues to outpace revenues. The ongoing budget challenges are the primary reason behind the Outlook revision to Stable from Positive.
FAVORABLE DEBT PROFILE: The city has a manageable overall debt burden, and payout of tax-supported debt is rapid.
PROGRESS CONTINUES ON FINANCIAL MANAGEMENT AND REPORTING: The city continues with its phased implementation of a new enterprise resource planning (ERP) system to upgrade its management information capabilities. Fort Worth's fiscal 2009, 2010 and 2011 annual financial reports were issued on time, ending a period of late audit filings that resulted from the discovery in 2004 of weaknesses in internal accounting and controls and tracking of assets.
LARGE AND DIVERSE REGIONAL ECONOMY: Fort Worth is a major anchor in the Dallas-Fort Worth regional economy with a population of roughly 6.5 million.
SLOWER TAX BASE GROWTH: Not surprisingly, the city's tax base growth has slowed due to recessionary pressures and reduced development activity. Taxable assessed valuation (TAV) for fiscal 2012 is up roughly 2.3% from fiscal 2011, offsetting a similar decline from the previous year; similarly modest gains are projected for the near term.
SCR ASSETS ESSENTIAL: The SCR series 2004 lease revenue bonds financed a consolidated service center/vehicle maintenance building, an essential facility for various city departments.
FINANCES SOLID, RESERVES HEALTHY
The city's financial performance has been positive in recent years, characterized by net gains and increases in general fund reserves well in excess of the policy target level. Audited results in each of the past three fiscal years were significantly better than earlier projections (moderate drawdowns had been anticipated in each year); the city's general fund recorded net income of roughly $20 million in fiscal 2009 and 2010 and a modest gain of $714,000 in fiscal 2011; the cumulative impact of these results was a boost to the unrestricted fund balance (committed, assigned and unassigned per GASB 54)to $152.8 million, or nearly 25% of expenditures and transfers out at fiscal 2011 year-end.
While management has successfully addressed large budget gaps the past several years, a structural gap between operating revenues and outlays persists. The gap appeared again in the fiscal 2012 budget, which included a roughly $30 million initial general fund shortfall, and the city's five-year forecast projects expenditures to outpace revenues each year. The current year budget reflects the challenges facing management, as it included a 3% pay increase for general employees (the first pay hike in several years), contractual pay increases for police and fire employees, and a 10% increase in health insurance costs. This ongoing budgetary imbalance is the primary reason for the Outlook revision to Stable from Positive.
The current projection for fiscal 2012 includes sales tax receipts exceeding budget by $7 million or nearly 7% and general fund spending in line with the original budget. Due to the gain in sales tax and other revenues and the spending constraint, management anticipates a drawdown in operating reserves of less than $16 million at year-end. Despite the projected drawdown, the unreserved fund balance is expected to remain comfortably above the city's minimum 10% reserve policy. Fiscal 2013 is expected to see a continuation of financial pressures, and management anticipates a generally 'maintenance of effort' budget with only mission-critical hiring. The fiscal 2013 budget will be adopted in late August.
REPORTING, INTERNAL CONTROL ISSUES ADDRESSED
Management reports that the implementation of various components of a new ERP system are proceeding as scheduled, with human resources/payroll currently in the post-implementation state and the core financial component scheduled for an initial phase-in beginning later in 2012. The system is expected to be fully operational by 2015. Fitch notes the significant progress the city has made in addressing the internal control and accounting deficiencies that were first identified in 2004. After delays in preparation of its comprehensive annual financial reports from fiscal 2004 to fiscal 2008 due to internal control and accounting issues, the city has completed all prior year audits and released the fiscal 2009, fiscal 2010 and fiscal 2011 audits in a timely manner.
MANAGEABLE DEBT BURDEN AND CAPITAL NEEDS
The city's debt profile is favorable. The direct debt-to-market value is moderate while overall ratios jump to above average levels, reflecting the large number of school districts located within the city's boundaries. Principal amortization is rapid, with roughly two-thirds of GO and CO debt retired within 10 years. The current offerings will finance street and drainage improvements, finance a new police/fire training facility and purchase equipment, and restructure approximately $51 million of outstanding tax-supported debt to eliminate balloon payments in 2018. The next GO sale is tentatively set for 2013 with an estimated par amount of $66 million.
The city maintains a single employer defined benefit retirement system that covers all regular full-time employees of the city. As of Jan. 1, 2011 the funded ratio was roughly 77% and the unfunded actuarial accrued liability was $579 million, or roughly 1% of fiscal 2012 market value. The actuarial assumptions include an investment return of 8.25%; using a more conservative 7% return assumption, the estimated funding ratio declines to a less sound 67%. The city also offers other post employment benefits for healthcare (OPEB), and the unfunded liability as of Dec. 31, 2010 was sizable at $1.04 billion. The city has established an OPEB trust and has initiated contributions to the trust; management reports a 20-year funding strategy has been adopted for the OPEB liability.
POPULATION AND ECONOMY CONTINUE EXPANSION
With an estimated 2012 population of about 754,000, Fort Worth's population continues to grow (up 3.3% annually since 2006). In addition, the city's extra-territorial jurisdiction is sizable and provides opportunity for future annexation and growth. The metropolitan area employment base is extensive, and while military-related spending still accounts for an estimated one-quarter of the economy, recent gains in other sectors, such as services, construction, and trade have helped diversify the labor force. In addition, mining (natural gas), ranching, manufacturing, technology, education, and aerospace are significant components of the Fort Worth economy and serve to diversify economic activity.
The city has not been immune to negative economic factors, as evidenced by the bankruptcy filing by AMR Corporation (parent of American Airlines with Fort Worth corporate headquarters). A major north Texas employer, AMR announced 13,000 layoffs in February of this year, and the impact is being felt in Fort Worth given that both management and maintenance workers in the area were included in the layoff announcement.
Despite the AMR announcement, the city has added to employment totals by at least 2% each of the last two years and the unemployment rate has declined. For May 2012, the city's unemployment stood at 6.9%, down from 8% a year ago and below the national average of 7.9% for the month. City wealth levels are below the region and state; however, housing prices remain relatively low in comparison to other large cities in the state, pointing to a lower cost of living. TAV grew by a compound annual growth rate of 5% between fiscal 2007 and fiscal 2012, although growth slowed in fiscal 2010 and then dipped 2% in fiscal 2011. The fiscal 2012 TAV indicates some stabilization with a 2.3% increase to $41.98 billion, and management anticipates similar increases for the near term. Given recent history and the relative strength of the Dallas-Fort Worth regional economy, Fitch considers this forecast reasonable.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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, Zillow.com, and the National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria