AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings affirms the ratings on the following Princeton, Texas obligations:
--$1.12 million series 2007 general obligation (GO) refunding bonds at 'A-';
--$7.75 million series 2007 combination tax and surplus revenue certificates of obligation at 'A-';
The Rating Outlook is Negative.
The bonds and COs are direct obligations of the city payable from ad valorem taxes limited to $1.50 per $100 of taxable assessed valuation (TAV). The COs are further secured by a pledge of surplus net revenues of the city's water and sewer system.
KEY RATING DRIVERS
DIMINISHED RESERVES: The Negative Outlook reflects the trend of operating deficits in recent years, culminating in a negative general fund balance at the close of fiscal 2011. Although unaudited, the city reports a fiscal 2012 net operating surplus which reduces the negative reserve position, and hopes to restore a positive fund balance in fiscal 2013.
INCREASED TAX RATES: The fiscal 2013 budget includes an increased ad valorem tax rate (the first since fiscal 2009) to increase funding for maintenance and operations; increased water service rates are also included in the budget.
SLOWED TAX BASE GROWTH: The region's pre-recession residential construction boom generated significant appreciation in Princeton's largely residential tax base, although growth in the city's TAV has slowed considerably in the past several years as the housing market softened.
ABOVE AVERAGE DEBT: Princeton's moderately high overall debt reflects the historically rapid growth needs of the city and local school district, offset to some extent by above average income levels.
WHAT COULD TRIGGER A RATING ACTION
FUND BALANCE ADEQUACY: The city's inability to replenish unrestricted general fund balances to levels that provide adequate operating flexibility and financial cushion likely would result in negative rating action.
NORTH DALLAS SUBURBAN COMMUNITY
Princeton's population almost doubled over the past decade as the residential construction boom moved north from Dallas into Collin County. Although development slowed in 2008, the city's population continued to grow at an average rate of more than 5%, with many residents commuting to Dallas and nearby suburbs for employment.
The city's tax base fared relatively well throughout the recession, with double digit growth rates giving way to small incremental gains in TAV as development slowed over the past three years. Fiscal 2012 TAV totaled $284 million, essentially unchanged from the prior year. Residential property comprised 67% of fiscal 2012 market value, with commercial & industrial property contributing 12%.
Officials believe that the city's affordable and available land, as well as public investment in regional roadway projects, utility / municipal infrastructure, and local school district facilities positions the city for future growth. The city expects the nearly completed expansion of Highway 380 (to four lanes) through the city's downtown to further benefit local merchants. Fitch notes that the addition of retail business in fiscal 2011, as well as increased fiscal 2012 permitting activity likely will contribute to further gains in the district's tax base and sales tax collections.
FINANCIAL DEFICITS & GROWTH CHALLENGES
The city's revenues have been absorbed by spending to meet pent up growth-related needs over the past five years, as reflected in recurring deficits through fiscal 2011. These losses brought the unrestricted general fund balance to negative $254,000 (3% of general fund expenditures and transfers out). The fiscal 2011 net deficit of $4.2 million (50% of spending and transfers out) resulted primarily from a transfer ($3.8 million) of bond proceeds to the capital projects fund for city infrastructure improvements.
Unaudited fiscal 2012 results indicate a $205,000 net operating surplus due to higher revenues and cost controls; the improvement is expected to shrink the unrestricted general fund balance deficit to negative $39,000. Contributing to higher revenues were sales tax collections (up 21.6% year-over-year), higher permit revenues, a modest increase in ad valorem tax receipts, and the benefit of a one-time $159,000 FEMA grant for the fire department. The operating surplus was aided by a centralized requisition approval process implemented by the new city manager which helped to rein in spending.
The city projects a fiscal 2013 general fund operating surplus similar to that estimated for fiscal 2012, which Fitch considers feasible based on the budget's conservative assumptions, sales tax trends, the increased ad valorem tax rate, and continued cost controls. Fitch notes the city's ad valorem tax rate is above average for Texas municipalities, which could limit further increases.
ABOVE AVERAGE DEBT
Overall debt is above average at 5.2% of market value despite state support for overlapping school district debt and support for direct city debt by the utility system. GO debt amortization remains below average with 36.8% of principal scheduled for repayment within 10 years. The city does not expect to issue debt in the near term.
Ongoing support from the utility fund for a portion of the city's GO debt service has pressured utility fund balances over the past several years. Fitch notes that a series of water and sewer rate increases has improved the ability of the utility system to make these GO debt transfers. Management reports that rate sufficiency is reviewed each year, and that there are no planned rate increases beyond fiscal 2013, except for pass-through costs.
The city's pension plan is provided through the Texas Municipal Retirement System, a multiple employer public employee retirement system; the city's plan had a fiscal 2011 funded position of 88%, based on the TMRS investment rate assumption of 7%.
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, 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
U.S. Local Government Tax-Supported Rating Criteria