AUSTIN, Texas--()--Fitch Ratings affirms the underlying rating on Azle, Texas' (the city) outstanding limited tax debt as follows:
--$3.4 million in outstanding general obligation (GO) bonds at 'AA-';
--$5.1 million in outstanding certificates of obligation (COs) at 'AA-';
--$385,000 in outstanding tax notes at 'AA-'.
The Rating Outlook is Stable.
The GO bonds, COs, and tax notes are secured by a limited ad valorem tax pledge of the city, not to exceed $2.50 per $100 of taxable assessed valuation (TAV). The COs are additionally secured by a nominal pledge of surplus net revenues (limited in amount to $1,000) of the city's waterworks and sewer system.
KEY RATING DRIVERS
STABLE FINANCIAL PROFILE: The city maintains its sound financial position and solid reserves in line with historic trends, well above adopted policy levels. Conservative spending and budgeting practices typically enable financial performance that modestly exceeds budget.
ECONOMIC PROSPECTS FAVORABLE: The city's commuting proximity to the larger Dallas-Fort Worth metropolitan statistical area (MSA) economy and employment base offsets risk to the city's limited economic presence. Fitch believes further residential and attendant retail/commercial expansion within city limits appears reasonable over the intermediate-term. However, it will remain tempered by the city's small size and dependent on the pace of the housing market.
STAGNANT TAX BASE: Taxable assessed valuation (TAV) trends have been generally flat since the recession primarily due to a weaker housing market and low natural gas prices. The tax base has historically experienced healthy rates of growth. Sales tax trends are likewise stable, but remain below pre-recessionary levels.
DEBT AND OTHER-LONG TERM LIABILITIES MODERATE: Overall debt levels remain modest despite the area's population expansion and recent TAV trends. Amortization of the city's tax-supported debt is rapid. Management has no near-term debt plans and capital needs appear moderate, assisted by pay-go spending. Carrying costs are manageable.
The city's strong financial position serves to offset a limited tax base and some reliance on economically sensitive revenues. Material deterioration is considered unlikely by Fitch given management's historical financial performance and adherence to conservative financial practices & policies.
The city of Azle is located primarily in Tarrant County, 17 miles northwest of downtown Fort Worth. Historically an agricultural economy, housing development in the city (which has since significantly slowed post-recession) has led its transition into a bedroom community for the Dallas-Fort Worth MSA. The city remains a small community, encompassing roughly 8 square miles and about 11,000 residents despite previously solid annual population and tax base growth. Income/wealth metrics are mixed but generally slightly above average. More recently, the city has benefited from its geographic location over workable portions of the Barnett Shale formation, one of the largest natural gas fields in the U.S.
TREND OF STABLE FINANCES
The city's historically stable financial profile is a key credit strength. Strong reserves and liquidity provide the city with significant financial flexibility. Since fiscal 2006, general fund unreserved/ unrestricted reserves have been no less than 42% of spending, well in excess of the city's adopted policy to maintain reserves at 120 days or about 33% of spending. Property taxes provide approximately half of the city's general operating revenues, followed by sales taxes that contribute about 25%. The city's property tax rate ($0.65 per $100 TAV) is considered moderately high by Fitch, reflecting recent increases to offset valuation declines, but the sales tax rate of 1.5% is below the 2% maximum rate allowed by state law and typical for most Texas cities.
The city has consistently generated modest operating surpluses over the last six fiscal years, assisted by management's conservative financial practices that include long-term planning efforts and continued attention to cost control. For fiscal 2011, the city modestly outperformed budgeted expectations with a $260,000 addition to reserves, boosting the unrestricted general fund balance to $4.1 million or about 61% of spending. Liquidity strengthened in fiscal 2011 as well with general fund cash and investments totaling $4 million or slightly over 7 months of general operational spending at year-end. Management anticipates adding a very modest $65,000 to reserves at fiscal 2012 year-end.
The fiscal 2013 adopted operating budget reflects a modest drawdown of $145,000 for one-time capital spending; general fund spending remained fairly flat at $7.35 million. Year-to-date operations are reportedly running in line with budget; break-even to modestly positive operating results are anticipated.
UNEMPLOYMENT DOWN ALTHOUGH TAXABLE VALUES REMAIN STALLED
The expansion of affordable housing and attendant retail/commercial development led to solid TAV gains for the city before the recession. However, TAV has since registered a trend of modest decline to flat growth over the past four fiscal years (2010 - 2013), largely due to recessionary pressures on the housing market as well as reduced natural gas values. TAV totaled $631 million in fiscal 2013. Near-term projections anticipate this recently flat trend to continue in fiscal 2014, which Fitch believes is reasonable given the very low levels of new development reported.
The tax base is predominately residential and market value per capita is relatively modest at about $70,000. The top ten taxpayers contribute a moderate 9.5% of TAV, led by Wal-Mart at 3%. Some economic strengthening since the end of the recession is evident with a year-over-year decline in unemployment. At 5.6% in November 2012, county unemployment levels were down from 7.1% in November 2011, falling slightly below those of the MSA and state (5.8%), but well below the nation's rate of 7.4%.
MODERATE LONG-TERM LIABILITIES
The city's debt profile is favorable. Overall debt levels are modest despite the area's population gains and recent property valuation declines at about $1,500 per capital and 2.2% of market value. The city's capital needs have remained manageable due in part to typically annual pay-go capital spending that is supported by a dedicated 0.25% sales tax levy for streets as well as some gas royalty revenues. The city's debt profile is fully comprised of fixed-rate debt. Amortization of the city's tax-supported debt is rapid with roughly 75% of principal retired in 10 years. The city has no remaining bond authority or other near-term debt plans.
The city's pension plan is through the Texas Municipal Retirement System (TMRS), a statewide agent multiple-employer plan. The city has paid a high (86%) portion, but not the full 100% of its annual pension costs (APC) for fiscal years 2009-2011. Like many other Texas cities, this was done by design as part of an 8-year phase-in of increased annually required costs with TMRS. Fitch considers the city's funded position satisfactory at 78.3% and at $3.2 million as of Dec. 31, 2011, the unfunded accrued actuarial liability (UAAL) totaled less than 1% of market value.
Other post-employment benefits (OPEB) offered by the city include an implicit rate subsidy for health insurance coverage for retirees. The city funds OPEB on a pay-go basis that covers a high (89.4%) but not full 100% of the actuarially determined annual OPEB costs. Carrying costs for the city (debt service, pension, OPEB costs) totaled a manageable 17.3% of governmental spending in fiscal 2011 that would rise slightly if APC and the annual OPEB cost were fully funded that year.
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, LoanPerformance, Inc., and IHS Global Insight.
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