AUSTIN, Texas--()--Fitch Ratings assigns a rating of 'AA-' to the following combination tax and revenue refunding bonds (the bonds) of the city of Galveston, Texas (the city):
--$11.2 million combination tax and revenue refunding bonds, series 2013A;
--$2.1 million combination tax and revenue refunding bonds, series 2013B.
The bonds are expected to price via negotiation the week of March 18, pending market conditions. Proceeds will be used to refund for debt service savings a portion of the city's outstanding COs, series 2004A and series 2004B.
In addition, Fitch affirms the following ratings:
--$53.5 million general obligation (GO) debt (pre-refunding) at 'AA-';
--$27.6 million hotel occupancy tax (HOT) revenue refunding bonds, series 2012A and 2012B at 'A'.
The Rating Outlook is Stable.
The GOs and the city's COs are secured by an annual property tax levy, limited to $.70 per $100 taxable assessed valuation (TAV). The series 2013A and 2013B bonds are additionally payable from surplus wharfage revenues. The city's COs are additionally payable from the city's surplus sanitation, water & sewer operations.
The HOT bonds are secured by a first lien on a portion of HOTs levied within the city. The HOT bonds are additionally secured by a cash funded debt service reserve fund. The HOTs securing the bonds represent 4% of all hotel room rentals in the city.
KEY RATING DRIVERS
SOLID FINANCES: The city maintains a strong financial position, with strong reserves and a return to surplus operations in fiscal 2012 after two years of deficits related to the impact of Hurricane Ike in September 2008.
TOURISM/MARITIME BASED ECONOMY: The city's economy is centered in leisure, hospitality and port operations. Expanding health services and top government and education sector employers help to stabilize the local economy.
ECONOMIC RECOVERY CONTINUES: Galveston suffered severe flooding damage during Hurricane Ike in 2008. Economic recovery continues at a solid pace, driven primarily by various infrastructure projects and ongoing development of the local tourism industry.
MANAGEABLE DEBT: The city's overall debt is moderate and its debt service burden is low. Fitch anticipates overall debt to remain moderate based on the lack of new debt issuance plans and a rapid amortization rate. Retiree costs are also manageable.
SOUND COVERAGE/HOT VOLATILITY: The 'A' rating on the HOT bonds is based on sound maximum annual debt service (MADS) coverage (over 2x). HOT revenues are subject to economic sensitivity and high concentration among top HOT contributors. However, HOT collections have demonstrated solid growth since Hurricane Ike in 2008 and sound legal provisions provide adequate bondholder protection.
SOLID FINANCIAL PROFILE: The city's debt is sensitive to shifts in fundamental credit characteristics including structural balance of the city's operations and maintenance of adequate general fund reserves.
The rating on the HOT bonds incorporates the historical level of volatility. Should actual HOT revenues exceed such volatility, pressuring MADS coverage, there could be downward pressure on the rating.
The city of Galveston is located on Galveston Island approximately 45 miles from Houston in southeast Texas. With a population of approximately 48,000 the city is the county seat of Galveston County (rated 'AA+' by Fitch, Stable Outlook).
UPPER TEXAS COAST COMMUNITY
The local economy is anchored by the Port of Galveston, healthcare, and tourism. The University of Texas Medical Branch (UTMB) anchors the city's health and education service sector, provides primary indigent health care, and serves as a teaching hospital and hub for medical research. UTMB is constructing a $438 million 13-story hospital to replace a facility damaged by Hurricane Ike; the opening is projected for 2016. UTMP employs 11,568 representing approximately 8% of the county's total employment base and a likely higher proportion of the city's base. The city's improved unemployment rate of 7.3% as of December 2012 reflects new job growth, and compares favorably to an average U.S. rate of 7.6% but continues to trail the average Texas rate of 6% for the same period.
Oil & gas, petroleum and industrial tenants rely on the Port of Galveston and nearby privately owned Pelican Island maritime and transportation infrastructure for support and cargo transport services. Infrastructure improvements are underway at both locations to support growth in maritime activity anticipated with both expanded cruise operations and the opening of the new locks in the Panama Canal in 2014.
IMPACT OF HURRICANE IKE WANING
Hurricane Ike hit the upper Texas coast in September 2008, resulting in widespread flood damage across the island. The city's population and tourism declined subsequent to the storm, but management reports that 90% of its hotel stock was undamaged due to its proximity to the seawall which extends along the city's beachfront.
Public and private support has infused over $2 billion in disaster recovery monies to the local economy since the storm on a variety of projects. Evidence of the recovery is found in the city's 16% post-hurricane tax base growth (taxable assessed value suffered a 14% storm-related decline and upward adjustments are limited to 10% annually), as well as sales tax growth averaging 5% over the past two years.
SOUND FINANCIAL PROFILE
Facing reduced population, revenue streams and service requirements in the wake of Hurricane Ike, management 'right-sized' operations through staffing reductions and other efficiencies. This prudent fiscal management and conservative budgeting enabled the city to complete fiscal 2011 with an unrestricted general fund balance of $10.3 million, representing 24.8% of expenditures and transfers out.
The city posted a net surplus of $6.3 million (15 % of spending and transfers out) in fiscal 2012 (unaudited) on the strength of sales tax revenue growth and continued cost control, aided by proceeds from the sale of nonessential city-owned property. Year-end unrestricted reserves of $16.4 million represent a solid 39.1% of spending and transfers out.
Management anticipates balanced fiscal 2013 operations based on the continuing trend of strong sales tax receipts and ongoing cost management. Fitch views the city's healthy fund balance level as a mitigating factor to its exposure to economically sensitive sales tax revenue (31% of general fund revenues) and its tourism centered economy.
MODERATE DEBT; AFFORDABLE RETIREE COSTS
The city's overall debt level is moderate at 4.6% of market value and amortization is rapid at 81% in 10 years. Management expects its capital needs will be funded predominantly with grant monies and remaining bond proceeds over the near term.
The city sponsors three single-employer defined benefit pension plans for city employees, firefighters and police, and acts as a conduit for the provision of retiree health care benefits (at the retiree's cost). Pension funded rates are adequate for the city employee plan, but underfunded for the police and firefighter plans (47.6% and 65.5% respectively, based on Fitch's more conservative 7% investment rate assumption. Fitch notes that the funding rates are premised on an actuarial assumption for projected salary increases which exceeds those currently in place and anticipated in the near term. The city's carrying cost including annual debt service, pension and other post-employment benefit contributions represent a low 7.6% of fiscal 2011 governmental spending net of capital project fund expenditures.
RISING HOT COLLECTIONS, SOUND DEBT COVERAGE; CONCENTRATED TAXPAYERS
Fiscal 2012 HOT collections are a strong 17% above fiscal 2011 reflecting continued improvement in the tourism sector. HOT collections have grown at a sound compound annual growth rate of 3.8% over the past five years ending in fiscal 2012, with higher growth of 13.6% since fiscal 2009.
Fiscal 2013 HOT debt service of $1.9 million is covered 2.8x by the most recent 12 months of HOT collections through January 2013. Projected debt service coverage of maximum annual debt service (MADS) ($2.3 million) is healthy at 2.4x based on the most recent 12 months of HOT collections through January 2013. The debt service coverage of MADS performs well under a variety of Fitch stress test scenarios. Fitch notes MADS coverage would remain at 1.0x assuming a decline in HOT revenue of 58% or more than two times the actual revenue decline following Hurricane Ike.
Legal provisions are satisfactory and include an additional bonds test (ABT) of 1.5x MADS and a standard cash funded debt service reserve fund requirement. Additional leveraging to the ABT requirement, though not anticipated, would likely contribute to negative action on the rating.
HOT revenues are concentrated in the top hotel tax generators; the 10 largest account for 65% of pledged revenue in the city. While the top HOT generator (Moody Garden Hotel) contributes 20% of pledged revenues, the presence of its adjoining 140,000 foot convention center lends a degree of stability to the current concentrated stock. Management reports new hotels under construction and additional planned for the near term. Fitch considers the strong coverage and broadening hotel base as mitigating factors to current high concentration.
EXPANDING TOURISM AND HOSPITALITY
The city's burgeoning cruise business is the country's 6th largest, estimated to bring more than 100,000 visitors a year to the island through the Port of Galveston. The port serves as a home to the Carnival Magic, Triumph, the Disney Magic, and most recently the Princess Cruises' Crown Princess cruise ships. The city does not anticipate an adverse impact on local tourism from the recent and widely reported mechanical failure of the Triumph and expects the ship to return to service in mid-April 2013.
The Pleasure Pier on the city's beachfront leverages the attraction of the city's shoreline and is expected to draw 3 million visitors annually. The pier represents a $60 million redevelopment investment by Landry's Inc. in dining, attractions, retail and parking. The city's seawall beautification project is expected to draw additional visitors to the island as well.
The Galveston Island Convention Center (140,000 square feet of meeting and convention space) is located on the beachfront and is supplemented by the Moody Garden complex (over 100,000 square feet of combined meeting space). The city's center reports an increase in conventions/meetings scheduled for 2013.
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, 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