AUSTIN, Texas--()--Fitch Ratings takes the following rating actions on Grand Prairie, Texas (the city):
--Assigns 'AA+' to $11.26 million limited tax general obligation (LTGO) refunding and improvement bonds, series 2013;
--Assigns 'AA+' to $11.7 million combination tax and revenue certificates of obligation (COs), series 2013;
--Assigns 'AA' to $11.53 million sales tax revenue refunding bonds, series 2013.
The bonds are scheduled to sell on March 19 via competition.
Proceeds of the LTGOs and COs will be used to refund outstanding debt for interest savings and for street, park, and municipal facility improvements. The sales tax bonds will refund all outstanding senior lien sales tax bonds for interest cost savings.
In addition, Fitch affirms the following ratings:
--$143.3 million in LTGOs and COs at 'AA+';
--$11.6 million in sales tax revenue bonds at 'AA'.
The Rating Outlook is Stable.
SECURITY
The LTGOs and COs are secured by and payable from a limited ad valorem tax levied against all taxable property within the city. The COs are further secured by a limited, de minimus pledge ($2,500) of the net revenues of the city's water and wastewater system.
The sales tax bonds are secured by a senior lien on the 1/4-cent sales and use tax, authorized in perpetuity for the city's parks and recreation system. The bonds have a springing debt service reserve that will only be funded in the event maximum annual debt service (MADS) coverage of the parity bonds falls below 1.50x.
KEY RATING DRIVERS
STRONG, RESILIENT ECONOMY: The city of Grand Prairie is located in the heart of the broad and resilient Dallas-Fort Worth (DFW) metropolitan area. Residents benefit from easy access to an expansive employment market via the major transportation corridors that run through the city.
DIVERSE RESOURCE BASE: The city's tax base is diverse. Taxable assessed value (TAV) has contracted slightly in recent years but Fitch believes prospects for resumed growth in the near term are favorable given some ongoing development, highway expansion projects, and the strength of the regional economy.
SOUND FISCAL PROFILE: Sound management practices and policies have preserved the city's strong financial profile. General fund reserves and liquidity are robust and the city has prudently continued its pay-go approach to capital spending.
ELEVATED DEBT BURDEN: Overall debt levels are high, due primarily to the debt of various overlapping school districts. Future capital needs will require debt funding but the budget impact should be mitigated by the rapid pace of amortization of existing debt.
IMPROVED PENSION FUNDING: Unfunded pension liabilities are manageable, having declined due to the city's full funding of its required annual contribution as well as system-wide structural and actuarial changes.
ADEQUATE LEGALS; SOUND COVERAGE: The sales tax bond rating reflects weak legal provisions including a 1.25x additional bonds test (ABT) and a springing debt service reserve fund. Fitch expects debt service coverage to remain sound given historical revenue trends, absence of further leveraging plans, and need for residual revenues to pay subordinate lien debt and support park operations.
RATING SENSITIVITIES
The rating is sensitive to shifts in fundamental credit characteristics, including the city's strong financial management practices and sound coverage of the sales tax bonds. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
CREDIT PROFILE
The city of Grand Prairie encompasses a narrow, 80 square mile stretch of land in the center of the DFW metroplex, directly between the two major cities and just south of DFW International Airport. Population growth is continuing and is currently estimated at over 179,000, up 40% from 2000.
STABLE ECONOMIC BASE CENTRALLY LOCATED IN THE DFW METROPLEX
Defense, manufacturing, aerospace, and distribution are major components of Grand Prairie's economy and are complemented by a retail and entertainment presence. The city's economy is buoyed by its location in the heart of the DFW metroplex and easy access to major air and ground transportation routes.
The city's employment picture is positive, with both employment and labor force growth in the last 12-months improving the December 2012 unemployment rate to 6% from 7.1% in December 2011. The most recent figure is on par with the state and below the national average (7.6%). Residents also benefit from access to the broad and diverse employment market of the greater DFW MSA, which has outpaced the nation in job growth since 2009. Wealth indicators are slightly below average.
SLUGGISH TAX BASE PERFORMANCE
TAV has fallen about 4% below the peak fiscal 2009 TAV, reflecting slightly lower residential and flat commercial/industrial valuations. Year-to-year TAV performance has been uneven, expanding 1.7% in fiscal 2012 but contracting very slightly in fiscal 2013. Residential and commercial permits dropped sharply in 2007 as a result of the national recession but have since strengthened, up 40% in 2011 and 15% in 2012.
Commercial development along recently completed highway connections has been anticipated for some time, and the first major facility, a Restoration Hardware distribution center, recently broke ground. Officials expect development along new highway access roads as well as positive reappraisals to support some growth in TAV over the near term. Management actively promotes economic development and has spurred investment through the city's three diverse tax increment financing (TIF) districts.
STABLE FINANCIAL PROFILE WITH SOME BUDGET FLEXIBILITY
The city's finances are well-managed. Property and sales taxes are the leading sources of general fund revenue at 44% and 22%, respectively, in fiscal 2011. Declines in both revenue streams in fiscal 2010 were managed through spending cuts while the city prudently continued to make pay-go contributions for capital items and maintain strong reserves. Conservative budgeting in fiscal 2011 resulted in a very small net operating deficit after transfers of 0.25% of spending, in contrast to the larger $3.3 million deficit originally budgeted. General fund balance, all of which is unrestricted, was $30.6 million or 32% of spending in fiscal 2011.
The fiscal 2012 budget was balanced on a recurring basis but appropriated $7.5 million of fund balance for capital purposes and early retirement of debt. However, unaudited results (Sept. 30 fiscal year) show a much smaller drawdown of $2.7 million, largely due to growth in revenues and under-spending of the operating budget. Unaudited fund balance declined but remains very strong at 28% of spending, comfortably above the city's unreserved fund balance policy floor of 50-60 days of expenditures (15% of total annual expenditures).
The fiscal 2013 budget increases spending 3.6% from the 2012 amended budget to provide a 2.5% pay raise to staff and absorb increased premiums for health insurance. Revenue assumptions appear realistic. Commensurate with past budgets, the city appropriated fund balance above its policy floor ($5.7 million) for non-recurring items, including $3.2 million to capital funds, $1 million to an employee insurance fund, and the remainder for one-time supplemental pay. Given a positive year-to-date revenue trend, Fitch believes the city will again significantly reduce the forecast drawdown. Fitch also notes that the city retains some expenditure flexibility, as the capital transfer totaling $3 million (3% of the fiscal 2013 budget) could be reduced, deferred, or eliminated if needed.
ELEVATED DEBT BURDEN
Overall debt levels are high at $5,060 per capita and 8.0% of full market value. The elevated debt levels are primarily attributable to the debt of various overlapping school districts. Outstanding direct debt of the city consists of GO bonds, COs repaid from general property tax and tax increment district revenues, and sales tax bonds. The city has above-average variable-rate exposure totaling what Fitch considers to be a high 28% of outstanding debt. However, the variable-rate exposure does not impact general government operations or debt service coverage on the senior-lien sales tax bonds. Early retirement of some of the variable-rate obligations should reduce the presence of this risk over time.
Tax-supported debt service consumed an above-average 17.7% of governmental fund spending in fiscal 2011. This calculation excludes capital projects fund spending and the portion of debt management prudently retired early. The higher carrying cost also reflects the rapid pace of amortization (81% retired in 10 years).
With approximately $106 million planned in tax-supported debt issuances in fiscal years 2013-2017, debt ratios will likely remain elevated. However, Fitch believes the debt burden will remain manageable given the city's prudent fiscal management, favorable prospects for tax base growth, and rapid debt retirement.
WELL-FUNDED PENSIONS
Pensions are provided through the Texas Municipal Retirement System (TMRS), an agent-multiple-employer plan. The city has consistently made 100% of the annual required contribution (ARC). Recent legislative restructuring to system-wide actuarial assumptions and fund balance reporting produced improvement in the vast majority of TMRS' participating entities, and for Grand Prairie, reduced its unfunded liability by 33% from 2009 to 2010. Fitch views the city's pension funded position as adequate at 81.9% using the system's 7% investment return.
Other post-employment benefits are funded on a pay-go basis. The unfunded liability for the city' OPEB totaled a nominal 0.25% of full market value (MV). Combined fixed costs for debt service, pension ARC, and OPEB pay-go totaled a high 24% of governmental fund spending in fiscal 2011.
STRONG COVERAGE OF SALES TAX BONDS
The sales tax refunding bonds carry a senior lien and will refund all existing senior lien bonds for annual interest cost savings. The city also has one series of subordinate lien bonds that will remain outstanding. Historical coverage of the senior lien bonds by the pledged 0.25% sales tax revenues has been strong; fiscal 2011 audited revenues covered MADS 3.6x. The city does not currently anticipate leveraging down to the 1.25x ABT for parity bonds.
The pledged sales tax revenues declined by a cumulative 6.4% in fiscal years 2009 and 2010 but ticked up 3.4% in fiscal 2011. Cash-basis receipts (unaudited) for fiscal 2012 show stronger growth of 10%. Sales tax revenues should further benefit from the recent opening of a 100-store outlet mall (Paragon Outlets), which will generate its first full year of sales taxes in fiscal 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, and the Texas Municipal Advisory Council.
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
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