AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has taken the following rating action on Johnson County, Texas' (the county) limited tax general obligation (LTGO) bonds:
--$11.3 million LTGO bonds, series 2007 and 2010, affirmed at 'AA+'.
The Rating Outlook is Stable.
In addition, Fitch has withdrawn the 'AA+' rating on the county's LTGO refunding bonds, series 2011, as the bond was not sold.
The bonds are general obligations of the county, payable from an ad valorem tax levied against all taxable property within the county, limited by state law to $0.80 per $100 assessed valuation.
KEY RATING DRIVERS
STRONG FINANCIAL PROFILE: The high rating reflects the county's continued positive fiscal performance, high fund and cash balances, and conservative budgeting and cost management practices. Fund balance in excess of prudent policy targets is used for non-recurring items.
HEALTHY ECONOMY: The county is situated near the broad labor market of the Dallas-Fort Worth (DFW) metropolitan statistical area (MSA), access to which is being enhanced by a major highway project. Job growth coming out of the recession is strong, and unemployment and poverty rates are low.
VOLATILE TAX BASE: Taxable assessed values (TAV) are volatile and highly correlated to natural gas production and prices due to the presence of the Barnett Shale. The county's demonstrated willingness to increase its operating tax rate and competitive tax burden offset this concern to a degree, as does its high reserve levels. Taxpayer concentration in the oil/gas industry is above average.
MODERATE DEBT: Overall debt levels are moderate. Direct debt of the county amortizes rapidly and carrying costs are very low.
FISCAL PERFORMANCE: The maintenance of a balanced operating profile and high fund balance is necessary to offset the concentrated taxpayer base and volatility in TAV.
Johnson County is located directly south of Fort Worth (GO bonds rated 'AA+', Outlook Stable). The county spans 740 square miles and has an estimated population of nearly 160,000. The city of Cleburne (GOs rated 'AA-', Outlook Stable) is the county seat and principal commercial center. Other municipalities within the county include Burleson, Alvarado, Joshua, Keene, and Venus.
GROWING ECONOMY REFLECTS PROXIMITY TO DFW
The county's local employment base is diverse and residents benefit from the close proximity to the DFW metro area. The DFW regional employment base is extensive and diversified in manufacturing, wholesale trade, defense, technology, business services, education, retail, and oil and gas. The proximity to DFW and the availability of affordable land has continued to attract significant development to the county. The completion of a major highway (expected spring 2014) will provide direct access to downtown Fort Worth and supports further development potential.
The regional economy is experiencing good post-recession job growth. Johnson County's unemployment rate of 6.4% in July 2013 is down from 7.3% in July 2012 and 8.2% in July 2011, reflecting job gains above state and national norms. County job growth totaled 3.4% in the last 12-months, compared to 2.4% statewide and 1.4% nationally. Population growth is continuing at about 2% annually. Income levels are average when compared to the state and nation.
DIMINISHED NATURAL GAS PRODUCTION DRIVES TAV DECLINES
The Barnett Shale play is one of the largest natural gas fields in the U.S. It underlies much of the county and has provided significant but declining taxable resources for the county. At their peak, mineral values made up 25% of the county's TAV in fiscal 2010 but declined to 15% in fiscal 2013, triggering a cumulative TAV decline of 15% during this period. Another 7% decline in total TAV is projected for fiscal 2014. The lower mineral values are a function of historically low natural gas prices and decreased extraction activity in the Barnett Shale. Drilling and profitability has shifted to other shale plays where there are more profitable commodities being extracted (wet gas and oil) and lower population and development density issues.
Despite the value declines top taxpayer concentration in the oil/gas industry persists. The top 10 payers made up a high 17.5% of TAV in fiscal 2013. Management believes that the area mineral values have likely reached a trough. Importantly, management has raised tax rates over the last several years to mitigate the revenue impact from the declines.
SOLID FISCAL PERFORMANCE AND POSITION
The general fund realized operating surpluses from fiscal years 2008 to 2011 (after transfers) during which period the total fund balance more than doubled, and the unrestricted fund balance peaked at $26.7 million or 63% of spending. Fiscal 2012 results were again positive before considering large transfers out totaling $10.1 million to fund construction costs of an adult probation facility and prudently defease outstanding debt. These transfers resulted in a net $5.8 million draw-down on fund balance. Unrestricted general fund balance settled to $20.9 million or a still significant 37% of spending.
Officials expect to conclude fiscal 2013 with a modest surplus after transfers and fund balance to tick up to $21.5 million. The budget of $47.1 million was essentially balanced. Officials shifted a small amount of the tax rate to general operations and away from debt service given the lower annual debt service costs resulting from the fiscal 2012 defeasance.
FISCAL 2014 PROPOSED BUDGET MAINTAINS GOOD FISCAL CUSHION
County commissioners proposed a 4-cent tax rate increase (10%) in the fiscal 2014 budget to offset another TAV decline, for a total tax rate of 42-cents. The size of the tax rate increase is just under the maximum allowed without being subject to a voter referendum; the total tax rate also remains well-below the 80-cent tax rate limit.
The proposed $53.7 million budget has a deficit of $4.5 million, of which $2.5 million is to finance capital costs (construction of a sub-courthouse and vehicle and equipment replacement). Proposed expenditures also include a 1% pay increase for staff (estimated recurring cost of just under $1 million). If the deficit is realized in full, fund balance would still remain comfortably above the county's formal fund balance floor of 25% of spending. Fitch views this level of fiscal cushion as important to the high 'AA+' rating given the TAV concentration and volatility, and also views positively the county's conservative budgeting practices.
MODERATE DEBT BURDEN WITH RAPID AMORTIZATION
Overall debt levels are moderate at $3,740 per capita and 4.5% of market value. Principal amortization is very rapid with 98% of debt retired within the next 10-years. The county may issue up to $5 million of short-maturity tax notes in fiscal 2013 to fund technology improvements and purchase an automated court management system. Other capital needs will be pay-go funded and Fitch expects debt levels will remain stable for the foreseeable future. Annual debt service costs relative to the budget (excluding one-time debt defeasance) are very low at 3.2% of noncapital governmental fund spending in fiscal 2012.
The county participates in the Texas County and District Retirement System (TCDRS) for its employee pensions and is fully funding its actuarially-determined annual required contribution (ARC). The county's funded position is good at just below 80%, adjusted by Fitch to assume a more conservative 7% rate of return (the plan is 86.7% funded using its 8% rate of return). The county made changes to its other post-employment benefits (OPEB) retiree health care program in 2010 that reduced the unfunded obligation from $5.2 million to $1.8 million, a nominal 0.01% of MV. OEPB is funded on a pay-go basis. Combined carrying costs for debt service, pensions, and OPEB paygo were very low at 6.5% of fiscal 2012 non-capital governmental fund spending.
Additional information is available at 'www.fitchratings.com'.
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