AUSTIN--(BUSINESS WIRE)--Fitch Ratings has affirmed its 'BBB' rating on the following Robstown, Texas (the city) limited tax bonds:
--$505,000 limited tax general obligation (LTGO) refunding bonds, series 2003;
--$1.2 million combination tax and limited pledge revenue certificates of obligation (COs), series 2003.
The Rating Outlook is Negative.
The GO and COs are secured by an annual property tax levy limited to $2.50 per $100 taxable assessed valuation (TAV). The COs are additionally secured by a de minimis pledge of net revenues of the city's utility system.
KEY RATING DRIVERS
WEAK INTERNAL CONTROLS: The Negative Outlook primarily reflects risk associated with the city's weak internal controls. Management's cited cause of a de minimis partial missed interest payment in 2012 as an administrative error appears reasonable given the adequacy of cash balances to make the payment at and around the time of the delay. Management has outlined steps taken to improve its accounting practices, but Fitch is skeptical about timely implementation given the persistence of audit findings and late release of the 2012 audit.
FINANCES STILL WEAK; AUDIT MEETS PROJECTIONS: The affirmation reflects the city's release of its 2012 audited financial results that are slightly better than management's interim projections. The positive results follow a large deficit in fiscal 2011 that varied significantly from the budget and management's interim forecasts. General fund reserve and liquidity levels remain quite low.
UNCERTAINTY ABOUT FUTURE BUDGET PERFORMANCE: Balanced operations that leave low general fund reserves intact are forecast by the city for fiscal years 2013 and 2014. Budgets are benefitting from strong growth in tax revenues and stable, continued revenue transfers from the city's utility fund. The Negative Outlook reflects Fitch's concern over the city's ability to meet projections given its uneven track record of budget-to-actual results.
SALES TAX DEPENDENCE: The general fund relies heavily on economically volatile sales taxes. This revenue stream has increased significantly due to economic activity from natural gas drilling in the area.
LIMITED RESOURCE BASE: The city's population is small, the tax base is concentrated, and wealth levels are below average. Some commercial development is occurring but the overall economy is limited.
HIGH DEBT BURDEN: The city's debt profile is characterized by a high overall burden relative to its tax base. This ratio will remain elevated given the city's debt issuance plans.
FISCAL TREND: The city's fiscal performance will be key to the direction of the rating. A decline in the city's still negligible liquidity and fund balance position could trigger another downgrade.
UTILITY FUND OPERATIONS: The utility system's willingness and ability to continue subsidizing city general operations is key to the city's fiscal health and Rating Outlook, absent replacement revenues or equivalent spending cuts.
Robstown is located in Nueces County about 15 miles northwest of downtown Corpus Christi. The estimated 2012 population of 11,618 has changed little in the last two decades.
FINANCIAL POSITION REMAINS WEAK; 2012 SURPLUS A POSITIVE STEP
General fund operations yielded a $0.3 million surplus (after transfers) in fiscal 2012, equivalent to 3.4% of spending. Audited results are slightly better than management's interim forecast due to under-spending of the budget and robust growth in sales tax receipts, which exceeded budget by 9%. Sales tax revenues make up a substantial 30% of general fund revenues.
The positive variance from management's mid-year projections is a key credit consideration for Fitch. The satisfactory results come on the heels of a large $0.4 million (5% of spending) deficit in fiscal 2011, unanticipated by the city and significantly divergent from budget and mid-year projections.
The deficit was caused by increased spending, aggressive revenue assumptions and a downward audit adjustment to fund balance; reversing generally positive results in fiscal years 2007-2009. The cumulative effect of the deficit and accounting adjustment was a 70% reduction in the fiscal 2011 fund balance to $0.26 million or a thin 3.1% of spending, from a comparatively healthy 11.5% of spending in fiscal 2010.
The fiscal 2012 surplus bumped up fund balance to $0.5 million which represents a still low 6.5% of spending. Liquid general fund assets covered current liabilities only 0.4x current liabilities or a slim 17 days of operating costs.
The city just concluded its 2013 fiscal year (Sept. 30) and is forecasting a small surplus similar to fiscal 2012 results. The budget added staff and included more reasonable revenue assumptions overall. Sales tax revenues (unaudited) increased 17% from year-to-year and 10% from the budget. Fitch remains cautious about the city's forecasts given the large variance in fiscal 2011, although the fiscal 2011 adjustments appear to be one-time in nature with similar items not evident in 2013 unaudited statements.
The fiscal 2014 budget of $9.8 million is balanced. Revenue assumptions included flat sales tax revenues relative to actual cash receipts in 2013, an 11.5% increase in property tax revenues reflecting robust TAV growth, and a utility fund transfer, stable since 2008.
The balanced projections for 2013 and 2014 are positive. However, the city's continued ability to meet budget projections and restore its fund balance is key to the direction of the rating and long-term credit quality. Fitch views a higher fund balance as a necessary mitigant to the city's small overall budget size and exposure to economically sensitive sales taxes, a portion of which are derived from cyclical oil and gas activities. Material divergence from current budget forecasts would likely trigger another downgrade.
CITY REMAINS RELIANT ON NET REVENUES OF THE UTILITY SYSTEM
The city's combined electric, water, and gas utility system supports general city operations through annual transfers totaling $850,000 or 10% of fiscal 2012 general fund revenue. The monthly transfers were initiated in fiscal 2008 to support the fiscal health of the city and are annually appropriated in the system's budget. A retrenchment of this transfer would likely have a negative credit impact absent a replacement revenue source or substantial spending cuts.
The system is governed by a five-member board that is independent of the city council, with the exception of joint-membership of the mayor. The system's board is charged with governing the system's day-to-day operations and approving the annual budget and transfers, but the power to approve utility service rates rests with city council. The system and the city's payer base are essentially coterminous.
The system demonstrates ample capacity for continued assistance due to its limited debt obligations and positive operating margins that produced $1.5 million in net revenues after debt service (before transfers) in fiscal 2012.
SUBSTANDARD FINANCIAL AND REPORTING PRACTICES
Fitch remains concerned about a trend of weak management practices. The city's auditor provided unqualified opinions on the fiscal 2011 and fiscal 2012 audits but cited several material weaknesses and significant deficiencies regarding internal controls. The finance director, who began in March 2012, has reportedly tightened monitoring of accruals and cash balances and has implemented new financial software (Incode) in an effort to improve monitoring and reporting practices.
The city cited internal control deficiencies as the reason for a 12-day delay in a $7,747 interest payment to bond holders in September 2012. The city's total interest payment due Sept. 1, 2012 was $165,384, and all but $7,747 was on-time. Several factors caused the delay: the late interest payment had a different paying agent than the balance of interest paid, and the invoice was not received by the city due to an incorrect address.
Fitch's review of cash balances prior to and after the payment due date revealed sufficient cash was on-hand to make this payment timely. While Fitch is comfortable that the missed payment was an administrative error, it highlights the concerns over management practices.
HIGH DEBT BURDEN BUT AFFORDABLE ANNUAL CARRYING COSTS
Overall debt relative to the city's full market value (MV) is extraordinarily high at 19%. This debt calculation includes as direct debt a $5 million federal loan for a new city hall, to be secured this year, and outstanding sales tax debt held by the city's economic development corporation, as well as the significant overlapping debt of the Robstown school district (without consideration for state support). Debt ratios will likely remain elevated relative given the slow pace of amortization. However, annual debt service is affordable, consuming only 5% of governmental fund spending in fiscal 2012.
The city's pension plan, provided through the Texas Municipal Retirement System, recorded a sound funded position of 93% as of Dec. 31, 2012. Other post-employment benefits are limited to supplemental death benefits in the form of one-year salary. Carrying costs for debt service and pensions totaled a manageable 7.4% of governmental fund spending in fiscal 2012.
LIMITED BUT STABLE ECONOMY
Robstown's local economy is limited, but the city's proximity to Corpus Christi (estimated population of 312,000) and the area's petroleum and chemical refineries provide residents with more abundant employment opportunities. The employment picture has also benefited from the robust drilling activity in the Eagle Ford shale, a large oil and gas shale play spanning south Texas that stretches just north of the city. The Nueces County unemployment rate in July 2013 was a low 6%, down from 6.8% in July 2012 due to strong 3.1% employment gains.
Robstown also benefits from its location at the intersection of two major gulf coast surface, port, and rail corridors. The city's tax base has continued to expand given the addition of small to medium manufacturing concerns. TAV has increased by a strong 6.6% compound average growth rate since fiscal 2008 and gained 11.5% for fiscal 2014, allowing management to reduce the tax rate to $0.86 from $0.96 per $100 of TAV. Fitch views the growth cautiously as some of the development is likely driven by inherently cyclical oil and gas activity. Also, the construction of an 83-store outlet mall recently commenced (July 2013). Much of the mall's value will be temporarily abated for city tax purposes but the project should add jobs and may spur some related development.
Wealth indicators further reflect the limited nature of the economy. Residents' median household and per capita money income levels equal only 62% and 54% of the nation respectively, while the poverty rate is double the nation's. Per-capita market value, also a measure of tax base wealth, is a low $37,000 in fiscal 2014.
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