Fitch Rates Carrollton, TX's LTGOs 'AAA'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned an 'AAA' rating to the following Carrollton, Texas (the city) bonds:

--$18.49 million limited tax general obligation (LTGO) improvement bonds, series 2014.

The bonds are scheduled for competitive sale the week of April 28. Proceeds will be used for street, traffic, drainage, parks, public safety, and central service center improvements.

In addition, Fitch affirms the 'AAA' rating on approximately $172.8 million in outstanding GO improvement bonds.

The Rating Outlook is Stable.

SECURITY

GO improvement bonds are secured by a limited ad valorem tax pledge of $2.50 per $100 taxable assessed valuation (TAV) levied against all property within the city.

KEY RATING DRIVERS

DIVERSE ECONOMY: The city's economic base is diverse, led by large manufacturing and distribution concerns and complemented by healthcare and technology. Carrollton's economic base also benefits from its location within the fundamentally strong Dallas-Fort Worth (DFW) metro economy.

GOOD SOCIOECONOMIC INDICATORS: Residents' income and educational attainment levels are above state and national norms and the area continues to register strong job and labor force growth.

SOUND FINANCIAL POSITION: City finances are well managed, characterized by the maintenance of solid financial reserves over a sustained period of time, ample liquidity, strong management practices, and adherence to prudent fiscal policies.

STABILIZED TAX BASE: Assessed values of the city have been somewhat vulnerable to the recession, but TAV recently resumed growth - providing stability in property tax revenues and debt affordability without pressuring tax rates.

MODERATELY HIGH DEBT BURDEN: Overall debt levels on a per capita basis are considered above average by Fitch but debt is retired swiftly. Future capital needs are manageable, but Fitch expects continued direct and overlapping debt issuance will keep city debt ratios elevated.

RATING SENSITIVITIES

The city's exemplary 'AAA' rating is most vulnerable to changes in its debt metrics and financial performance. The Stable Outlook reflects Fitch's opinion that such changes are unlikely.

CREDIT PROFILE

Carrollton is located northwest of Dallas along Interstate 35 East, in parts of Dallas, Denton, and Collin counties in the DFW metroplex. The estimated 2013 population is approximately 122,280, an 11% increase from 2000 census levels.

DALLAS SUBURB WITH STRONG SOCIOECONOMIC PROFILE

Carrollton is accessible by three major highways and is home to a number of manufacturing, distribution, and service concerns, and serves as the national or regional headquarters for several companies.

The city's labor force exhibits educational attainment above the national standard as measured by the proportion of residents possessing a four-year college degree. Residents' income levels, as measured by per capita income, are about 23% above the state average and 13% above the national average. Full value per capita of the city is strong at $98,000 but slightly below the median for 'AAA' peers.

Employment in Carrollton contracted during the recession but is now in its fourth consecutive year of growth. Strong employment growth of 2.8% in 2013 reduced the unemployment rate to 5.6%, down from 6% in 2012 and below the state and U.S. averages.

DIVERSE TAX BASE; TRANSIT-ORIENTED DEVELOPMENT CONTINUING

The city's tax base is comprised of about one-half residential and one-fourth each commercial and industrial properties. Assessed values were not immune to the economic downturn and contracted modestly in fiscal 2011 and 2012; however, fiscal 2013 and 2014 TAV rebounded moderately, climbing by a cumulative 7.3%. Notably, Zillow's February home value index shows a 7.8% year-over-year increase for the city. Management conservatively expects modest 1%-2% TAV growth in fiscal 2015, although building permit trends indicate higher growth is likely.

In addition, development around three Dallas Area Rapid Transit (DART) light-rail stations located within the city is continuing. Carrollton's multiple rail lines are expected to facilitate the city's transition to becoming one of three mass transit rail hubs in the DFW metroplex.

SOUND FINANCIAL PROFILE BUILT ON PRUDENT MANAGEMENT PRACTICES

Prudent financial policies, conservative budgeting practices, and a responsive management team underpin the city's strong financial profile. Unrestricted/unreserved general fund balance has remained at or above 20% of spending for several years, despite revenue pressure stemming from the economic downturn and modest fund balance draw-downs for pay-go capital needs.

The city relies significantly on property and sales tax (approximately 37% and 29% of revenue, respectively) to fund operations, and both revenue streams demonstrated some weakness from fiscal years 2009-2011, resulting in lower total revenues. However, management reduced expenditures during this period through a combination of furlough days, layoffs, a pay freeze for non-civil service personnel, careful monitoring of hiring, and departmental efficiencies.

POSITIVE RESULTS IN 2013; REVENUES REBOUNDING

Fiscal 2013 operations yielded level results after transfers, resulting in an unrestricted general fund balance of $18.4 million or a solid 21% of spending. Notably, the city increased the level of transfers out for capital expenditures in fiscal 2013(by $2.1 million or 30% from the prior year) while still generating balanced results.

Such transfers were increased by 50% in the previous year, and they represented a sizable 8%-10% of budgeted outlays these past two years. Management budgets reserves in excess of its formal 60-day fund balance floor for one-time and/or capital initiatives. The increased transfers in fiscal 2013 were supported by solid sales tax revenue growth of 5.9% year-over-year, which more than offset operating expenditure growth (before capital transfers) of 4.8% over fiscal 2012 spending levels.

In recognition of the growth in sales tax revenues and the greater economic sensitivity of this revenue stream relative to other revenue sources, management formally capped the level of sales taxes that are permitted to be used for general fund purposes. This new policy requires sales tax revenues in excess of this cap to be transferred out of the general fund and used for non-recurring purposes. The fiscal 2014 cap of $23.7 million, to be adjusted annually for inflation, is slightly larger than audited receipts of $23.3 million in fiscal 2012. Fitch views this as a prudent budgeting strategy.

OPERATING SURPLUS EXPECTED IN FISCAL 2014

The adopted fiscal 2014 budget includes a manageable 4.9% increase in the level of recurring general fund expenditures from last year's budget. The budget incorporates a 2% net increase in full-time equivalents (FTEs), staff pay increases, higher health insurance costs, and stable pension contributions. The increased spending is supported by increased property tax revenues due to the TAV growth as well as sales tax growth. Management is currently projecting surplus general fund results, after transfers out for non-recurring purposes, due to solid revenue performance and under-spending relative to the budget.

HIGH DEBT BURDEN; RAPID AMORTIZATION

Fitch considers Carrollton's overall debt burden to be elevated on a per capita basis at $4,716 but moderate relative to full value at 4.8%. The overall debt load stems mainly from the large amount of debt from two local school districts. Inclusive of the current offering, the city maintains a rapid pace of principal amortization (68% retired in 10 years), which Fitch views as a credit strength.

The city has $81 million in remaining GO authorization, comprised mostly of $75 million approved by voters in November 2013. The remaining bonds will be structured to limit the peak debt service tax rate to a moderate $0.226 per $100 TAV, compared to the current rate of $0.203, reasonably assuming 1%-2% TAV growth each year through the life of the bonds.

PENSION/OPEB LIABILITIES NOT A CREDIT PRESSURE

The city contributes to the Texas Municipal Retirement System (TMRS), an agent multiple-employer plan. The city's actuarially determined contribution to the plan consumed a manageable 5.2% of fiscal 2013 governmental expenditures. Recent structural and actuarial changes to TMRS have continued to benefit the city's funded position, which now stands at 95% as of the Dec. 31 2012 actuarial valuation compared to 73.2% as of Dec. 31 2009 (using an estimated 7% investment return for both years).

The cost of other post-employment benefits (OPEB) makes up a nominal 0.3% of fiscal 2013 governmental spending, and management took action to reduce its long-term OPEB cost by closing this benefit in fiscal 2009. Only existing employees meeting the age/years of service requirement were allowed to remain in the city-subsidized retiree health plan.

Combined debt, pension, and OPEB costs are a manageable 20% of fiscal 2013 governmental expenditures and are not expected to further pressure the budget given a modestly descending debt service schedule and a closed OPEB plan.

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

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=826638

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Contacts

Fitch Ratings
Primary Analyst
Jose Acosta, +1-512-215-3726
Senior Director
Fitch Ratings, Inc.
111 Congress Ave, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Shane Sellstrom, +1-512-215-3727
Analyst
or
Committee Chairperson
Steve Murray, +1-512-215-3729
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Jose Acosta, +1-512-215-3726
Senior Director
Fitch Ratings, Inc.
111 Congress Ave, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Shane Sellstrom, +1-512-215-3727
Analyst
or
Committee Chairperson
Steve Murray, +1-512-215-3729
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com