AUSTIN--(BUSINESS WIRE)--Fitch Ratings has affirmed the following Montgomery, Texas, obligations at 'A-':
--$2.68 million general obligation (GO) refunding bonds, series 2012;
--$845,000 tax and revenue certificates of obligation (COs), series 2005A;
The Rating Outlook has been revised to Positive from Stable.
SECURITY
The GOs and COs are secured by an annual property tax levy limited to $1.50 per $100 taxable assessed valuation (TAV). The COs are additionally secured by a subordinate lien on the net revenues of the city's water and sewer system.
KEY RATING DRIVERS
IMPROVED FINANCIAL PERFORMANCE: The revision of the Outlook to Positive reflects strong sales tax growth resulting in solid general fund gains for fiscals 2012 and 2013, following three years of operating deficits. The city's financial reserves are high as a percentage of spending but modest as a nominal dollar amount.
HIGH SALES TAX DEPENDENCE: The general fund's revenue mix, comprised primarily of sales taxes, exposes the city's operations to economic volatility but also allows the cost of municipal services to be shared with its many non-resident shoppers.
POSITIVE TAX BASE TRENDS: The city's tax base is small and concentrated but per capita tax base wealth is high, reflective of the city's affluence. High-end homebuilding activity along nearby Lake Conroe supports strong taxable assessed value (TAV) growth in the city. Furthermore, the city benefits from economic and employment opportunities in the nearby large and diverse Houston regional economy.
WEAK DEBT PROFILE: The overall debt burden is very high and given slow principal pay-out will remain high. Additionally, debt service as a percentage of spending is above average; however, the city has no plans for additional tax-supported debt over the near term.
RATING SENSITIVITIES
POSITIVE OPERATING PROFILE: Continuation of recent operating gains and growth in reserves could lead to an upgrade.
ECONOMIC EXPANSION: Positive rating action would hinge on continued expansion of the city's limited economy.
WEAKENED DEBT PROFILE: Further weakening of the debt profile, though unexpected, could lead to negative rating action.
CREDIT PROFILE
Montgomery is a very small city located in northwest Montgomery County about 40 miles north of Houston. The city encompasses 4.5 square miles with an estimated population of 659. Its proximity to Lake Conroe has historically made it a regional tourist destination.
SMALL BUT GROWING COMMUNITY
The city is a regional commercial destination in the fast-growing Montgomery County, and daytime population in the town reportedly swells with shoppers and local school activity. The rural setting near Lake Conroe and the well-regarded area school district are key factors in promoting recent, high-end residential development.
TAV performed well through the recession, with growth slowing to approximately 8% annually from fiscal 2010-2012. The city's tax base posted a solid 15% gain for fiscal 2014, assisted in part by annexations of raw land; preliminary values for fiscal 2015 also show growth of over 15%. Top 10 taxpayer concentration remains high at more than 20%, led by a local shopping center.
Recent commercial projects include a mix of retail, office buildings, multifamily housing, and assisted living apartments. Construction will begin in summer 2014 for a shopping center to be anchored by a Kroger grocery store, which management anticipates will double the city's sales tax revenue. An 80-unit apartment complex is also expected to break ground in fall 2014. Prospects for continued growth appear positive, given the city's desirable location near Lake Conroe and proximity to the extensive Houston metropolitan economic and employment base.
HEALTHY RESERVES, SALES TAX DEPENDENCE
The city's financial reserves are strong as a percentage of spending (although modest as a nominal dollar amount), and were bolstered by positive general fund operations in fiscals 2012 and 2013. The unrestricted general fund balance equaled $972,000 (55% of spending) for fiscal 2013, up from 36% of spending in fiscal 2011. This surpasses both the city's fund balance policy level of 35% of spending and management's informal target of 45%.
Sales taxes are the largest general fund revenue source, and they grew by 15% and 25% in fiscals 2012 and 2013. However, year-to-date allocations show a 16% increase over 2013 on a calendar year basis. Management's projections for fiscal 2014 include a modest general fund surplus, which would continue the recent trend of positive performance. Fitch views the city's healthy reserves as a key mitigant to its dependence upon historically volatile sales tax revenues. City officials expect to monitor this revenue source and adjust expenditures accordingly in order to maintain structural balance.
VERY HIGH DEBT LEVELS
Overall debt levels, which include overlapping school district debt, are very high, particularly on a per capita basis at $13,576. The large debt burden reflects the city's small, primarily residential tax base and small number of residents. Amortization is slow with 35% of principal paid out in 10 years. The city's capital improvement plan includes no additional tax-supported debt in the near term. Carrying costs for debt service and pension obligations equaled an above average 22% of governmental spending in fiscal 2013. The funded position of the city's pension plan, administered by the Texas Municipal Retirement System, is very strong at 119% as of December 31, 2012. The city does not provide other post-employment benefits.
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, Zillow.com, National Association of Realtors, and the Municipal Advisory Council of Texas.
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=834360
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