AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA' rating to the following Killeen, TX's (the city) debt:
--$11.7 million limited tax general obligation (LTGO) refunding and improvement bonds, series 2014;
--$13.4 million combination tax and revenue certificates of obligation, series 2014.
Proceeds will be used to refund certain outstanding bonds for interest cost savings and to fund road, fire facility, park, recreation and community center projects. The bonds are scheduled to sell via negotiation the week of June 23.
In addition, Fitch affirms the 'AA' rating on the following outstanding limited tax bonds:
--$75.3 million in LTGOs (pre-refunded), series 2006, 2011, 2012 and 2013;
--$41.08 million in combination tax and revenue COs, series 2005, 2006, 2011, and 2012;
--$49.5 million in pass-through toll revenue and limited tax bonds, series 2011 and 2011A.
The Rating Outlook is Stable.
The bonds and outstanding bonds are secured by an ad valorem tax levied against all taxable property within the city of Killeen, limited in amount to $2.50 per $100 of taxable assessed valuation (TAV).
The outstanding COs are additionally secured by a limited, de minimus pledge of surplus revenues of the city's waterworks and sewer system, not to exceed $1,000.
The outstanding pass-through bonds are additionally secured and primarily payable from payments received by the city pursuant to a pass-through toll agreement between the city and the Texas Department of Transportation (TXDoT). The payments are subject to appropriation by the Texas Legislature, but the bonds carry the city's LTGO backstop pledge and the rating is based on this pledge.
KEY RATING DRIVERS
HISTORICALLY STABLE ECONOMY: The local economy is anchored by Fort Hood army base and also benefits from the presence of affordable housing and continuing transportation infrastructure improvements. The city's tax base continues to modestly expand.
SOLID FINANCIAL PROFILE: The city maintains sound reserves reflecting conservative budgeting and prudent cost management. Revenue trends reflect very little volatility, but the city remains vulnerable to sales tax exposure.
SIGNIFICANT BUT AFFORDABLE DEBT: Overall debt is above-average in relation to market value, but affordable in relation to governmental spending.
FEDERAL MILITARY SPENDING: The city's substantial economic dependence on Fort Hood makes it susceptible to changes in military funding levels.
Killeen is located in central Texas, about 60 miles north of Austin, and has an estimated 2014 population of 134,654. The area economy is anchored by the Fort Hood army base located adjacent to the city.
MILITARY-RELIANT ECONOMY ANCHORED BY FORT HOOD ARMY BASE
Fort Hood is the largest Army post in the U.S. and employs nearly 63,000 military and civilian personnel, accounting for a significant portion of the region's employment base.
Troop levels at the base tend to fluctuate as a result of the continuous deployments, but the impact to Killeen's economy is smoothed in part by the presence of soldiers' families, who remain at the base during deployment, and new recruits who arrive on an ongoing basis. While the base saw a modest decline in personnel under the 2005 Base Realignment and Closure (BRAC) process, the city believes that Fort Hood is positioned to benefit from further base consolidations given available capacity and road improvements. Fitch believes that the base and city remain susceptible to future federal funding changes and reallocations related to military spending.
Although the economy will likely always remain heavily dependent on Fort Hood, a growing medical sector, expansion of the Texas A&M University-Central Texas campus, and growth of retail add a small measure of diversity.
AVERAGE SOCIOECONOMIC PROFILE
The unemployment rate in the city typically is marginally higher than the state but below the U.S. average given the impact of ongoing federal military funding. City unemployment for March 2014 trended lower year-over-year and was 6.5% compared to the state and national averages of 5.3% and 6.8%, respectively.
City residents are less affluent than average, with per capita money income and median household income at 72% and 85% of the national average, respectively; however, the region's cost of living is relatively low. Per capita market value is also low at $42,000 in fiscal 2014, reflecting a high degree of tax-exempt property.
GROWTH IN TAXPAYER BASE CONTINUING
Killeen's TAV grew at an impressive double-digit annual rate before downshifting to between 1%-4% growth from fiscal years 2010 to 2014. The moderation in TAV growth was, in part, affected by a legislatively mandated homestead exemption for disabled veterans (effective fiscal 2009) that provides a 100% tax exemption for homeowners meeting the eligibility requirements.
The city's total estimated loss in property tax revenue related to these exemptions is $920,000 in fiscal 2012 (.02% of total TAV) and closer to $1 million in fiscal 2013. Management expects the number of exemptions to rise annually due to the legislation. Nevertheless, TAV growth is continuing and Fitch believes officials' preliminary expectations of moderate growth in the next few years to be reasonable. The projected growth, net of the exempted value, reflects new residential and commercial development underway and planned.
SOUND RESERVES AND LIQUIDITY MAINTAINED
The city has prudently maintained a solid fiscal cushion and balanced operating profile while continuing to pay-go finance capital outlays. The city's fiscal 2013 deficit of $1.2 million resulted from cash funding $1.6 million in capital projects. Fiscal 2013 unrestricted reserves of $21.2 million represent a solid 30.1% of spending. The city anticipates ongoing structural balance in fiscal 2014.
Aggregate debt ratios, inclusive of overlapping issuers, are moderate at about $2,200 per capita, but well above-average at 5.3% of full market value (MV). Annual debt service consumes a moderate 12.5% of governmental fund spending. Not reflected in carrying costs, a portion of the annual debt carrying cost is expected to be reimbursed by the state under provisions of its pass-through toll revenue program, which subsidizes the debt service costs of certain transportation projects undertaken by municipalities. The city reports the highway projects are on schedule and expects the first reimbursements from the state during fiscal 2014.
Amortization is moderate at 46% of principal retired in 10 years. The city's near term capital needs are modest, but Fitch anticipates the overall debt burden to remain elevated given regional growth expectations.
PENSION/OPEB LIABILITIES NOT A CREDIT PRESSURE
The city's required contributions to its two pension plans are paid in full each year. The city's major pension plan - the Texas Municipal Retirement System (TMRS) - is a statewide agent multiple-employer system and had a strong funded position of 91.4% as of the Dec. 31, 2012 actuarial valuation. The city also maintains a single-employer plan for firefighters, but Fitch considers this plan's funded position weak at an estimated 61.8% (using a 7% investment return).
Other post-employment benefits (OPEB) costs are paid as incurred and while the city has not funded any of its $5.6 million actuarial liability, this liability comprises a nominal 0.1% of full MV. Total carrying costs inclusive of debt service and pension ARC are manageable at 16.6% of governmental fund spending in fiscal 2013.
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, and 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