Fitch Rates Farmers Branch, Texas' Series 2014 GOs & COs 'AA+'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has initially assigned an 'AA+' rating to the following Farmers Branch, Texas' (the city) general obligation (GO) bonds and certificates of obligation (COs):

--$13.8 million GO bonds, series 2014;

--$1.9 million combination tax and revenue COs, series 2014.

The GO bonds and COs are scheduled to sell via competitive bid July 15, 2014. The bonds will be used to fund street repairs and the COs to construct and equip a joint public safety communication facility as well as pay issuance costs.

The Rating Outlook is Stable.

SECURITY

The GOs and COs are secured by a limited ad valorem tax pledge of the city, not to exceed $2.50 per $100 of taxable assessed valuation (TAV). The COs also carry a nominal pledge (limited to $1,000) from the surplus revenues of the city's waterworks and sewer system.

KEY RATING DRIVERS

SOUND FINANCES: The city maintains a strong financial position, characterized by solid reserves and stout liquidity. Operations are supported by a fairly diverse revenue base that has benefitted from rapidly rebounding sales tax revenues despite recent recessionary pressures. Management's conservative fiscal practices and policies have enabled break-even to net surplus operations over the last five fiscal years.

STRENGTHENED TAV, ECONOMY: The city is favorably located within the strong and diverse Dallas-Fort Worth metropolitan statistical area (MSA) economy. City unemployment is low and down on a year-over-year basis. Taxable assessed valuation (TAV) is anticipated to strengthen further, largely due to gains from new and existing commercial properties that comprise slightly more than half of the city's TAV. Top taxpayers provide moderate tax base and sector concentration.

ABOVE-AVERAGE SOCIO-ECONOMIC METRICS: Income/wealth levels are generally above MSA, state, and U.S averages.

MANAGEABLE LONG-TERM LIABILITIES: The city has historically been conservative in its debt program, utilizing pay-go capital spending to fund many of its capital projects. Near-term capital needs appear manageable. Overall debt levels are moderate. Carrying costs are midrange and the pension funded position is good.

RATING SENSITIVITIES

SHIFT IN FUNDAMENTALS; TAV DIVERSIFICATION: The rating is sensitive to shifts in fundamental credit characteristics, including the city's strong financial position. The city's history of maintaining solid reserves while addressing operating and capital needs indicates continued rating stability. Further, material diversification and growth of the city's tax base would be viewed positively, although Fitch expects this would occur gradually in the intermediate to longer-term.

CREDIT PROFILE

Farmers Branch (with a population base of approximately 32,000) is a mature city centrally located in the Dallas-Fort Worth metro area. Major transportation corridors, inclusive of Dallas Area Rapid Transit (DART), traverse the city.

MATURE DFW CITY ANCHORED BY COMMERCIAL

Various large commercial and retail properties along the major transportation corridors (Interstate Highways 35-East and 635 and the Dallas North Tollway) that traverse the city closely connect Farmers Branch to the economic pulse of the Dallas-Fort Worth MSA. Major industries in the MSA include defense, real estate/financial services, information technology and data, telecommunications, and distribution/transportation. Some of the area's top employers are located in Farmers Branch, including JP Morgan Chase, IBM, and the Internal Revenue Service. Individuals who work in the city are reported to nearly double daytime population. City unemployment is low and below the state and U.S. at 4.5% in April 2014, down from 5.5% in April 2013 on a year-over-year basis despite a nearly 2.5% gain in labor force. Income and wealth levels generally exceed those of the state and U.S by about 10%-20%.

About 60% of the city's tax base consists of commercial/retail properties; the city has historically realized moderate annual TAV growth. The city returned to positive TAV performance beginning in fiscal 2013 after a cumulative 14% recessionary decline in TAV over fiscals 2011-2012. TAV additionally strengthened by 4.3% in fiscal 2014, reaching $3.8 billion. Many of the top 10 taxpayers are commercial office towers; concentration is moderate at 15.5% in fiscal 2014. Management anticipates further solid TAV gains in fiscal 2015 given preliminary values that indicate roughly 10% TAV growth (after protests) due largely to new businesses locating in the city and increased commercial property values that sustain above-average occupancy and rental rates.

Housing stock and home values vary throughout the city, but in general, are somewhat below average as compared to other nearby metro communities given Farmers Branch's mature neighborhoods. This is evolving however with typically higher-end infill projects that benefit from the city's strategic development plans, such as the recently developed condos and homes near the city's existing DART station. The city also expects to realize additional residential growth over the near-term with various new multi-family projects under development or planned, estimated to add about $200 million to TAV. Management takes an active role in the city's economic and neighborhood development with the strategic purchase of property for future redevelopment purposes as well as establishing guidelines that ensure higher value land use.

Management expects future development along the tollway and interstate growth corridors to further strengthen taxable values over the intermediate term, which Fitch believes is reasonable given the strong Dallas Fort-Worth economy. Monitronics, the first large corporate tenant in the city's industrial park, recently announced its development of a 52-acre corporate campus, which is expected to be complete by summer 2015 as well as spur several other office construction projects.

SOLID FINANCIAL PROFILE

Operations are supported by a fairly diverse revenue base, led by property taxes that provided nearly 40% of total general operating revenue in fiscal 2013, followed by sales taxes at 28%. City sales tax performance has been robust with a very quick rebound during the recession, registering only one year of decline in fiscal 2010. General fund operations have generated roughly break-even to net surplus results at year-end over the last five fiscal years (fiscals 2009-2013), enabled by management's conservative budgeting and fiscal practices. Management used much of its expenditure flexibility over this period to preserve the city's stable financial profile, reducing personnel costs with the outsourcing of library and waste collection services, reorganizing staffing levels, as well as delaying some pay-go capital spending.

Reserves strengthened modestly in fiscal 2013 with a $408,000 addition to fund balance (equivalent to about 1% of the year's general operational spending). Unrestricted general fund reserves (totaling no less than 19% of spending since fiscal 2009) increased to nearly $12 million or about 25% of spending, assisted by the roughly $1 million year-over-year sales tax revenue gain. Included in this amount is $8.9 million in unassigned fund balance (18% of fiscal 2013 spending) that remains in line with the city's established policy of maintaining reserves between 15%-20%. The city's liquidity position remained stable and stout. General fund cash/investments totaled $10.5 million or just under three months of general fund spending at fiscal 2013 year-end, comparable to the prior two fiscal years.

The adopted fiscal 2014 $47.1 million general operating budget is up modestly from the prior year's by about $3 million or 6% of fiscal 2013 spending in large part to adding full-time staff, pay increases, and increased employee health insurance costs. Fiscal 2014 also began the use of $500,000 for pay-go capital spending from the general fund (projected to occur annually through 2024) to supplement the city's GO bond issuance for streets. Revenue estimates that support the year's structurally balanced budget incorporated a roughly 4% year-over-year growth in sales taxes of $600,000 and $1.5 million in additional property tax revenue. Nonetheless, mid-year budget adjustments currently anticipate $1.1 million use of fund balance due largely to a recently finalized lawsuit award and some modest downward revenue revisions. Despite the drawdown, the city expects to maintain reserves within its policy, ending fiscal 2014 with an unassigned fund balance of $7.8 million or 17% of spending according to management.

Preliminary budget plans for fiscal 2015 are in progress. Although the year's budget details are yet to be finalized, Fitch takes comfort from not only the city's trend of stable finances, but the six-year general fund financial forecast (fiscals 2014-2019) that is part of management's multi-year planning efforts. The current look-ahead anticipates maintaining ongoing structural operating balance, pay-go capital investment, and sound reserves according to policy each year while reasonably assuming moderate revenue and expenditure growth.

MODERATE OVERALL DEBT / SATISFACTORY PENSION FUNDED POSITION

The city has historically been conservative in its debt program and largely used pay-go capital spending to fund its generally manageable capital needs, including those of the water/sewer system. Principal amortization of the city's direct debt is rapid with 72% retired in 10 years. The overall debt burden is moderate at 3.5% of market value - largely due to overlapping school district debt - but higher on a per capita basis at about $5,800.

Voters strongly approved $23.5 million in GO bond authority recently for a 10-year street and bridge improvement program, inclusive of the approximately $0.05 per $100 TAV increase to the debt service tax rate required to support these bonds. This sale incorporates the first issuance from the new GO authorization; the remaining portion is projected to be issued in 2018. Other major capital projects underway include the construction of an aquatic center to be funded predominately from a $6.5 million debt issuance. Higher than expected bids have increased the total cost and slightly pushed back the project's construction schedule, although management expects the added $1.8 million in pay-go capital spending now projected over the near-term will allow for full completion.

The city's pension plan is through the Texas Municipal Retirement System (TMRS), a statewide agent multiple-employer plan. Contribution rates are determined each calendar year. For fiscals 2012-2013, the city paid 100% of the annual required contribution (ARC), which totaled about $5 million in fiscal 2013. The pension funded position edged up slightly over fiscals 2011-2013 to a satisfactory 86.4% at Dec. 31, 2012 (plan assumptions incorporate a 7% investment rate of return). Upcoming changes to TMRS actuarial assumptions are expected to net a modest drop in the funded position to 84.2% at Dec. 31, 2013, but city management expects to offset this increased liability over time by modestly overfunding its ARC beginning in fiscal 2015.

The city provides other post-employment benefits (OPEB) through a single-employer, defined contribution health care plan. In order to reduce this liability, city officials proactively reduced retiree eligibility and capped benefits. Funding is done annually on a pay-go basis, which has covered between 33% - 95% of the actuarially determined annual OPEB cost in the last three fiscal years (2011 - 2013). Further, significant reduction of the unfunded actuarial accrued liability (estimated to decline from $13.2 million to $5.4 million) is anticipated in calendar year 2015 with mandatory use by retirees of their premium in exchanges. Carrying costs for the city (debt service, pension, and OPEB costs) totaled a moderate 15.2% of governmental spending in fiscal 2013 despite being elevated by an above-average pace of debt principal amortization.

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, IHS Global Insight, the 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=837209

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Contacts

Fitch Ratings
Primary Analyst
Rebecca C. Moses
Director
+1-512-215-3739
Fitch Ratings, Inc.
111 Congress Ave.,
Austin, TX, 78701
or
Secondary Analyst
Shane Sellstorm
Analyst
+1-512-215-3727
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Rebecca C. Moses
Director
+1-512-215-3739
Fitch Ratings, Inc.
111 Congress Ave.,
Austin, TX, 78701
or
Secondary Analyst
Shane Sellstorm
Analyst
+1-512-215-3727
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com