AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AAA' rating to the following limited tax obligations for Austin, Texas (the city):
--$104.6 million public improvement bonds (PIBs), series 2014;
--$10 million public improvement bonds, taxable series 2014;
--$40.45 million certificates of obligation (COs), series 2014;
--$9.6 million COs, taxable series 2014;
--$15.8 million public property finance contractual obligations (PPFCOs), series 2014.
The tax-exempt public improvement bonds, COs, and PPFCOs are scheduled for negotiated sale on Aug. 27; the taxable public improvement bonds and COs are scheduled for negotiated sale in early September. Proceeds from all series will finance various municipal improvements.
In addition, Fitch affirms the following ratings for the city:
--$1.23 billion outstanding public improvement bonds, COs and PPFCOs at 'AAA';
Mueller Local Government Corporation (Mueller LGC or the corporation):
--$9.6 million contract revenue bonds, series 2006 at 'AA+'.
The Rating Outlook is Stable.
The public improvement bonds, COs, and PPFCOs are direct obligations of the city and secured by an ad valorem tax limited to $2.50 per $100 assessed valuation, levied against all taxable property in the city.
The COs are secured further by a limited pledge (not to exceed $1,000) of surplus revenues of the city's solid waste disposal system.
The corporation contract revenue bonds are secured by a first lien on pledged revenues pursuant to a grant agreement with the city of Austin; payments are subject to annual appropriation. The pledged revenues are any of the city's available general fund monies, including sales tax revenues from retail activity within the designated Mueller project area.
KEY RATING DRIVERS
SOUND FINANCIAL PROFILE: The city maintains a balanced operating profile while using cash in excess of fiscal targets for non-recurring and capital initiatives. Recent gains in economically sensitive revenues have contributed to operating surpluses and expanding reserves and liquidity. Likely continued economic expansion should allow the city to maintain a sound financial profile while addressing growing service needs.
VIBRANT, DYNAMIC ECONOMY: The city's economy is diverse and growing steadily, with government, higher education, healthcare and high technology the primary employment sectors. The city continues its strong post-recession performance, as reflected in healthy job and population gains. Wealth levels are good, the labor force is highly educated, unemployment is low, and taxable values are climbing at a healthy pace.
UNDERFUNDED RETIREE LIABILITIES: City pension costs have been increasing primarily to address the underfunded position of the city's civilian pension program. The city recently reached full annual required contribution (ARC) funding for this program, and recent benefit adjustments are expected to stabilize the city's pension burden over the long term. The city has not addressed a sizable other post-employment benefit (OPEB) liability.
MODERATE DEBT PROFILE: Austin's debt profile is moderate and capital needs appear manageable. The payout rate for outstanding tax-supported debt is above average with roughly two-thirds retired in 10 years.
MUELLER LGC BOND RATING: The rating of the Mueller LGC contract revenue bonds is one notch below the city's 'AAA' limited tax general obligation (LTGO) rating to reflect annual appropriation risk.
FOCUS ON RETIREE LIABILITIES: The city has demonstrated its willingness to address its underfunded civilian pension. Continued progress in improving pension funding levels and addressing the sustainability of OPEB obligations will be important credit considerations looking forward.
HEALTHY AND EXPANDING ECONOMY
The Austin area is among the top performing U.S. metro area economies. The city is the state capital and home to the University of Texas at Austin (University of Texas System; rated 'AAA' by Fitch), as well as six other colleges and universities. The large state government and higher education employment base has provided a stabilizing presence and economic buffer for the city during downturns.
Technology manufacturing is another key area employment sector, led by Dell, IBM, Samsung and others. The city's highly educated workforce and availability of major research facilities continues to attract and support expansion of technology firms.
Tourism has also become a growing economic player. The city hosts several festivals and conferences for music and technology throughout the year, which continue to increase in visitor count. More recently the city has added high-profile sporting events to its roster of events, including Formula One auto racing and the ESPN Summer X Games. Airport traffic continues to grow, with 2013 recording a record 10 million-passenger total, and construction is underway at the airport on a terminal expansion and new parking and rental car facility.
STRONG JOB AND TAX-BASE GAINS
Job gains over the past 12 months equaled a strong 3.5%, outpacing the 2.1% growth in the labor force. Correspondingly, the city's June 2014 unemployment rate declined to 4% and is well below state (5.5%) and national (6.3%) averages for the month. The city's population, estimated at roughly 847,000 for 2014, has increased more than 25% since 2000.
Taxable values have resumed solid growth following a one-year decline in fiscal 2011. Increases the past three fiscal years have brought taxable assessed value (TAV) to $88.5 billion, with fiscal 2014 registering a more than 6% gain. Additionally, preliminary values for fiscal 2015 indicate an increase of as much as 10% in TAV. Development data provided by the city indicate healthy permit activity and apartment and commercial occupancy rates. The city's market value per capita of $120,000 is competitive with the median for 'AAA' peers.
Development continues at Mueller, a mixed-use project located at the city's old airport location. Increasing retail activity boosted sales tax receipts to more than $1 million in fiscal 2013, which exceeds annual debt service on the series 2006 contract revenue bonds. Other high-profile projects recently underway are redevelopment of the city's Seaholm Power Plant and Green Water Treatment Plant, both located downtown and both slated for mixed-use investment.
SOUND FINANCIAL PROFILE
The general fund produced operating surpluses (after transfers) in four of the last five fiscal years, as property tax and sales tax revenues (the two leading general fund revenue sources) demonstrated impressive growth and management controlled spending. The surpluses increased fund balance by more than 50% during this period.
The city concluded fiscal 2013 with an operating surplus (after transfers) of nearly $17 million; this positive result beat earlier projections and reflected better than expected revenue performance and continued cost management. The unrestricted fund balance climbed to $146.3 million or 19% of expenditures and transfers out, which is at the high end of recent year-end fund balance totals.
The city prudently adheres to its fund balance reserve targets which, by policy, include within the unrestricted fund balance a $40 million emergency reserve, a 1% contingency reserve ($6.8 million), and a budget stabilization reserve (equal to $78.3 million at the end of fiscal 2013). City policy permits the use of up to one-third of the budget stabilization reserve for one-time capital needs.
DIVERSE GENERAL FUND REVENUES
Property taxes and sales taxes made up 40% and 23% of general fund revenues and transfers-in, respectively, in fiscal 2013. Property tax revenues have averaged a robust 11% annual growth since fiscal 2008. Growth has been supported by the climbing TAV and council approval of tax rate increases. Sales taxes recovered from a recessionary dip of nearly 10% in fiscal 2009, registering solid gains in each succeeding year. Receipts surged 8.6% in fiscal 2012 and 7.3% in fiscal 2013 ($176 million total), and management anticipates a similar gain for fiscal 2014.
Dividends from the city-owned electric utility and water and sewer system are also a significant revenue source, representing 22% of fiscal 2013 general fund revenues. The transfers are formalized by city policy and equal 12% of the electric utility's nonfuel revenues (with a floor of $105 million) and 8.2% of the water utility's gross revenues. Fitch rates the city's combined utility systems (prior first lien) revenue bonds 'AA' and the combined utility systems (prior subordinate lien) revenue bonds 'AA-' with a Stable Outlook, the water and wastewater system revenue bonds 'AA-' with a Negative Outlook, and the electric utility system revenue bonds 'AA-' with a Stable Outlook.
PROJECTIONS CALL FOR FURTHER GAINS IN FISCAL 2014
Preliminary general fund estimates for fiscal 2014 indicate another healthy surplus of more than $30 million, driven largely by continued revenue increases. The budget stabilization reserve is projected to increase to $97 million despite use of a portion of the reserve for equipment purchases and an affordable-housing construction program. The proposed fiscal 2015 general fund budget totals $850 million and is balanced. Highlights include a two-cent decline in the property tax rate (as TAV continues to climb), a 3.5% pay increase for non-uniformed employees, and an 8% increase in city contributions to the employee health insurance program. Both operating revenues and spending are budgeted for a 6% increase from the amended fiscal 2014 budget, and sales taxes are slated for a 5% gain. Staffing is expected to increase by a net of 90 new employees.
PENSION FUNDING LEVELS WEAK BUT STABILIZING
The city maintains three single-employer pension programs for civilian, police, and fire retirees. Fitch considers the civilian and police plans to be underfunded. When adjusted to assume a more conservative 7% investment return, the funding levels for the civilian and police programs are below average at roughly 60% each. The fire pension program is stronger at 80% funded (adjusted). The funded ratios of all three plans have declined since 2008 due to the smoothing in of investment losses incurred during the market downturn and the city's underfunding of its ARC for the civilian plan.
The city's contributions to the civilian plan increased to 18% of payroll in fiscal 2013 from 8% in fiscal 2005 as part of a city-initiated supplemental funding plan. Additionally, management extended the years of service requirement for new civilian employees hired after Jan. 1, 2012. These changes are expected to improve the plan's funding level over time. City contributions to the police and fire plans have also been increasing. The city has generally fully-funded the ARCs for these plans, and further contribution increases are likely given the weak funding level of the police plan.
The city's unfunded OPEB liability totals $1.38 billion or 1.4% of full market value. To date the city has made limited progress in addressing the liability. However, the recent length of service changes for retirement benefits are expected to also lessen the OPEB liability over time. City contributions are made on a pay-go basis. The fiscal 2013 combined carrying costs (debt service, pension ARC and OPEB pay-go contribution) were moderately high at 22% of governmental spending.
MANAGEABLE DEBT BURDEN AND CAPITAL PLAN
The city's overall debt metrics remain moderate at 3.4% of market value and $4,121 per capita. Future borrowing plans, including previously authorized but unissued tax-supported debt from 2006, 2010, 2012 and 2013 elections, total roughly $400 million during the 2015-2018 capital improvement plan (CIP). Annual issuance varies from $55 million to $140 million. Voters approved a $65 million authorization request in November 2013 after a similar proposal had been rejected the previous year. Fitch does not foresee major changes to the city's debt profile under the current CIP.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported RatingCriteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, and the 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:
U.S. Local Government Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria - Effective Aug. 15, 2011 to Aug. 14, 2012