AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns a rating of 'AA-' to the following general obligation (GO) refunding bonds of the city of Galveston, Texas (the city):
--$6.2 million GO refunding bonds, series 2014.
The bonds are expected to price via negotiation the week of September 22, pending market conditions. Proceeds will be used to refund for debt service savings a portion of the city's outstanding debt.
In addition, Fitch affirms the following ratings:
--$47 million limited-tax GOs (pre-refunding) and combination tax and revenue bonds (COs) at 'AA-';
--$26 million hotel occupancy tax (HOT) revenue refunding bonds, series 2012A and 2012B at 'A'.
The Rating Outlook is Stable.
SECURITY
The GOs and the city's COs are secured by an annual property tax levy, limited to $.70 per $100 taxable assessed valuation (TAV). All COs are additionally payable from the city's enterprise operations - surplus sanitation, water & sewer and wharfage revenues.
The HOT bonds are secured by a first lien on a portion (4%) of HOTs levied on all hotel room rentals within the city. The HOT bonds are additionally secured by a cash-funded debt service reserve fund.
KEY RATING DRIVERS
SOLID FINANCES: The city maintains a sound financial position with strong reserves, which Fitch views as an important rating factor given the city's coastal location and exposure to economically sensitive sales taxes. The city has a history of conservative forecasting, and operations are expected to remain structurally balanced over the near term.
GROWING COASTAL ECONOMY: The city's economy is traditionally based on leisure, hospitality and port operations. Expanding health services and top government and education sector employers help to stabilize the local economy. Economic recovery continues at a solid pace, driven primarily by infrastructure projects and ongoing tourism growth.
MODERATE DEBT: The city's overall debt burden is moderate and should decline over the next several years based on the lack of new debt issuance plans and a rapid amortization rate. Carrying costs associated with outstanding debt and retiree liabilities are manageable.
SOUND COVERAGE/HOT VOLATILITY: The 'A' rating on the HOT bonds is based on sound maximum annual debt service (MADS) coverage. Offsetting risks include HOT revenues' high level of economic sensitivity and payor concentration. Sound legal provisions provide adequate bondholder protection.
RATING SENSITIVITIES
SOLID FINANCIAL PROFILE: The city's GO and CO ratings are sensitive to shifts in fundamental credit characteristics including structural balance of the city's operations and maintenance of adequate general fund reserves. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
ADEQUATE HOT COVERAGE: The rating on the HOT bonds incorporates their historical level of volatility. Should actual HOT revenues exceed such volatility, pressuring MADS coverage, there could be downward pressure on the rating.
CREDIT PROFILE
The city of Galveston is located on Galveston Island, approximately 45 miles from Houston in southeast Texas. With a population of approximately 48,800 the city is the county seat of Galveston County (rated 'AA+' by Fitch, Stable Outlook).
GROWING TEXAS COASTAL COMMUNITY
The local economy is centered in healthcare, maritime and tourism industries. The University of Texas Medical Branch (UTMB) anchors the city's health and education service sector and serves as a teaching hospital and hub for medical research. UTMB is nearing completion of a $438 million 13-story hospital to replace a facility damaged by Hurricane Ike. UTMP reports total fiscal 2013 personnel at 11,452 representing about 8% of the county's total employment base and a likely higher proportion of the city's base. The city's improved unemployment rate of 6.4% as of July 2014 reflects new job growth, but continues to trail the average Texas rate of 5.6% for the same period.
The Port of Galveston and nearby Pelican Island support growing industrial operations, cargo transportation and petroleum support services. Recent and near-term infrastructure improvements bode well for ongoing growth in the island's maritime trade.
TOURISM CONTINUES TO GROW SIX YEARS AFTER HURRICANE IKE
Hurricane Ike hit the upper Texas coast in September 2008, resulting in widespread flood damage across the island. The city's population and tourism declined subsequent to the storm, but 90% of the city's hotel stock was undamaged due to its proximity to the seawall which extends along the city's beachfront.
Texas' strong economic growth and over $2 billion in disaster recovery monies have continued to expand the island's tourism trade as measured by visitors to the island, hotel spending and cruise passenger trends. Evidence of the recovery is found in the city's 26% post-hurricane tax base growth (TAV suffered a 14% storm-related decline and upward adjustments are limited to 10% annually), as well as sales tax growth averaging over 5% in the past four years.
Tourism visitor volumes reached a new peak in 2013, supporting the island's cruise industry and beachfront attractions. The Galveston port is home to three year-round cruise ships, contributing to the port's ranking as the fifth largest home port as measured by embarkations. The city's recent beachfront pier redevelopment further contributed to fiscal 2013 growth of greater than 5% in visitor recreation, lodging, food, beverage and retail spending.
RISING HOT COLLECTIONS, SOUND DEBT COVERAGE; CONCENTRATED TAXPAYERS
Fiscal 2013 HOT collections represent the fourth consecutive year of post-Hurricane Ike growth, gaining a total of 46.8% over four years, after dropping 21.3% in fiscal 2009, immediately after the storm.
Fiscal 2014 HOT debt service of $1.7 million is covered 3.4x by the most recent 12 months of HOT collections through July 2014. The same revenues cover maximum annual debt service (MADS; $2.1 million) by a healthy 2.7x. The debt service coverage of MADS performs well under stress, providing approximately 2x coverage based on the level of decline in pledged revenues experienced immediately after Hurricane Ike.
Legal provisions are satisfactory and include an additional bonds test (ABT) of 1.5x MADS and a standard cash-funded debt service reserve fund requirement. Additional leveraging to the ABT requirement, though not anticipated, would likely contribute to negative action on the rating.
HOT revenues are concentrated in the top hotel tax generators; the 10 largest account for roughly two-thirds of pledged revenue in the city. Management reports new hotels under construction with more planned for the near term. Fitch considers the strong coverage and broadening hotel base as mitigating factors to current high concentration.
SOUND FINANCIAL PROFILE
Galveston realized surplus results over the past two years, benefiting from a leaner post-Hurricane Ike cost structure and improving ad valorem and sales tax trends. The city completed fiscal 2013 with unrestricted reserves of $18.3 million, a healthy 43.2% of spending. Officials project a similar level of reserves for fiscal 2014, and the city's fiscal 2015 budget is structurally balanced. The city has maintained healthy reserves for an extended period, with a recent low in fiscal 2010 equaling a still solid 19.6% of spending. Fitch views the city's healthy fund balance level as a mitigating factor to its exposure to economically sensitive sales tax revenue (31.8% of fiscal 2013 general fund revenues) and its tourism-centered economy.
MODERATE DEBT; AFFORDABLE RETIREE COSTS
The city's overall debt level is moderate at 3.3% of market value and amortization is rapid at 65% in 10 years. Management expects its capital needs will be funded predominantly with grant monies and remaining bond proceeds over the next several years.
The city sponsors three single-employer defined benefit pension plans for city employees, firefighters and police, and acts as a conduit for the provision of retiree health care benefits (at the retiree's cost). Pension funded rates are adequate for the city employee plan, but underfunded for the police and firefighter plans (estimated at 44.5% and 62%, respectively, based on Fitch's more conservative 7% investment rate assumption). Fitch notes that the funding rates are premised on an actuarial assumption for projected salary increases which exceeds those currently in place and anticipated in the near term. The city's carrying cost including annual debt service, pension and other post-employment benefit contributions represent a moderate 13.4% of fiscal 2013 governmental spending.
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=876154
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