Fitch Affirms Dallas Co. Utility & Reclamation District, Texas' ULTs at 'A-'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings affirms its 'A-' rating on the following Dallas County Utility and Reclamation District, Texas (the district) unlimited tax (ULT) bonds:

--Approximately $267 million (on an accreted basis) in outstanding ULT bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by an unlimited property tax levied against all taxable property within the district.

KEY RATING DRIVERS:

UNLIMITED PLEDGE; TAX RATE: The district's ability to levy an unlimited tax for both debt service and operations is a key rating factor. However, the high overall tax rate limits practical rate-raising flexibility, even with a much lower tax rate for the approximately 60% of property value in the district that receives some form of tax abatement.

STRONG TAV GAINS: Recent taxable assessed valuation (TAV) trends reflect a return to rapid gains; the fiscal 2015 valuation exceeds the prior, pre-recessionary peak. Fitch believes further TAV growth is likely over the near term given development underway that has been spurred in part by light rail projects that link the district to other parts of the metroplex.

SIGNIFICANT TAX BASE CONCENTRATION: The district's top 10 taxpayers represent about 25% of TAV.

DISTRICT PART OF WELL ESTABLISHED DEVELOPMENT: The district is favorably located in central Dallas and part of the larger, 12,000 acre mixed-use Las Colinas development that began in the 1970s. Nonetheless, the district operates in a competitive commercial real estate market.

ADEQUATE FINANCIAL POSITION MAINTAINED: Fitch believes the district operations and modest fund balances will remain stable over the near term given management's conservative fiscal practices, limited operating responsibilities, and ongoing efforts to lower the tax rate.

HIGH DEBT BURDEN; MANAGEABLE CAPITAL NEEDS: Debt as a percentage of market value has declined moderately, but remains high. Principal amortization of the district's direct debt is below-average. Near-term capital needs appear manageable and there are no borrowings planned.

RATING SENSITIVITIES

FINANCIAL PROFILE MAINTAINED: The rating is sensitive to shifts in fundamental credit characteristics, including material change to the district's satisfactory financial position, which has been enabled in part by its limited operating responsibilities. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

FAVORABLE CENTRAL DALLAS LOCATION; PART OF LAS COLINAS

Comprising roughly 3,600 acres, the district is part of the Las Colinas development, a 12,000 acre mixed-use project begun in the 1970s and located between Dallas-Fort Worth International Airport and Love Field in Dallas. The district incorporates primarily office, commercial, retail, hotel, restaurant, and more recently, some residential properties given its focus on development as the area's urban/business center. Roughly 20% of the district's total acreage remains undeveloped (but infrastructure ready).

Management reports development currently underway or planned includes a sizeable number of single-family and apartment projects, some retail, and an oncology treatment facility. Fitch believes it is likely much of this development has been spurred by the expansion of the Dallas Area Rapid Transit (DART) light rail service to the district that began in 2012 and currently provides easy access to the DFW Airport. In addition, the district's monorail, the area personal transit system (APT), links up fully with the DART stations and schedule.

STRONG TAV GAINS; TAX RATE REMAINS HIGH

Recent taxable assessed valuation (TAV) trends reflect a return to strong annual gains after a fairly short period of moderate decline during the recession. TAV totaled nearly $3 billion in fiscal 2015 with a nearly 18% year-over-year gain; this level of growth is comparable to annual trends before the recession. Management attributes much of the gain to still-improving Class A office market values. Although taxpayer concentration has declined over time, it remains a credit concern with the top 10 taxpayers representing about 25% of fiscal 2014 TAV. A commercial/office property (the Towers at Williams Square) led the taxpayer list at 8%.

Management anticipates a continuation of strong TAV growth trends over the next few years given the aforementioned development projects underway and some further growth in commercial values. Fitch believes this is reasonable and expects future development trends and economic activity will be additionally boosted by the city of Irving's recent announcement that it will create an entertainment district within the existing district, scheduled to open in 2016.

At $1.98 per $100 TAV in fiscal 2015, the overall tax rate remains high despite declining from its recent recessionary peak. However, the high tax rate for unabated property is balanced against a much lower tax rate levied on about 60% of the property value in the district that receives some form of tax abatement. Tax abatements were implemented beginning in 1997 and they roll off no earlier than 2023. Fitch anticipates the overall tax rate will remain high despite near-term TAV gains projected. This is due largely to abatements still offered by the district to attract development, a moderately ascending annual debt service schedule through payoff, and additional costs from expanded APT system operations necessitated by the new DART stations.

SATISFACTORY FINANCIAL POSITION MAINTAINED

Almost all of the district's general operating revenues come from property taxes. General operating expenditures stay relatively slim as the district has historically transferred the majority of its ongoing maintenance and operations of its infrastructure to the city of Irving. Debt service makes up roughly 70% -80% of general operational spending.

Financial operations remain satisfactory. The district ended fiscal 2013 with an unrestricted general fund balance equal to $4.6 million or 15.4% of spending and transfers that bettered Fitch's prior expectations due largely to management's conservative assumptions and fiscal practices. Reserve levels remained fairly comparable to prior years' and modest as a dollar amount. Included in the year's total was the roughly $2.2 million that is informally maintained by management as a minimum reserve for capital funding (about $1 million) and potential tax repayments. Liquidity was adequate with fiscal 2013 general fund cash and investments totaling $4 million or just under two months of spending.

Fiscal 2014 year-end results are projected to be down from budgeted expectations, but remain within Fitch's range of expectation. General fund reserves are expected to decline to $2.3 million or about 8% of spending as the district anticipates using a sizeable portion of reserves to refund a larger than anticipated, multi-year tax protest settlement of $2.5 million to the district's largest taxpayer. Management reports the district maintains adequate liquidity in the event of another tax settlement with cash available if necessary in other funds outside the general fund and does not anticipate the need for any external cash flow borrowing.

Operational spending in fiscal 2015 totaled $5.7 million, which was down about 9.5% as compared to the prior year. This was due largely to management's decision to postpone some pay-go capital spending for various renewal/rehabilitation projects. The district also significantly strengthened its cushion in excess of historical trends for possible TAV loss from outstanding tax protests when building the year's budget. The year's tax rate increase is expected to allow the district to rebuild reserves with a roughly $900,000 surplus.

VERY HIGH DEBT BURDEN; MANAGEABLE CAPITAL NEEDS

Initial development of the district and the associated infrastructure necessary (water, sewer, roads, and the APT system) saw the district issue a sizeable amount of debt relative to the developing tax base. The debt burden remains high with direct and overall debt representing 8% and 12% of fiscal 2015 TAV, respectively. This is despite recently strong TAV gains and no new money debt issuances for additional infrastructure projects in many years. Fitch expects debt levels will remain high even with likely healthy TAV gains over the near-term as annual debt service of $22.5 million in fiscal 2014 rises moderately to reach maximum annual debt service of $31.3 million in the final year of the amortization schedule in fiscal 2029. The pace of amortization remains below-average at about 41% of outstanding principal repaid within 10 years. The district has no additional borrowing plans.

Pension obligations are manageable. The district maintains a single-employer, retirement plan and has established a pension trust fund. The district has typically paid 100% of its annually required contribution (ARC) each fiscal year, which was approximately $165,000 (less than 1% of governmental spending) in fiscal 2013. The pension's funded position at Jan. 1, 2012 was roughly 80% (assuming a 7.5% investment rate of return). Using a more conservative 7% return assumption, the estimated funding level is slightly weaker at approximately 72%, although management is considering contributing some one-time funds towards reducing the unfunded actuarial accrued liability (UAAL). Carrying costs for the district (debt service, pension, and OPEB costs) are very high at about 75% of governmental spending in fiscal 2013 given its sizeable debt burden and narrow purpose, not unlike other special districts.

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, the Texas Municipal Advisory Council, and IHS Global Insight.

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=903335

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Contacts

Fitch Ratings
Primary Analyst
Rebecca C. Moses
Director
+1 512-215-3739
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Leslie Cook
Analyst
+1 212-908-1507
or
Committee Chairperson
Amy Laskey
Managing Director
+1 212-908-0568
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Rebecca C. Moses
Director
+1 512-215-3739
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Leslie Cook
Analyst
+1 212-908-1507
or
Committee Chairperson
Amy Laskey
Managing Director
+1 212-908-0568
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com