AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA+' rating to the following limited tax obligations for Grand Prairie, Texas' (the city):
--$25.4 million combination tax and revenue certificates of obligation (COs), series 2014.
The bonds are scheduled to sell competitively Nov. 4.
Proceeds of the COs will be used for capital improvements, including public safety, library, and other municipal facilities, street and drainage improvements, and bond issuance costs.
In addition, Fitch affirms its 'AA+' rating on $165.4 of outstanding LTGOs and COs.
The Rating Outlook is Stable.
SECURITY
The COs and GOs are payable by a pledge of ad valorem taxes, limited to $2.50 per $100 taxable assessed valuation (TAV). The series 2014 COs are further secured by a limited, de minimus pledge ($2,500) of the net revenues of the city's water and wastewater system.
KEY RATING DRIVERS
STRONG, RESILIENT ECONOMY: The city of Grand Prairie is located in the heart of the broad and resilient Dallas-Fort Worth (DFW) metropolitan area. Residents benefit from easy access to an expansive employment market via the major transportation corridors that run through the city.
DIVERSE RESOURCE BASE: The city's tax base is diverse with average wealth metrics. Prospects for continuing economic development and tax base growth are favorable given the city's central location in a strong regional economy, some ongoing development, and highway expansion projects.
SOUND FISCAL PROFILE: Sound management practices, including adherence to prudent fiscal policies and timely spending adjustments, have preserved the city's strong financial profile. General fund reserves and liquidity are robust and the city has prudently continued its pay-go approach to capital spending.
ELEVATED DEBT BURDEN: Overall debt levels are high and likely to remain so, due primarily to the debt of various overlapping school districts. Future capital needs will require debt funding but the budget impact should be tempered by the rapid amortization of existing debt.
GOOD PENSION FUNDING: Unfunded pension liabilities are manageable, having declined due to the city's full funding of its required annual contribution as well as system-wide structural and actuarial changes.
RATING SENSITIVITIES
The rating is sensitive to shifts in fundamental credit characteristics, including the city's strong financial management practices and healthy economy that provide some offset to the high debt burden. Any weakening in fundamental credit characteristics could pressure the rating. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
CREDIT PROFILE
The city of Grand Prairie encompasses a narrow, 80 square mile stretch of land in the center of the DFW metroplex, directly between the two major cities and just south of DFW International Airport. Population growth is continuing and is currently estimated at over 181,000, up 44% from 2000.
STABLE ECONOMIC BASE CENTRALLY LOCATED IN DFW METROPLEX
Defense, manufacturing, aerospace, and distribution are major components of Grand Prairie's economy and are complemented by a retail and entertainment presence. The city's economy is buoyed by its location in the heart of the DFW metroplex and easy access to major air and ground transportation routes.
The city's employment picture is positive, with both employment and labor force growth in the last 12 months improving the unemployment rate to 5.5% in August 2014 from 6.3% in August 2013. The unemployment rate is comparable to the state (5.5%) and below the national average (6.3%). Residents also benefit from access to the broad and diverse employment market of the greater DFW MSA, which has outpaced the nation in job growth since 2009.
City wealth indices are mixed. Median household income approximates the state and nation but per capita income is only 80% of the national norm. Market value per capita ticked up to $71,000 in fiscal 2014 but remains below-median for the 'AA' rating category.
STRENGTHENED TAV
Taxable assessed value (TAV) performance was lackluster from fiscal years 2010 to 2013, declining by an average of 1% annually during this four-year period. The TAV weakness reflected slightly lower residential and flat commercial/industrial valuations, as well as a decline in new development activity. However, commercial development along recently completed highway connections had been anticipated for some time, and the first major facility, a Restoration Hardware retail distribution center, opened in 2013. In addition, permitting activity gradually strengthened. The positive growth sparked a 5% increase in TAV for fiscal 2014.
Year-over-year TAV growth strengthened in fiscal 2015 to 7.5%, reaching $10.5 billion. This was boosted in large part by improving home and business inventory valuations. Officials expect some continuation of this two-year TAV momentum over the near-term with further, positive residential reappraisals and added development along new highway access roads, which Fitch believes is reasonable. Management actively promotes economic development and has spurred investment through the city's three diverse tax increment financing (TIF) districts. Highlighting these efforts is a recently announced hotel and indoor ski resort facility, estimated to provide roughly 2,000 jobs upon full operation.
STABLE FINANCIAL PROFILE BENEFITS FROM GOOD MANAGEMENT PRACTICES
The city's finances are well-managed. Property and sales taxes are the leading sources of general fund revenue at 43% and 24%, respectively, in fiscal 2013. Management prudently managed sluggish performance in revenue from fiscal years 2009 to 2011 with spending adjustments. Recent modest fund-balance declines reflect continued general fund transfers for capital and other non-recurring expenditures, including early defeasance of debt with cash. Management considers unassigned fund balance in excess of the city's formal policy floor of 50-60 days of expenditures (15%) as available for non-recurring budget items. Fund balances have tracked at between 25% and 33% of spending over the past six fiscal years.
The general fund concluded fiscal 2013 with a modest $1 million net surplus after transfers (roughly 1% of spending). Ending results remained within the range of fiscal performance previously anticipated by Fitch given the year's steady narrowing of the $5.7 million drawdown originally budgeted. The positive variance was largely due to added growth in property and sales tax revenues and under-spending of the operating budget. Unrestricted fund balance improved slightly to $28.8 million or a strong 28.2% of spending. Fiscal 2014 projections anticipate property tax revenue in excess of budget at year-end and serve to offset in part the year's sluggish sales tax results. Estimated appropriations are slightly below budgeted amounts and also include another contribution to capital funds of $6 million or roughly the amount of the year's anticipated drawdown.
The fiscal 2015 general fund budget of $109.4 million increases total appropriations by $6.8 million or 6.7% from 2013 spending estimates. Key line-item spending changes include a $4 million increase in personnel costs for additional staff and pay raises. Operations remain structurally balanced and revenue assumptions appear reasonable. The nominally flat tax rate of $0.67 per $100 was adopted for the 14th consecutive year. A $4.8 million fund balance drawdown is budgeted for one-time spending priorities, but residual fund balance would remain in compliance with the city's fund balance policy. In addition, Fitch believes it is likely the city will improve upon initially budgeted projections, in line with historical performance.
ELEVATED DEBT BURDEN LIKELY TO PERSIST
Overall debt levels are high at $5,100 per capita and 7.2% of full market value. The elevated debt levels are primarily attributable to the debt of various overlapping school districts. Outstanding direct debt of the city consists of GO bonds, COs repaid from general property tax and tax increment district revenues, and sales tax bonds. The city's variable-rate exposure has moderated somewhat to roughly 22% of outstanding debt, down from what was a recently high 28% in Fitch's estimation. Early retirement of a portion of the city's variable-rate obligations in addition to issuance of primarily fixed-rate, tax-supported debt since 2008 has prudently reduced the presence of this risk over time. Tax-supported debt service (property-tax and sales-tax bonds) consumed 13% of governmental fund spending in fiscal 2013. The higher carrying cost also reflects the rapid pace of amortization (84% retired in 10 years).
The city's most recent five-year capital improvement plan (CIP; 2015-2019) calls for an increased $171 million of tax-supported debt issuance, up from $128 million in the last iteration. Total CIP spending is higher than prior-year plans due to the addition of a public safety communication system ($13 million) and some new city facility projects. Nonetheless, management estimates there is sufficient capacity to debt-fund these various capital projects without an accompanying tax rate increase, assuming a modestly paced 2% annual TAV expansion during that time period. Fitch believes this is a reasonable assumption given the recently stronger TAV growth and also takes some comfort from the city's reported flexibility in the timing of the city's CIP if there is a return to sluggish TAV trends.
In addition to the city's aforementioned tax-supported CIP, the city received voter approval in May 2014 to repurpose and extend two expiring sales tax levies (0.125% each) to separately support an expansive capital parks project (EPIC). Preliminary plans include the maximum allowable use of $75 million in debt funding from this dedicated tax revenue stream for the construction of a large recreation center and waterpark, expected to open in the summer of 2017. Funding for the other capital projects planned (library, amphitheater, trails and playground) are reportedly not anticipated to require debt issuance, but will be eventually funded by the EPIC budget. Operations are also expected to be self-supporting, which is underlined by management's plan to adjust spending as needed to ensure these results. However, in the event they became a drain on general fund or other budgetary resources, it could affect the city's credit standing.
City officials envision the waterpark as spurring economic development, although Fitch believes this may be fairly optimistic given the area's competitive entertainment environment and average local wealth metrics. The city's debt ratios will likely remain elevated given the planned tax-supported capital projects. However, Fitch expects the debt burden will remain manageable given the city's prudent fiscal management, prospects for tax base growth, and rapid debt retirement.
WELL-FUNDED PENSIONS
Pensions are provided through the Texas Municipal Retirement System (TMRS), a state-wide, agent-multiple-employer plan. The city has consistently made 100% of the actuarially-calculated annual required contribution (ARC). The city's pension position has improved in recent years as a result of consistent ARC funding and more notably, TMRS' recent, system-wide methodology changes to its fund accounting and actuarial assumptions. The city's pension funded position as of Dec. 31, 2012 was a sound 86.3% using the system's 7% investment return.
Other post-employment benefits (OPEB) are funded on a pay-go basis. The unfunded liability for the city' OPEB totaled a nominal 0.30% of full market value. Combined fixed costs for debt service (excluding cash defeasances), pension ARC, and OPEB pay-go totaled a manageable 19% 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, the Texas Municipal Advisory Council, 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=907254
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