Fitch Affirms Various Round Rock, TX Bonds; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has taken the following rating actions on the city of Round Rock, TX's bonds:

--$5.7 million in outstanding hotel occupancy tax (HOT) revenue refunding bonds, series 2007, affirmed at 'A+';

--$10.8 million in outstanding Round Rock Transportation System Development Corporation senior lien sales tax revenue refunding bonds, series 2006, affirmed at 'AA'.

The Rating Outlook is Stable.

SECURITY

The HOT revenue bonds are payable from hotel occupancy tax revenues, less the local tourism component, levied within the city of Round Rock, as well as any amounts and investments on deposit in the revenue fund. The city levies the maximum allowable 7%. Under the bond ordinance, the rate may not be lowered while the bonds are outstanding. Pursuant to city ordinance, the greater of a) 1% of the cost of the room or b) $339,240 (as of 2015, adjusted annually by 3% on a compounded basis) must be used by the city for advertising and promotion and does not constitute part of the pledged revenues.

The sales tax revenue bonds are payable from a first lien on a voted half-cent sales tax levied within the city, the proceeds of which are dedicated for streets, roads, and other transportation-related purposes.

KEY RATING DRIVERS

AMPLE HOT COVERAGE BY CONCENTRATED REVENUES: Hotel tax revenues have recovered from recession-induced declines and continue to provide strong coverage for the HOT bonds. Revenues from the narrow base are concentrated among the top taxpayers.

STRONG SALES TAX COVERAGE DESPITE CONCENTRATION: Strong coverage of sales tax revenue bonds is projected to improve significantly over the near term as a sizable amount of debt is retired. A single taxpayer accounts for nearly one-third of total collections. Sales tax revenue has recovered to pre-recessionary levels and has posted growth in each of the last five fiscal years.

CONCENTRATED EMPLOYMENT WITHIN SOUND AUSTIN AREA ECONOMY: The city's economy is strong although somewhat concentrated with employment increasing to meet population gains.

STRONG FINANCIAL PROFILE: Financial management is strong with consistent positive results and robust fund balances.

ABOVE-AVERAGE SALES TAX DEPENDENCE: The budget's dependence on sales tax revenues, which are in turn fairly dependent on a single payer, makes financial operations susceptible to economic fluctuations.

SIZABLE DEBT; AVERAGE PAY-OUT: The city's overall debt levels are elevated. Total carrying costs, including pension and OPEB costs, are above average and the rate of principal amortization is average. The city does not plan to issue any additional sales tax or HOT bonds.

OVERALL CREDIT QUALITY CAPS RATINGS: The HOT and sales tax revenue bond ratings are capped by the general credit quality of the city.

RATING SENSITIVITIES

HOT REVENUE DECLINES: Large and sustained declines in hotel occupancy tax revenues could lead to negative rating pressure.

TOP SALES TAXPAYER CONCENTRATION: Significant sales tax declines from the city's top taxpayer would likely lead to negative rating pressure, given the sales tax concentration from Dell Inc.

CONTINUED STRUCTURAL BALANCE: Fitch views maintenance of the city's strong financial position as critical given its exposure to economically sensitive taxes.

GROWTH PRESSURES: The city will be challenged to address increasing infrastructure needs without undue fiscal strain as the population continues to expand.

CREDIT PROFILE

Round Rock is located 19 miles north of Austin in Williamson County. Population growth has been substantial since 1990 with an estimated 80% population increase since 2000.

HOT REVENUES PROVIDE SOLID COVERAGE

Debt service coverage on HOT bonds remains healthy. HOT revenues now exceed pre-recession levels after experiencing a cumulative 22% decline in fiscal years 2008-2010. Revenue collections grew by a cumulative 31% in fiscal years 2012-2014, and year-to-date collections for fiscal 2015 are up 7.4% over the prior year.

Coverage of maximum annual debt service (MADS) was a solid 3.4x for fiscal 2014. Significant concentration among top taxpayers remains, with Austin Marriott accounting for 19% of total HOT revenues and the top five payers accounting for 46% of total revenues during fiscal 2014. The city's budget conservatively reflects a revenue decline for fiscal 2015 that would provide 3x coverage. Legal provisions include a cash-funded reserve and weak 1.4x MADS coverage from historical revenues needed to issue parity debt. No additional issuance is planned for at least the next five years.

STRONG COVERAGE OF SALES TAX BONDS

Pledged revenues from a permanent, citywide sales tax approved by voters have nearly recovered to prior levels after decreasing by over 10% in fiscal 2009, though year-to-date fiscal 2015 collections are down slightly from the previous period. Management reports that sales tax revenue from the city's top taxpayer, Dell Inc., is down somewhat for the first quarter, while collections from other payers have grown on a year-over-year basis. Dell accounted for 32% of the city's total sales tax collections in fiscal 2013.

MADS coverage of the senior lien bonds remains robust at 3.8x using audited fiscal 2014 revenues. Fitch expects this coverage to improve to 8.2x by fiscal 2018 assuming no growth in pledged revenue as debt service requirements decrease over the near term. Legal provisions are adequate, requiring 1.4x MADS coverage to issue parity debt. No additional debt is planned for at least five years. The debt service reserve was fulfilled with a surety policy from MBIA.

CONCENTRATED ECONOMY EXPANDING RAPIDLY

The city's economy is strong with significant retail, healthcare, and education sectors. The corporate headquarters of Dell Inc. is located within the city, serving as the city's top employer with 13,000 employees, according to the most recent data.

Dell's founder and CEO partnered with a private equity firm to complete a leveraged buy-out of the company in October 2013. Manufacturing activity at this campus is limited, and the buy-out has produced no apparent negative impact on employment or property valuation. Fitch's upgrade of Dell's IDR in December 2014 to 'BB'/Positive Outlook from 'BB-'/Stable Outlook reflects the company's use of free cash flow to repay debt and Fitch's expectation of reduced core leverage by the end of fiscal 2015.

Several hospitals and healthcare facilities are located in the city, including a clinical campus for the Texas A&M University System Health Science Center. The campus opened in 2009 to provide clinical training for medical students and has since been joined by additional high educational facilities, a nursing college and a community college campus, which both opened in 2010. The city also has a sizable retail sector centered around the Round Rock Premium Outlets, which are fully occupied.

Employment has largely increased at the same rate as labor force, meeting the city's population gains over time. The 3.3% unemployment rate for December 2014 declined notably from a year prior and remains well below state and U.S. levels. Wealth levels in the city are above average.

STRONG GENERAL FUND OPERATIONS

Financial management is strong, evidenced by consistent operating surpluses, robust fund balance levels, and adherence to conservative fiscal policies. Audited fiscal 2014 results reflect a $6.8 million (7.2% of spending) operating surplus before transfers. After an $8.4 million non-recurring transfer out, the unrestricted general fund balance was a high 40.6% of spending. The city's fiscal 2015 budget is balanced, based on a moderate 3.8% decline in sales taxes.

SALES TAX CONCENTRATION ON DELL INC.

The city remains heavily dependent on the 1.5-cent portion of the sales tax that is available for operations. This tax is levied on the same base as the half-cent transportation sales tax and accounts for roughly half of all general fund revenues. A significant portion of operating sales tax revenues stem from a revenue sharing agreement between Dell and the city whereby sales tax revenues generated by taxable computer sales within the state are shared between Dell and the city based on a percentage of total tax revenues.

As sales tax revenues increase or decrease, the amount rebated to Dell moves accordingly. In its fiscal 2015 budget, the city expects Dell to account for 27% of all operational sales tax revenues (about 14% of total general fund revenues). Notably, any sales taxes generated by Dell in excess of 27% are transferred to a separate capital projects fund. Transfers of excess sales tax revenues, including those from Dell, have totaled 8.5%-12% of general fund spending since fiscal 2008.

The capital projects fund totaled $25 million at the end of fiscal 2014, equal to 26% of general fund spending. The city adopted a financial management policy that requires it to reduce its operational reliance on Dell's sales tax revenues to 20% from 27% by 2017. This policy recognizes the cyclicality inherent with computer-related sales tax revenues, as well as the auspicious growth trend in sales taxes from other sources.

ELEVATED DEBT PROFILE

Overall debt levels are expected to remain elevated, currently at 5% of market value and $4,122 per capita, with planned issuance of the city's remaining 2013 bond authorization of $52.6 million over the medium term. Capital plans include various parks, public safety, and library projects, and will be funded with general obligation issuances and pay-as-you-go financing.

The city's pension fund is funded at 78% as of Dec. 31, 2013, using a 7% investment rate, and the city regularly pays 100% of its annual required contribution. Total carrying costs for GO bonds, sales tax bonds, HOT bonds, and retiree benefits are moderate at 19% of governmental fund spending. The aggregate amortization rate is average with 56% of principal retired in 10 years.

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, the Municipal Advisory Council of Texas, 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:

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=981249

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Contacts

Fitch Ratings
Primary Analyst:
Shane Sellstrom, +1-512-215-3727
Analyst
Fitch Ratings, Inc.
111 Congress Ave, Suite 2010
Austin, TX 78701
or
Secondary Analyst:
Jose Acosta, +1-512-215-3726
Senior Director
or
Committee Chairperson:
Amy Laskey, +1-212-908-0568
Managing Director
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Shane Sellstrom, +1-512-215-3727
Analyst
Fitch Ratings, Inc.
111 Congress Ave, Suite 2010
Austin, TX 78701
or
Secondary Analyst:
Jose Acosta, +1-512-215-3726
Senior Director
or
Committee Chairperson:
Amy Laskey, +1-212-908-0568
Managing Director
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com