Fitch Rates Abilene, TX's $69.5MM Certificates of Obligation 'AA+'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned its 'AA+' rating to the following obligations of Abilene, Texas (the city):

--$69.5 million combination tax and surplus revenue certificates of obligation (COs), series 2015.

The COs are scheduled to sell via negotiation April 8. Proceeds from the COs will be used for water and sewer system improvements and to pay issuance costs.

In addition, Fitch affirms the following ratings:

--$33.7 million general obligation (GO) bonds at 'AA+';

--$131.5 million outstanding COs at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The GO bonds and COs are payable from a continuing direct ad valorem tax levied against all taxable property within the city, subject to a $2.50 per $100 assessed valuation limitation prescribed by law. The COs are also payable from a pledge of the net revenues of the city's water and sewer system.

KEY RATING DRIVERS

PRUDENT FINANCIAL MANAGEMENT: The city's management demonstrates conservative stewardship and adherence to policies and practices that contribute to the city's strong financial position.

SALES TAX DEPENDENCE: High reserve levels temper risks associated with the city's reliance on sales tax revenues for operations.

MANAGEABLE DEBT PROFILE, EXPANDED CAPITAL PLANS: The overall debt burden and carrying costs for debt and benefits are moderately low. Despite increased capital pressure for utility projects, Fitch expects general purpose capital needs to remain moderate.

STABLE LOCAL ECONOMY: Located in west Texas, the city serves as a commercial, educational, and cultural hub. The area economy demonstrated resilience during the recession with modest growth including taxable assessed valuation (TAV) gains in each of the last five years. Unemployment rates are typically lower than state and national rates but wealth levels trail the nation.

RATING SENSITIVITIES

MAINTENANCE OF STRONG FINANCIAL POSITION: The rating is sensitive to shifts in fundamental credit characteristics. Preservation of the solid financial profile, including overall revenue-raising flexibility, is a key credit consideration.

CREDIT PROFILE

Abilene is located 150 miles west of Fort Worth, along Interstate 20, in Taylor and Jones Counties. The estimated city population is 120,000, including about 5,000 military and civilian personnel stationed at Dyess Air Force Base. The city is home to two public hospitals and six higher education institutions.

STRONG FINANCIAL POSITION ENABLES BY PRUDENT MANAGEMENT

The city's financial profile is sound with strong general fund balance levels currently well in excess of the city's formal policy. The city maintains a minimum 20% reserve policy with an optimum target at 25%.

Economically sensitive sales tax receipts typically comprise around 40% of total general fund revenues. The city budgets conservatively for sales tax revenue each year. Year-to-date receipts for fiscal 2015 have grown by 5.8% over the same period in fiscal 2014, attributable to overall economic growth.

Operations generated a surplus in four of the last five years, with a modest use of fund balance in fiscal 2013 for one-time spending. The unrestricted general fund balance at fiscal 2014 year-end was a solid $25.9 million or 32% of spending and transfers out. The adopted budget for fiscal 2015 reflects a $1.5 million surplus despite a 3% pay raise for employees, and officials indicate that the city is on track to meet budgeted results.

MANAGEABLE DEBT BURDEN; GROWING CAPITAL PLANS TEMPERED BY HEALTHY ENTERPRISE OPERATIONS

Abilene's overall debt per capita is low at $1,386 per capita and debt is moderate as a percentage of market value (2.8%). These ratios benefit from the use of pay-as-you-go financing to fund recent capital projects. Principal amortization of direct debt is moderately slow at 42% in 10 years, including the COs now offered.

The city will seek $81 million of debt authorization from voters in May 2015 to fund various public improvements. If approved, the bonds will be issued over the next five years and the projects incorporated into the general purpose capital plan. This planned issuance will be offset by $33 million of general purpose debt maturing in the next five years.

The current issuance will fund capital projects related to a water source acquisition approved in 2014 due to the current drought conditions in the area. This offering completes the project's first phase, which has an estimated total cost of $70 million to expand potable water resources. This offering will also fund a second phase expansion of the water system estimated at $35 million. In conjunction with the current issuance, the city will adopt a large 9% rate increase for the average residential customer to support the additional debt service. Despite the rate hike, the city's rates compare favorably to similarly sized Texas systems.

Although the city plans to support these obligations from water and sewer system operations, they do not have the same legal protections as utility debt, which typically include a rate covenant and an additional bonds test. This could expose the city's general operations to the potential need to support debt service if rates are not raised sufficiently to cover increasing debt. Fitch considers this debt to be self-supporting, based on the health of the water and sewer system and the city's practice of raising rates to cover debt service.

ADEQUATELY FUNDED PENSIONS

The city participates in the Texas Municipal Retirement System (TMRS) for pension benefits to civil employees, with a robust funded position of 91% for fiscal 2014, based on an assumed 7% investment return rate. Pension benefits for firefighters not covered by TMRS are provided through the Abilene Fireman's Relief and Retirement Fund, a single-employer defined benefit plan. The funded ratio in this plan for fiscal 2014 is weak at 52% (assuming a 7% rate of return), but the city regularly pays more than the annual required contribution. The combined plans are funded at 80%.

The only other postemployment benefit (OPEB) the city provides is supplemental death insurance; this benefit is administered by TMRS. The annual contribution is nominal at less than $50,000 in each of the last three years. Total carrying costs for debt service, pension, and OPEB contributions are considered moderately low at 15.2% of fiscal 2014 governmental fund spending.

TAX BASE GROWTH

The city's tax base is diverse and grew by a compound annual growth rate of 3% between fiscals 2008 and 2015 despite the economic slowdown and without any decline. Some of the increase in TAV was driven by commercial investment (most notably in the healthcare sector), as well as by residential valuations that held up well. Additionally, located just outside of the city is the Horse Hollow Wind Energy Center, considered to be the world's largest wind development, with 421 turbines spread across roughly 60,000 acres. This development has attracted various wind energy companies to set up manufacturing and support operations within the city.

ECONOMIC HUB IN RURAL AREA

Abilene's primary employment sectors are government, education, healthcare, and retail. As the economic hub for west central Texas, the city serves an estimated retail base of 300,000. While the city's wealth levels are below the state and U.S. averages, the unemployment rate (3.3% for December 2014) is historically better than the state and national rates.

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=982455

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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:
Gabriela Gutierrez, +1-512-215-3731
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:
Gabriela Gutierrez, +1-512-215-3731
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