AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating to the following Plano, Texas (the city) tax-supported obligations:
--$77.3 million general obligation (GO) refunding and improvement bonds, series 2015;
--$5.6 million tax notes, series 2015.
The Rating Outlook is Stable.
SECURITY
The bonds and tax notes are payable by a limited ad valorem tax pledge of $2.50 per $100 of taxable assessed valuation (TAV) levied against all taxable property within the city. The COs are further secured by a de minimus limited pledge (not to exceed $1,000) of surplus net revenues of the city's waterworks and sewer system.
KEY RATING DRIVERS
DIVERSE, AFFLUENT RESOURCE BASE: The city benefits from a diverse corporate base and prominence in the broad and resilient Dallas-Fort Worth (DFW) economy. Residents are affluent and well-educated.
WELL-MANAGED FINANCES: Sound management practices and policies have sustained the city's strong financial profile and proactive approach to funding operational, economic development, and capital needs.
AMPLE RESERVES AND FLEXIBILITY: Operating reserves and liquidity provide good fiscal cushion. Additional flexibility is provided by the presence of sizable capital reserves and a portion of the tax rate earmarked for discretionary economic development.
MODERATE DEBT BURDEN: The city's debt burden and total carrying costs are moderate. Future debt issuance plans should be easily managed given the currently rapid pace of debt retirement. Pensions are well-funded and other post-employment benefit (OPEB) liabilities are facilitated through a dedicated trust.
RATING SENSITIVITIES
The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely.
CREDIT PROFILE
Plano is a wealthy and mature suburb located 20 miles north of Dallas with a population of approximately 274,000.
STRONG LOCAL ECONOMY WITH EXCELLENT DEMOGRAPHICS
Plano's suburban location within the extensive DFW economy and well-educated workforce support continued private sector investment and strong employment trends. The city's economy is diverse and serves as corporate and/or regional headquarters for a number of companies, including HP Enterprise Services, JCPenney, PepsiCo's Frito-Lay North American division, Alcatel-Lucent, Capital One Auto Finance, and Dr. Pepper Snapple Group. The percentage of residents with an advanced degree is nearly twice the national average. Wealth levels are also very high, with per capita personal income at 145% of the national average.
The city and region continue to outpace the nation in job growth. Plano's February 2015 unemployment rate improved to 3.8% from 5% a year prior as employment gains outpaced labor-force gains, which compares favorably to the state (4.3%) and national averages (5.8%), respectively.
JCPenney, the city's second largest taxpayer (0.6% of TAV) and fourth largest employer, made layoffs in 2014 and continues to adjust its business strategy to combat poor margins. Fitch believes the impact of further layoffs and down-sizing would not have significant credit implications given the diversity of Plano's economy and taxing base.
HEALTHY HOUSING MARKET/COMMERCIAL DEVELOPMENT SUPPORT TAV GAINS
TAV climbed a solid 7.1% in fiscal 2015, which marks the fourth consecutive year of tax base gains since slight contraction resulting from lower commercial and residential valuations. Per-capita market value has grown to a high $131,000 and the housing market is very active. Median home sales prices continue to trend up and totaled $244,000 as of March 31, 2015 according to Zillow.
The city continues to benefit from large corporate relocations which should further stoke the city's housing market. Toyota recently broke ground on a $400 million campus for the relocation of its North American headquarters to Plano from California. More than 4,000 employees will work on the campus that's scheduled to open in early 2017. FedEx Office & Print Services, a subsidiary of FedEx Corp., is also building a corporate headquarters that will consolidate 1,200 employees from the DFW metroplex. Liberty Mutual Insurance is also a $325 million campus to consolidate 4,000 employees from the DFW metroplex. All three projects are within the high-density Legacy West multi-use development in west Plano. Fitch believes prospects for continued tax base growth are positive.
STRONG FINANCIAL MANAGEMENT PRACTICES AND RESULTS
Conservative budgeting, interim reporting, and long-term forecasting practices are hallmarks of the city's financial management, and this approach has led to results that consistently outperform budget projections. Significant budget flexibility is apparent through the annually large general fund operating transfers to a capital reserve fund (5%-8.8% of spending since fiscal 2008), which could be reduced, deferred, or eliminated if necessary. In addition, 4% of the tax rate is earmarked for economic development purposes and could be re-directed by the city council to general operations.
Management successfully navigated modest recessionary pressures with spending reductions while prudently continuing the transfers to the capital reserve fund. Strong growth in property taxes and sales taxes, the two leading sources of operating revenues, as well as continued conservative budgeting yielded positive margins in fiscal years 2011-2013, totaling 1.7% to 3.9% of spending.
The fiscal 2014 audit posted a net general fund deficit of $4.9 million (2.1% of spending), considerably less than the budgeted deficit of $20 million due to greater than budgeted sales tax revenues and positive expenditure variances. Actual sales tax collections totaled $73.9 million or 120% of budgeted collections. The planned deficit was driven primarily by rising transfers to the capital reserve fund which reflect the city's goal of funding 75% of estimated annual depreciation. The resulting unrestricted fund balance totaled a still strong $50.5 million or 20.9% of spending and year-end liquidity covered current liabilities 4.8x.
The fiscal 2015 budget includes another $20 million (8.8% of appropriations) draw down resulting from a similarly sized capital reserve fund transfer. This is commensurate with past budgets which appropriated fund balance reserves above its policy floor of 30 days for capital and non-recurring items. The operating budget also funds moderate 3% pay hikes and the addition of 35 new positions (equal to a 1.7% increase).
City policy requires budgeted sales tax revenue projections equal the average of the last three years' collections (net of audit adjustments). As a result, sales taxes are budgeted at $65.9 million or a modest 89% of fiscal 2014 actual collections. Sales tax collections for the first six months of fiscal 2015 are up 8.8% over the same period the prior year and a large 18.7% over budget. Given the positive year-to-date trends and prior-year performance, Fitch expects the city will again significantly outperform the forecast draw-down. The presence of $51 million of unrestricted funds in the capital reserve fund (21% of fiscal 2014 general fund spending) further enhances the city's strong fiscal profile.
MODERATE DEBT BURDEN
The city's overall debt ratios are moderate at 3.7% of market value and $4,888 per capita. Amortization of tax-supported debt is rapid at 69 % of principal retired in 10 years and all repaid in 20 years.
The city actively maintains a comprehensive capital improvement program. The city's remaining GO authorization totals $122 million including $94 million of bonds approved by a large margin of voters in May 2013. No tax rate impact is anticipated for the city's GO bonds due to the rapid retirement of existing debt. The city's next planned issuance is scheduled for early 2016 in an amount of $40 million. Debt issuance will be supplemented by continued pay-go capital spending.
PENSIONS NOT A PRESSURE
Employee pension benefits are substantially provided through the city's participation in the Texas Municipal Retirement System (TMRS), an agent-multiple employer plan. The city also maintains a single-employer Retirement Security Plan (RSP) for employees in lieu of participation in federal social security. The actuarially required contributions (ARC) for both plans are consistently funded and together consumed 8.8% of fiscal 2014 governmental fund spending. Fitch considers both pension plans well-funded, with TMRS at 83.7% and RSP at 92.6% as of Dec. 31, 2013 year-end using an adjusted 7% investment return.
Unfunded liabilities OPEBs are a nominal 0.1% of market value and the city pro-actively established an OPEB trust in fiscal 2008. Combined fixed costs for debt service, pension and OPEB consumed an above average 23.3% of fiscal 2014 governmental fund spending but this is mostly a result of the higher annual debt cost from rapid amortization.
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, Zillow.com, and Texas Municipal Advisory Council.
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=984200
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