AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA' rating to the following Corpus Christi, Texas bonds:
--$14.5 million combination tax and limited pledge revenue certificates of obligation (COs) taxable series 2015;
--$75.6 million general improvement refunding bonds series 2015.
The Rating Outlook is Stable.
SECURITY
General improvement bonds and COs are payable from an annual property tax levy limited to $2.50 per $100 taxable assessed value (TAV). The COs are subject to the city's $0.68 per $100 of TAV tax rate limit for combined operations and non-voter-approved debt service. The COs are additionally payable from a subordinate lien on the surplus revenues of the city's solid waste disposal system.
KEY RATING DRIVERS
STABLE FINANCIAL PROFILE: The city's favorable financial position is supported by generally solid sales tax trends and management's prudent financial practices.
DIVERSE TAX BASE: The city's tax base is diverse with generally healthy rates of growth.
REGIONAL ECONOMIC HUB: Much of the current commercial/industrial development revolves around the large petrochemical industries, refineries, associated oil/gas support industries, and shipping/port activity that have traditionally anchored this regional employment center. The recent plunge in oil prices is expected to slow the pace of economic growth in the medium term if prices do not recover.
MIXED DEBT PROFILE: Overall debt levels remain moderate, principal amortization of direct debt is above average, and future debt needs are manageable. Pension funded levels are adequate and the city is making progress in attaining full funding of its actuarially determined annual pension cost (APC) for general city employees.
RATING PARITY: Given the availability of taxing margin within the $0.68 per $100 AV limit, no rating distinction is made between voter-approved and non-voter-approved tax supported debt. The total debt service rate is currently $0.21.
BELOW-AVERAGE SOCIO-ECONOMIC INDICATORS: Area population growth trends are modest and below those of the state; income and wealth indices are below state and national levels.
RATING SENSITIVITIES
MAINTENANCE OF FINANCIAL POSITION: Material deterioration of the city's strong financial management practices and operating reserves would produce negative rating pressure. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
CREDIT PROFILE
Situated on the Gulf Coast, Corpus Christi is the eighth largest city in Texas and serves as the regional economic center for a 12-county area. The city's 2015 population is estimated at 325,477.
ECONOMIC EXPANSION DESPITE OIL PRICE COLLAPSE
Healthy year-over-year gains in employment offset the gain in labor force and edged down the unemployment rate to 4.2% in May 2015 from 4.8% one year prior. This metric compares favorably to state and U.S. averages of 4.1% and 5.3%, respectively, for the same period. Local wealth levels are below average, although area cost of living is relatively low.
The recent plunge in oil prices will likely affect the pace of economic growth in the city over the medium term. Corpus Christi's economic base includes a number of petrochemical interests, and economic activity in recent years was driven by the city's proximity to the large and productive Eagle Ford Shale oil/gas formation in neighboring counties. While growth in other sectors (shipping, tourism, military, and higher education) has reduced dependence on the energy sector, oil and gas drilling remains a significant contributor to the regional economy.
Management reports various commercial/industrial projects underway or planned, which generally will capitalize upon the area's traditional strength in the energy sector and associated industries. Noteworthy development includes the $19 billion Cheniere liquid natural gas plant to be located adjacent to the Port of Corpus Christi (the port). The plant will be one of the largest construction projects in the Coastal Bend region, adding 300 permanent jobs to the area. In addition, the Tianjin Pipe project (a steel pipe mill) is projected to complete its $1 billion construction in 2016. It is estimated to be one of the largest Chinese investments in the U.S.
The port ranks as the fifth largest in the nation and 44th in the world based on tonnage. The Corpus Christi Army Depot (CCAD) is the largest industrial employer in South Texas, and several U.S. Navy installations are also located in the area. Tourism is an important component of the economy, with Padre Island National Seashore and Mustang Island State Park as leading area tourist attractions. Schlitterbahn, a major waterpark operator, opened a $550 million waterpark and resort for the 2015 summer season.
RECENT TAX BASE GAINS STRONG
The city's tax base is diverse with the top 10 taxpayers representing only 6% of TAV for fiscal 2015. Tax base gains have historically been solid, with a moderate 4% decline in fiscal 2011 followed by four years of increasing gains. Taxable values grew by a strong 9.7% and 7.6% in fiscal years 2015 and 2016, respectively, consistent with the improving levels of economic activity in the area. However, Fitch expects future AV growth to moderate should oil prices remain low.
POSITIVE FINANCIAL PERFORMANCE TRENDS
Operating performance in fiscal 2014 benefited from 14 months of sales tax collections due to a mid-year change in the city's fiscal year end from July 31 to Sept. 30. Calendar year 2014 sales tax collections grew by 6.2% over 2013 due largely to the economic activity stemming from the nearby Eagle Ford Shale and the city's key role in oil/gas shipping, processing, and support industries.
The general fund posted a $1.3 million net operating surplus (0.5% of spending) and a $50 million unrestricted fund balance in fiscal 2014. At a solid 19.9% of spending, reserves are well above the city's 10% formal policy. Changing the fiscal year end to Sept. 30 allows the city to base its adopted budget on certified AV figures, eliminating the need for budget revisions due to use of preliminary AV figures.
SALES TAXES FLATTEN IN CURRENT FISCAL YEAR
The adopted fiscal 2015 budget is balanced, funded with a level tax rate, and projects an aggressive 7.8% gain in sales tax revenues relative to the last 12 months of fiscal year 2014. Year-to-date sales tax collections (for the first 10 months) are flat from the previous year, attributable to the oil price drop. However, expenditure savings from conservative budget assumptions and mid-year budget cuts are projected to limit the impact of the sales tax revenue gap to a modest deficit of $1.3 million (0.6% of spending).
The budget also incorporates the city's new policy to transfer 6% of general fund revenues (equal to $10 million) to the street fund for maintenance, as well as a full year of the street maintenance fee imposed in mid-fiscal 2014 and collected from monthly utility bills.
PROPOSED BUDGET PROJECTS MODEST SALES TAX GAIN
The city's proposed fiscal 2016 budget is balanced using a more moderate assumption of 1% sales tax growth from fiscal 2015 actual receipts. Management's multi-year forecast through fiscal 2020 anticipates balanced operations that are supported by projected moderate growth in property and sales taxes. If revenue growth slows materially, Fitch expects the city to adjust its spending to maintain balance.
MIXED DEBT PROFILE
Overall debt levels are moderate at 4.1% of fiscal 2016 market value and $3,018 per capita, primarily due to debt of the large number of school districts and the local community college. Payout of property tax-supported debt is above average with 66% of principal retiring in 10 years. Principal amortization of the city's three dedicated sales tax levy bond series is rapid at nearly 84% in 10 years. City officials do not expect to additionally leverage any of the dedicated sales tax levies for further debt issuance over the near term.
The CO offering will fund improvements to the city's solid waste facilities and will be fully-supported by solid waste system revenues. Future debt plans include $2 million of additional COs for general public improvements in fall 2015.
UNDERFUNDED ANNUAL PENSION COSTS
The city participates in the statewide, agent multiple-employer Texas Municipal Retirement System (TMRS) for the majority of its employees. Recent structural and actuarial changes to TMRS approved at the state level have allowed for the restructuring of the system's funds that boosted most participants' funded positions, including those of Corpus Christi, but also required the pre-funding of updated service credits and cost of living increases.
Although TMRS reports the city's funded ratio as a high 91% as of Dec. 31, 2014, the city's audit reported its funded position at 73.2% for the same period. The difference is due to the city's more conservative valuation basis that assumes certain pension benefits are annually repeating rather than determined on an ad hoc basis as allowed by TMRS. However, the city has not fully funded its annual pension cost (APC) on this basis in recent years. The city does, however, pay at least the APC based on TMRS assumptions. Starting with the fiscal 2015 budget, the city is increasing its pension contributions by one percentage point annually through fiscal 2019 in order to fully fund its APC.
The combined APC for TMRS and the city's single employer fire fighters' pension plan totaled a moderate 8.7% of fiscal 2014 governmental spending. The combined unfunded liability of both plans was 1.5% of fiscal 2015 market value. The cost of other post-employment benefits (primarily retiree healthcare) is funded by the city on a pay-go basis, and comprised less than 1% of fiscal 2014 spending. The total carrying costs for debt service, pension, and OPEB equaled an elevated 23.5% of governmental spending; carrying costs would have been even higher, at 25.4%, if the pension payment had met the annual required contribution (ARC).
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, Municipal Advisory Council of Texas, and National Association of Realtors.
Applicable Criteria
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990219
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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