Fitch Rates Huntsville TX's Series 2015 COs 'AA'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned an 'AA' rating to the following Huntsville, Texas (the city) bonds:

--$2.9 million combination tax and revenue certificates of obligation (COs) series 2015.

The bonds are scheduled to sell via competitive sale September 15. Proceeds of the bonds will be used to construct, expand, and equip a solid waste transfer station as well as pay issuance costs.

Fitch has also affirmed the 'AA' rating on the city's outstanding $17.7 million COs and limited tax GO (LTGO) bonds.

The Rating Outlook is Stable.

SECURITY

The COs and LTGOs are payable from an ad valorem tax pledge, limited to $2.50 per $100 taxable assessed valuation (TAV) and levied on all taxable property within the city. The series 2015 COs are further secured by a nominal pledge (not to exceed $1,000) of surplus revenues from the city's solid waste system.

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: The city has maintained consistently positive operating margins, good expenditure control, strong fund balances, and ample liquidity, which has resulted in significant financial flexibility.

RELIANCE ON SALES TAX RECEIPTS: Strong reserves somewhat mitigate the general fund's moderate reliance on economically sensitive sales tax receipts. Sales tax revenues have climbed consistently for the past four fiscal years with further growth realized in fiscal 2015.

MANAGEABLE DEBT AND CARRYING COSTS: The overall debt burden is moderate. Principal amortization of the city's direct, tax-supported debt is rapid. Carrying costs for debt service and retiree benefits are expected to remain manageable.

LIMITED BUT STABLE ECONOMY; LOW WEALTH: The local economy is limited, with employment anchored by the state prison system headquarters and a large state university. Employment metrics reflect modest growth, though area wealth indicators are low, skewed somewhat by the inclusion of a large prison inmate and student population in the census count.

RATING SENSITIVITIES

MAINTENANCE OF FINANCIAL PROFILE: The rating is sensitive to material change in the city's strong fiscal practices, including maintenance of high reserve levels as an offset to volatility in the city's revenue base.

CREDIT PROFILE

The city, located on Interstate 45, about 70 miles north of Houston and 170 miles south of Dallas, serves as the county seat for Walker County and home of the Texas prison system headquarters and Sam Houston State University (SHSU). The city's population is estimated at just under 40,000 and has grown modestly over the past decade.

LIMITED ECONOMY ANCHORED BY STATE GOVERNMENT

A large state government presence drives the local economy. The Texas prison system headquarters employs a stable base of administrative personnel; seven state prisons in the Huntsville area bring the employment total to nearly 6,800 workers. Sam Houston State University has shown strong growth in recent years with increases in both employment and students; the student population totals roughly 20,000. Fitch believes the strong presence of government institutions provides a source of stability for the otherwise weak local economy.

The local employment base remains relatively stable. The city's unemployment rate of 4.8% as of March 2015 declined from the prior year's (6.3%) in part due to modest labor force loss, while remaining slightly above the state (4.2%) and below the nation (5.6%) for the same time period. The city's wealth metrics remain approximately 50% below the state and nation, with an individual poverty rate greater than twice the national average, though the local prison and student populations skew these figures.

The city's TAV remained firm during the economic downturn, and has continued to strengthen since then. Modest amounts of new retail/commercial development and tax base appreciation have been the key drivers of recent TAV growth. TAV grew by 5% in fiscal 2015 to $1.4 billion, and certified values from the appraisal district reflect another solid 8% TAV gain in fiscal 2016. Taxpayer concentration remained moderate at 12% in fiscal 2015 with various apartment complexes comprising a majority of the top ten taxpayers list.

STRONG FINANCIAL PROFILE

The city has posted positive results in all but one of the last six fiscal years, yielding exceptionally high liquidity and strong reserves, well above the city's formal minimum fund balance policy of 25% of budgeted expenditures. Reserves in excess of this amount are made available for transfers to the capital projects fund. The city reported an unrestricted general fund balance of $10.9 million, or an ample 60% of general fund spending, in fiscal 2014.

The city relies on economically sensitive sales tax revenues (39% of general operating revenues in fiscal 2014), but this reliance is largely offset by the city's maintenance of high fund balances and ample liquidity. After declining by approximately 7% in fiscal 2010, sales tax receipts have shown consistent growth in the last four fiscal years due to new retail stores and the improving economic environment.

In contrast, property taxes provided about 21% of the city's fiscal 2014 general operating revenue. The city's total property tax rate of roughly $0.42 per $100 TAV in fiscal 2014 remained relatively low, well below the cap of $2.50 per $100 TAV. The city maintains healthy revenue flexibility in its property tax levy, (comparable to most Texas cities), given the statutory ability to increase the tax rate annually (up to 8% or the rollback rate) without voter approval.

Further sales tax gains in fiscal 2015 from additional retail/commercial development that opened mid-year is presently estimated at 10% or about $700,000 by management over the conservative $6.8 million originally budgeted. Assisted by some expenditure savings, the city currently projects to close fiscal 2015 better than budget with a modest operating surplus. Moderate use of fund balance (approximately $700,000 or about 4% of spending) is anticipated at fiscal 2015 year-end as city council has approved the early repayment of a portion of the city's outstanding tax-supported debt in order to allow for a modest reduction in the fiscal 2016 tax rate.

The preliminary $19.5 million fiscal 2016 general operating budget is structurally balanced with the proposed use of $975,000 in reserves, largely for one-time capital spending. Even with the projected drawdown, reserves would remain healthy at $9.2 million, or a still-high 47% of budgeted spending.

MANAGEABLE DEBT AND OTHER LONG-TERM LIABILITIES

Fitch views the city's overall debt ratios as moderate at approximately $1,210 per capita and 3% of fiscal 2016 market value. Debt service costs are relatively affordable, at $2.5 million (10.2% of governmental fund spending) in fiscal 2014, despite the city's rapid tax-supported principal amortization rate of 83% in 10 years.

General government capital needs are manageable; the city typically funds its smaller capital items with annual pay-go spending. A soon-to-be completed facilities study is expected to further inform the city's intermediate to long-range capital plans, although streets remain a key priority for the city. Management anticipates no new tax-supported borrowing in the near-term; annual debt service for this issuance is projected to be fully supported by solid waste/sanitation revenues after a recent rate increase.

Pension benefits are provided through the Texas Municipal Retirement System (TMRS), an agent multiple-employer plan. The city's funded ratio was 74.2% as of Dec. 31, 2013, based on the plan's 7% investment rate of return. The city has consistently funded its annual pension cost (APC) over fiscals 2012 - 2014, which was just under $2 million, or roughly 8% of governmental fund spending, in fiscal 2014. Recent revisions to various pension plan provisions are not yet reflected in actuarial valuations, and should allow for additional improvement in the pension funded position going forward.

The city historically paid other post-employment befits (OPEB) on a pay-as-you-go basis, but has contributed approximately $2 million to an OPEB trust established in 2011. The OPEB unfunded liability totaled $19.5 million, equivalent to 1.3% of market value in fiscal 2014. The city established employee healthcare savings accounts in fiscal 2014 to curb future retiree benefit costs. Carrying costs (pension, OPEB, and debt service, net of self-supporting enterprise debt) represent a manageable 20.2% of governmental fund spending in fiscal 2014.

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, Underwriter, and Bond Counsel.

Additional information is available at 'www.fitchratings.com'.

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

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990489

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Contacts

Fitch Ratings
Primary Analyst:
Rebecca C. Moses, +1-512-215-3739
Director
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst:
Rebecca Meyer, +1-512-215-3733
Director
or
Committee Chairperson:
Arlene Bohner, +1-212-908-0554
Senior Director
or
Media Relations:
Sandro Scenga, +1-212-908-0278
New York
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Rebecca C. Moses, +1-512-215-3739
Director
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst:
Rebecca Meyer, +1-512-215-3733
Director
or
Committee Chairperson:
Arlene Bohner, +1-212-908-0554
Senior Director
or
Media Relations:
Sandro Scenga, +1-212-908-0278
New York
sandro.scenga@fitchratings.com