Fitch Rates Bexar County, Texas' Venue Project Rev Bonds 'A+'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned an 'A+' rating to the following Bexar County, Texas (the county) obligations:

--$78.7 million venue project revenue bonds (combined venue tax) series 2015.

The bonds are scheduled to sell via negotiation during the week of Oct. 26. Bond proceeds will be used to refund short-term debt issued for the purpose of improving the county-owned AT&T Center.

In addition, Fitch affirms the ratings on the following outstanding bonds for the county:

--$237.7 million venue project revenue bonds (combined venue tax) at 'A+';

--$83.6 million venue project revenue bonds (motor vehicle tax) at 'A+';

--$27.9 million unlimited tax (ULT) bonds at 'AAA';

--$1.45 billion limited tax (LT) bonds at 'AAA'.

The Rating Outlook is Stable.

SECURITY

Motor vehicle rental tax bonds are payable from a first lien on the county's 5% motor vehicle rental tax (MVRT). Combined venue tax bonds are payable from a first lien on the county's 1.75% hotel occupancy tax (HOT), a junior lien on the county's 5% MVRT, and a $1.3 million annual license payment from the NBA Spurs (for the 2009 taxable bonds only). ULT bonds are payable from an unlimited annual property tax levied against all taxable property within the county. The LT bonds are payable from an annual property tax levied against all taxable property within the county, limited to $0.80 per $100 taxable assessed valuation (TAV) for operations and debt service.

KEY RATING DRIVERS

LARGE, MATURE HOSPITALITY SECTOR: Pledged revenues for the venue project revenue bonds benefit from the county's position as the top tourist destination in Texas. MVRTs and HOTs are subject to economic volatility but benefit from the county's large convention and visitor industry which markets to both regional and national audiences.

LOW COVERAGE; NO ADDITIONAL BONDS AUTHORIZED: Annual debt service coverage (DSC) for the combined venue tax bonds has thinned to only 1.06x with the current offering. DSC for the MVRT bonds is projected to remain sound. Both pledged revenue sources require voter approval for additional leveraging.

LARGE ACCUMULATED RESERVES: Fitch considers accumulated venue taxes in the capital improvement and coverage fund (CICF), which are restricted for debt service, capital improvements, or bond redemption, as a key mitigating credit factor. The rating assumes reserves will remain significant net of the current $10 million allocation for improvements to the AT&T Center. The bonds have cash-funded debt service reserves equal to average annual debt service (AADS).

SOUND FINANCIAL MANAGEMENT: The county's solid financial position has benefited from prudent stewardship during the last economic slowdown as evidenced by a multi-year approach to controlling expenditure growth and limiting the scale of structural imbalances.

WEAK DEBT PROFILE, SATISFACTORY PENSION POSITION: The long-term liability profile is characterized by a high overall debt burden, growing carrying costs, and slow principal amortization. However, the county fully funds the annual pension contribution requirement and its debt service tax rate is modest.

STABLE ECONOMY: Population growth remains rapid. The military remains a major economic factor although the local economy has diversified notably. The county is benefitting from rapid employment gains, enabling the unemployment rate to remain well below state and national averages despite the contraction of the energy sector.

TAX BASE STABILIZED: Recent solid tax-base growth has been aided by the area's strong housing market, ample developable land, and previously surging oil and gas activity at the nearby Eagle Ford Shale. Contraction of the county's emerging energy sector may dampen future tax base gains.

GO RATING PARITY: The LT bonds are rated on par with the ULT bonds due to the significant rate-raising flexibility under the rate limitation supporting the LT bonds. The county currently levies a combined $0.28 operations and debt service tax rate compared to the limit of $0.80.

RATING SENSITIVITIES

WEAKER COVERAGE: It's Fitch's expectation that coverage of the combined venue tax bonds will improve via continued moderate pledged revenue growth. Conversely, a decline in coverage for these bonds beyond already thin levels would pressure the rating. There is more tolerance for pledged revenue declines for motor vehicle tax bonds.

FURTHER CICF UTILIZATION: A reduction in the CICF to near or below AADS may result in negative rating action for the combined venue tax bonds.

GROWING DEBT BURDEN: A sustained trend of rising debt and carrying costs beyond current expectations would pressure the LT and ULT bond ratings.

CREDIT PROFILE

Bexar County, with an estimated 2015 population of 1.7 million, is home to San Antonio (general obligation bonds rated 'AAA' with a Stable Outlook by Fitch), the seventh largest city in the U.S.

VOTER-APPROVED VENUE TAXES

In May 2008, county voters approved the extension of the existing 1.75% HOT and 5% MVRT, originally approved in 1999 to finance the construction of the AT&T Center, home of the NBA Spurs. The extended venue taxes will finance $415 million in new tourism projects, including San Antonio River projects ($125 million), amateur sports projects ($80 million), rodeo and arena enhancements ($100 million), and cultural arts projects ($110 million). The four extension propositions received high voter approval rates ranging from 57% to 75%.

The commissioners' court later revised the plan and funded all San Antonio River projects with flood control COs payable from the county's flood control property tax. The county retains the legal authority to issue venue project revenue bonds to refund these COs although there are no such plans.

The current offering will finance improvements to the AT&T Center, the last remaining venue project. The venue taxes will remain in effect until the final maturity of the bonds.

LARGE HOSPITALITY SECTOR BENEFITS PLEDGED REVENUE BASE

The sources of pledged revenues are considered narrow by Fitch but are supported by the presence of five of the state's top 10 tourist attractions, including the Alamo, the San Antonio Riverwalk, Sea World, Six Flags over Texas, and the San Antonio Zoo. After strong growth through fiscal 2008, HOT and MVRT revenues declined by an aggregate 12.4% in fiscal 2009, before rebounding by a compound annual average of 6.6% through fiscal 2014. Combined HOT and MVRT receipts for the first 10 months of fiscal 2015 are up 5.6% over the same period a year prior.

The county's inventory of hotel rooms totals a large 43,928 rooms across over 400 hotels, motels, and bed/breakfasts. In 2014, the occupancy rate registered at 65% but is higher for downtown hotels. No major hotel projects are underway or currently planned. The county's forecast assumes flat pledged revenue performance which Fitch views favorably.

The combined HOT within the county totals an above-average 16.75%, comprised of the 1.75% pledged HOT, a 6.0% state HOT, and a 9.0% city HOT. The taxes are collected by the city of San Antonio pursuant to a contract with the county. The combined MVRT totals 15.0% on short-term rentals, comprising the 5.0% pledged MVRT and a 10.0% state MVRT, both of which are collected by the state comptroller.

ADEQUATE COVERAGE OF MVRT BONDS; NO FURTHER LEVERAGING

Maximum annual debt service (MADS) coverage totals 1.6x for the MVRT bonds based on audited fiscal 2014 revenues, which Fitch considers adequate for the rating level. Debt service is level but only 22% of principal matures in 10 years. All of the voter-approved amateur sports projects have been funded and no additional leveraging of this revenue stream is authorized.

THINNER COVERAGE OF COMBINED VENUE TAX BONDS; NO ADDITIONAL DEBT AUTHORIZED

The current offering will reduce MADS coverage of the combined venue tax bonds to a very thin 1.06x based on audited fiscal 2014 revenues. No additional bonds are authorized (except for the refunding of the previously mentioned flood control COs) without a popular vote. With voter approval and substantial pledged revenue growth, the county could issue additional debt as long as it meets a below-average 1.25x ABT. The county was able to issue the current offering although coverage will be far lower than the ABT because a portion ($2 million) of the unrestricted balance of the CICA was used in the ABT calculation as allowed by ordinance. The bonds are structured with level debt service but also mature very slowly (18% in 10 years).

LARGE RESERVES BUFFER THIN COVERAGE

The CICF totaled $75.6 million in fiscal 2014, equal to over five years of AADS at the time for the combined venue tax bond debt service payments. The CICF can only be used for debt service, capital improvements, and bond redemption, which Fitch's considers a key offsetting credit strength to thin coverage levels of the combined venue tax bonds. The CICF reserves are especially important under Fitch's stress scenarios in which revenues experience declines equal to those posted during the 2009 recession.

The county will use $10 million of the CICF to supplement its current offering for the $111 million arena improvement project. The remaining $65 million CICF is equal to 3.6x AADS including the new bonds. A reduction in the CICF balance to close to or below AADS may result in negative rating action for the combined venue tax bonds.

NO OPERATING IMPACT ON COUNTY

Fitch expects any county responsibility for operations and maintenance (O&M) costs of the numerous venue project bond-financed projects to be manageable. The county currently makes no O&M contributions, as costs are addressed through negotiated memorandums of understanding with third parties. In the event these third parties fail to meet the duties of maintaining and operating each venue, provisions are in place that state which organizations or entities are ultimately responsible for the venues. Under this scenario, the county's responsibility is limited to one amateur sports complex.

MILITARY STILL IMPORTANT WITHIN DIVERSE ECONOMY

The military and government sectors are prominent with four large military installations located within the county. Fitch views such military reliance cautiously, although the county has benefitted substantially from past realignment and base closure decisions. Other leading employment sectors include domestic and international trade, convention and tourism, medical and health care, financial services, and telecommunications.

EAGLE FORD SHALE IMPACTS EMPLOYMENT BASE

The ongoing recovery from the last recession was aided by employment hikes in the trade/transportation/utilities, leisure/hospitality and construction/mining sectors, fueled in part by surging oil and gas activity within the nearby Eagle Ford Shale. Due to the decline in oil prices, such activity has contracted substantially as evidenced by a large 64% drop in the Eagle Ford Shale rig count over the last 12 months per the Baker Hughes rotary rig count. The impact to the county's overall employment base has been muted so far by its diverse mix of sectors.

Notably, the county's unemployment rate declined to a low 3.7% in August 2015 from the 4.8% rate posted a year prior and compares favorably to state and national averages of 4.4% and 5.2%, respectively, for the same period. Nevertheless, the inherent volatility of oil and gas prices remains a source of some uncertainty for the local economy.

TAX BASE STABILIZED

The county's tax base has returned to a steady growth mode after declining modestly in fiscal 2012 due to the steep building downturn and falling base values of the last recession. TAV grew by 7.5% and 14.5% in fiscal years 2015 and 2016, respectively, mostly due to reappraisal gains. County officials are conservatively projecting modest rates of TAV growth beyond fiscal 2016 which Fitch considers reasonable given the ongoing contraction of the energy sector. About 70% of general fund revenue is derived from ad valorem taxes.

STRONG FINANCIAL PROFILE

The county's financial position remains strong and posted its fifth consecutive net operating surplus in fiscal 2014. The surplus equaled $8.5 million (2.4% of general fund spending) and increased the unrestricted general fund balance to $75.4 million or a high 21.5% of spending. Fiscal 2014 results were aided by the county's practice of budgeting for contingencies which helped offset a budgeted $11.7 million net deficit. Preliminary estimates for fiscal 2015 point to a $9.6 million (3.2% of spending) net deficit although the county typically outperforms its fiscal year end projections.

Funded by the large TAV gain, the adopted fiscal 2016 budget includes a moderately high 7% increase over estimated fiscal 2015 spending. The budget again includes both a draw on fund balance ($11 million or 2.7% of spending) and sizeable contingencies ($21 million or 5% of appropriations) which Fitch expects will support balanced results.

HIGH DEBT BUT MODEST PLANS

The county's overall debt burden is high at $6,028 per capita and 7.7% of market value. Direct debt includes a rising level of bonds secured by HOT and MVRT receipts which now make up 19.5% of the county's debt portfolio. However, overall debt levels have risen mostly from substantial debt issuances by the county's large number of overlapping jurisdictions, which include 15 school districts. The principal amortization of direct property-tax-supported debt remains well below average at 23% in 10 years. The county's combined debt service and flood control tax rate is modest at $0.069 per $100 AV.

The county's future property tax-supported debt plans are modest, comprised of $85 million of COs for road improvements and numerous facility improvements scheduled for issuance in fiscal 2016. The issuance of up to $55 million in pass-through toll road and limited tax bonds is planned in fiscal 2017. Continued large debt issuances beyond these expectations, without offsetting tax base growth, could result in negative rating pressure given the county's high overall debt burden.

MANAGEABLE PENSION AND OPEB COSTS

The county and all of its full-time employees contribute to a statewide agent multiple-employer defined benefit pension plan administered by the Texas County and District Retirement System (TCDRS). The county fully funds the annual required contribution (ARC), leading to a solid 82.6% funded position as of Dec. 31, 2013. Adjusted to reflect Fitch's assumption of a 7% rate of return, the funded position is still adequate at an estimated 74.4%. The county's other post-employment benefits (OPEB) are modest and funded on a pay-as-you-go basis. Carrying costs for the county's debt service, pension ARC and OPEB payments are sizable at 20.1% of total fiscal 2014 governmental spending. The combined pension and OPEB UAAL of $314.3 million represents a modest 0.2% of fiscal 2016 market value.

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

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from CreditScope, IHS Global Insight, and Zillow Group.

Applicable Criteria

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

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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Contacts

Fitch Ratings
Primary Analyst:
Jose Acosta, +1-512-215-3726
Senior Director
Fitch Ratings, Inc.
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst:
Rebecca Moses, +1-512-215-3739
Director
or
Committee Chairperson:
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations:
Sandro Scenga, +1-212-908-0278
New York
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Jose Acosta, +1-512-215-3726
Senior Director
Fitch Ratings, Inc.
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst:
Rebecca Moses, +1-512-215-3739
Director
or
Committee Chairperson:
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations:
Sandro Scenga, +1-212-908-0278
New York
sandro.scenga@fitchratings.com