Fitch Rates Grand Prairie, Texas' Taxable Series 2015 Sales Tax Rev Bonds 'AA-'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned an 'AA-' rating to the following sales tax revenue bonds of Grand Prairie, Texas (the city):

--$74.4 million sales tax revenue bonds taxable series 2015.

Fitch has also assigned 'AA+' ratings to the following limited tax obligation of Grand Prairie:

--$10.8 million general obligation (GO) refunding bonds series 2015;

--$26.9 million combination tax and revenue certificates of obligation (COs) series 2015.

The bonds are scheduled to sell Nov. 3 via negotiation.

Proceeds of the GO bonds will be used to refund certain outstanding obligations for debt service savings; CO proceeds will be used for various city-wide capital improvements. Sales tax revenue bonds proceeds will be used to fund improvements and additions to the city's central park that include the construction of a recreation center and a water park.

In addition, Fitch affirms its 'AA+' rating on $216.4 million (pre-refunding) of outstanding LTGOs and COs.

The Rating Outlook is Stable.

SECURITY

The taxable 2015 sales tax bonds are payable from a first lien on the 1/4-cent sales and use tax, which was authorized by voters through January 1, 2040 for sports and community venue projects. The COs and GOs are payable by a pledge of ad valorem taxes, limited to $2.50 per $100 taxable assessed valuation (TAV). The series 2015 COs are further secured by a limited, de minimus pledge ($2,500) of the net revenues of the city's water and wastewater system.

KEY RATING DRIVERS

STRONG, DIVERSE ECONOMY: The city of Grand Prairie is located in the heart of the broad and resilient Dallas-Fort Worth (DFW) metropolitan area. Various indicators, such as sales tax, employment, and permitting trends, all point to continued strengthening of the local economy. The city's tax base is diverse with average median household income and has shown solid annual growth in recent fiscal years.

NARROW COVERAGE, HIGH LEVERAGE: Annual debt service of the sales tax bonds has a first lien on pledged sales taxes, derived from a fairly diverse, city-wide revenue base. Growth in pledged revenues has typically been robust. The Series 2015 taxable sales tax revenue bond rating of 'AA-' is one notch lower than other outstanding city sales tax revenue bonds rated by Fitch given the dedicated sales tax revenue stream is highly leveraged and fiscal 2015 revenues (unaudited) provide slim coverage of maximum annual debt service (MADS) at 1.24 times (x). Residual revenues are projected to remain in a closed loop for this expansive capital parks project (EPIC) in order to fund additional capital expenditures, build operating reserve cushions, and likely provide some initial support for waterpark operations.

NO ADDITIONAL DEBT EXPECTED: Voters approved a debt cap of $75 million for the pledged ?% sales tax revenues, which will be reached with this issuance. Although there is no additional bonds test (ABT), management does not expect to reapproach voters for further leverage capacity.

SOUND FISCAL PROFILE: Sound management practices, including adherence to prudent fiscal policies and timely spending adjustments, have preserved the city's strong financial profile. City management has a history of successfully leveraging sales tax revenues to expand its economic base in various public-private partnerships. General fund reserves and liquidity are robust and the city has prudently continued its pay-go approach to capital spending.

ELEVATED DEBT BURDEN: Overall debt levels are high and likely to remain so, due primarily to the debt of various overlapping school districts. Future capital needs will require debt funding but the budget impact should be tempered by the rapid amortization of existing debt. Unfunded pension liabilities are manageable.

RATING SENSITIVITIES

FISCAL POSITION, REVENUE SHIFTS: The rating is sensitive to changes in key credit characteristics including the city's strong financial management practices and sustained, material change in sales tax performance. Fitch believes prospects for continuing economic development and tax base growth are favorable, although the Stable Outlook reflects Fitch's expectation that such shifts are unlikely to change the rating in the near term.

CHANGE IN BORROWING PLANS: The rating assumes no further leverage of this sales tax revenue stream.

CREDIT PROFILE

The city of Grand Prairie encompasses a narrow, 80 square mile stretch of land in the center of the DFW metroplex, directly between the two major cities and just south of DFW International Airport. Population growth is continuing and is currently estimated at about 183,000.

STRENGTHENING ECONOMY CENTRALLY LOCATED IN DFW METROPLEX

Defense, manufacturing, aerospace, and distribution are major components of Grand Prairie's economy and are complemented by a retail and entertainment presence. The city's economy is buoyed by its location in the heart of the DFW metroplex and easy access to major air and ground transportation routes. The city's employment picture is positive, with employment growth in the last 12 months improving the unemployment rate to a low 3.9% in August 2015 from 5.4% in August 2014. The unemployment rate is below the state (4.4%) and national (5.2%) averages. Residents also benefit from access to a broad and diverse employment market of the greater DFW MSA, which has outpaced the nation in job growth since 2009. City wealth indices are mixed. Adjusted median household income approximates the state and nation, but per capita income is only 80% of the national norm.

CONTINUED TAV GROWTH

TAV trends continue to improve after a more lackluster recessionary period over fiscals 2010 to 2013. Commercial development along recently completed highway connections sparked a 5% increase in TAV for fiscal 2014, which has been followed with similar, annual TAV gains. About half of fiscal 2016's 5% TAV gain was attributable to new construction with TAV reaching $11.1 billion. Management reports permitting trends remain healthy, particularly for those commercial/ industrial projects (such as distribution and warehousing) that rely on the city's favorable location amidst major transportation corridors. Other economic development includes the recent announcement of the second IKEA store planned for the Dallas-Fort Worth MSA to be located in Grand Prairie, scheduled to open in 2017.

NARROW COVERAGE OF SALES TAX BONDS

The city received voter approval in May 2014 to repurpose and extend two expiring sales tax levies (0.125% each) to separately support a large capital parks project (EPIC). The referendum also included the maximum allowable use of $75 million in debt funding from this dedicated tax revenue stream for the construction of a large recreation center and indoor/outdoor waterpark in the city's central park, planned to open in the summer of 2017. City officials expects to engage professional waterpark management and operations are anticipated to be self-supporting, which is underlined by management's plan to adjust spending as needed to ensure these results. However, in the event the park's operations became a significant drain on general fund or other budgetary resources, it could affect the city's credit standing.

The sales tax bonds carry a first lien on the pledged, ?% sales tax revenues. Previously purposed sales tax revenues (equivalent to the pledged sales tax levy) realized sound growth at an annual average of 4.1% over a 15-year period (fiscals 1999-2014) with relatively moderate, short-lived declines in recessionary periods. Revenues grew to $6.4 million or about 3% in fiscal 2014 (audited), which covers the currently projected $5.5 million MADS at 1.17 times (x). A step-up to approximately $5.5 million occurs in fiscal 2019 and the projected debt service schedule then remains flat through pay-off in 2040.

Further modestly positive revenue gains appear reasonable to Fitch in the near term given the aforementioned retail and commercial investment in addition to historical performance. Fiscal 2015 previously purposed sales taxes support this assumption as management indicates they totaled about 6% above the prior year's actuals on an unaudited basis.

STABLE FINANCIAL PROFILE BENEFITS FROM GOOD MANAGEMENT PRACTICES

The city's finances are well-managed. Property and sales taxes (from a separate 1% sales tax levy) are the leading sources of general fund revenue at 42% and 23%, respectively, in fiscal 2014. Management prudently managed sluggish recession-related performance in revenue from fiscals 2009 to 2011 with spending adjustments. Recent modest fund-balance declines reflect continued general fund transfers for capital and other non-recurring expenditures, including early defeasance of debt with cash. Management considers unassigned fund balance in excess of the city's formal policy floor of 50-60 days of expenditures (15%) as available for non-recurring budget items. Fund balances have tracked at between 22% and 33% of spending over the last six fiscal years (fiscals 2009-2014).

The general fund concluded fiscal 2014 with a moderate $4.7 million (4% of spending) net drawdown on reserves as another contribution to capital funds while preserving $24 million in unrestricted reserves or 21.5% of spending at year-end. Ending results remained within the range of fiscal performance previously anticipated by Fitch. Unaudited projections for fiscal 2015 year-end include a modest use of reserves for pay-go capital spending while preserving unrestricted general fund balance at $23 million or approximately 21% of spending.

The fiscal 2016 general fund budget of $118.8 million increases total appropriations by about 4% from 2015 spending estimates. Key line-item spending changes include a $3 million increase in personnel costs for additional staff and salary adjustments. Operations remain structurally balanced and revenue assumptions appear reasonable. Management indicates operations are presently running in line with budget. The nominally flat tax rate of $0.67 per $100 was adopted for the 15th consecutive year. A $5 million fund balance drawdown is budgeted for one-time spending priorities, largely to fund equipment needs, but residual fund balance would remain in compliance with the city's fund balance policy. Fitch believes it is likely the city will improve upon initially budgeted projections as the fiscal year progresses as has been the city's historical fiscal performance.

ELEVATED DEBT BURDEN LIKELY TO PERSIST

Overall debt levels are high at $5,645 per capita and 7.6% of full market value. The elevated debt levels are primarily attributable to the debt of various overlapping school districts. The city's variable-rate exposure has moderated somewhat to roughly 19% of outstanding debt, down from what was previously a high 28% in Fitch's estimation. Early retirement of a portion of the city's variable-rate obligations in addition to issuance of primarily fixed-rate, tax-supported debt since 2008 has prudently reduced the presence of this risk over time. Fitch also notes the city's variable-rate exposure does not impact general government operations. Tax-supported debt service (property-tax and sales-tax bonds) consumed roughly 13% of governmental fund spending in fiscal 2014. Including these series 2015 issuances, the city maintains a slightly reduced but still rapid pace of amortization (70% retired in 10 years).

The city's most recent five-year capital improvement plan (CIP; 2016-2020) reflects relatively stable and affordable property tax-backed debt plans as management estimates there is sufficient capacity to debt-fund these various capital projects without an accompanying tax rate increase. Fitch believes this is a reasonable assumption given recently stronger TAV trends and also takes some comfort from the city's reported flexibility in the timing of the CIP.

The city's debt ratios will likely remain elevated given the planned tax-supported capital projects. However, Fitch expects the debt burden will remain manageable given the city's prudent fiscal management, prospects for tax base growth, and rapid debt retirement.

WELL-FUNDED PENSIONS

Pensions are provided through the Texas Municipal Retirement System (TMRS), a state-wide, agent-multiple-employer plan. The city has consistently made 100% of the actuarially-calculated annual required contribution (ARC). The city's pension position has improved in recent years as a result of consistent ARC funding and more notably, TMRS' recent, system-wide methodology changes to its fund accounting and actuarial assumptions. The city's pension funded position as of Dec. 31, 2013 was a sound 83.5% using the system's 7% investment return.

Other post-employment benefits (OPEB) are funded on a pay-go basis. The unfunded liability for the city' OPEB totaled a nominal 0.25% of full market value. Combined fixed costs for debt service, pension ARC, and OPEB pay-go totaled a manageable 19% of governmental fund spending in fiscal 2014.

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, the Texas Municipal Advisory Council, IHS Global Insight.

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.

Pursuant to Fitch policy, new rating assignments during the exposure draft period will be analyzed under both the existing and proposed criterial approaches. The rating(s) assigned in this Rating Action Commentary would be the same under both approaches.

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
Rebecca C. Moses
Director
+1-512-215-3739
Fitch Ratings, Inc.
111 Congress Ave., Suite 2010
Austin, TX 78701
or
Secondary Analyst
Gabriela Gutierrez
Director
+1-512-215-3731
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-1575
or
Media Relations:
Sandro Scenga, New York, +1 212-908-0278
Email: sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Rebecca C. Moses
Director
+1-512-215-3739
Fitch Ratings, Inc.
111 Congress Ave., Suite 2010
Austin, TX 78701
or
Secondary Analyst
Gabriela Gutierrez
Director
+1-512-215-3731
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-1575
or
Media Relations:
Sandro Scenga, New York, +1 212-908-0278
Email: sandro.scenga@fitchratings.com