AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA+' rating to Johnson County, Texas' (the county) $20.7 million certificates of obligation (COs), taxable series 2015.
The bonds are scheduled for negotiated sale the week of Nov. 2. Proceeds will be used for the renovation and expansion of the county jail.
In addition, Fitch affirms the 'AA+' rating on the following obligations:
--$9.0 million GO refunding bonds, series 2007.
The Rating Outlook is Stable.
SECURITY
The GO bonds and COs are payable from an annual property tax levy limited to $0.80 per $100 taxable assessed valuation (TAV).
KEY RATING DRIVERS
STRONG FINANCIAL PROFILE: The high rating reflects the county's continued positive fiscal performance, high fund and cash balances, and conservative budgeting and cost management practices. Fund balance in excess of prudent policy targets is used for non-recurring items.
HEALTHY ECONOMY: The county is situated near the broad labor market of the Dallas-Fort Worth (DFW) metropolitan statistical area (MSA), access to which has been enhanced by a major highway project. Job growth coming out of the recession is strong, and unemployment and poverty rates are low.
TAX BASE IMPROVEMENT: The district's tax base has returned to growth after a period of contraction due to the devaluation of natural gas that lies within the county in the Barnett Shale natural gas formation. Some oil and gas industry concentration remains with the top 10 largest taxpayers, but mineral values now make up a smaller portion of total taxable assessed valuation (TAV).
AFFORDABLE DEBT BURDEN: Debt levels have increased primarily as a result of underlying issuers. Carrying costs remain low, retiree benefits are affordable, and debt-funded capital needs are limited.
RATING SENSITIVITIES
FISCAL PERFORMANCE: The rating is sensitive to the maintenance of a balanced operating profile and high fund balance to offset the concentrated taxpayer base and volatility in taxable values.
CREDIT PROFILE
Johnson County is located directly south of Fort Worth (GO bonds rated 'AA+', Outlook Stable). The county spans 740 square miles and has an estimated population of nearly 160,000. The city of Cleburne (GOs rated 'AA-', Outlook Stable) is the county seat and principal commercial center. Other municipalities within the county include Burleson, Alvarado, Joshua, Keene, and Venus.
GROWING ECONOMY REFLECTS PROXIMITY TO DFW
The county's local employment base is diverse and residents benefit from the close proximity to the DFW metro area. The DFW regional employment base is extensive and diversified in manufacturing, wholesale trade, defense, technology, business services, education, retail, and oil and gas. The proximity to DFW and the availability of affordable land has continued to attract significant development to the county. Direct access to downtown Fort Worth through Interstate 35 along with the recent completion of a tollway supports additional prospects for development.
The regional economy is experiencing good post-recession job growth. Johnson County's unemployment rate of 4.3% in August 2015 is down almost a percentage point from one year prior, reflecting job gains in excess of labor force growth. Income levels are average when compared to the state and nation.
DIMINISHED NATURAL GAS CONCENTRATION
The Barnett Shale play is one of the largest natural gas fields in the U.S., over which most of the county lies. Recent declines in TAV were due to weakness in mineral values, which made up 25% of fiscal 2010 TAV but fell to less than 15.5% of fiscal 2016 TAV due to decreased drilling activity and lower natural gas prices. The tax base contraction occurred in fiscals 2011-2014, causing a cumulative decline of 20%. Modest annual gains in fiscals 2015 and 2016 of 3% show recovery in the tax base, with further gains likely given the new accessibility to the MSA. Importantly, management has raised tax rates over the last several years to mitigate the revenue impact from the declines.
Several consecutive years of low gas prices have reduced the top taxpayers' share of the tax base, but industry concentration remains a concern. The top 10 taxpayers comprised 13.5% of fiscal 2016 TAV, and eight of the top 10 are directly engaged in the oil and gas industry.
SOLID FISCAL PERFORMANCE AND POSITION
County officials have prudently managed losses in property tax revenues through tax rate adjustments and conservative assumptions to maintain reserves above the formal policy of 25%. Fund balance in excess of this policy is used for one-time spending, including infrastructure and vehicle/equipment purchases. Audited fiscal 2014 results demonstrate improvement above a $4.5 million budgeted deficit, with the county ending the year after transfers with a $2.6 million draw down of fund balance. Unrestricted general fund reserves remained healthy at 33.4% of general fund spending. Fitch views this level of fiscal cushion as important to the high 'AA+' rating given the TAV concentration and volatility and also views positively the county's conservative budgeting practices.
Management estimates a surplus of $3.2 million for the fiscal year ending Sept. 30, 2015 due to strong tax collections and an underspending of the budget. The fiscal 2016 adopted budget is balanced with a slight decline in spending and a tax rate of $0.405 per $100 TAV.
AFFORDABLE DEBT BURDEN
Proceeds from the current bond issue will fund renovations and additional capacity at the existing county jail. Maximum annual debt service (MADS) following this issue occurs in 2021 and accounts for an affordable 5.5% of 2014 spending, compared to the current 2.9%. Debt is elevated at 6.1% of fiscal 2015 market value due primarily to issuance by underlying borrowers. Principal amortization slows with this issuance from a rapid 100% retired in 10 years to a more moderate 61%. Management reports no plans to issue additional tax-supported debt in the foreseeable future.
County employees participate in the Texas County and District Retirement System, a cost-sharing multiple employer plan that is funded at 77% as of Dec. 31, 2013 using a 7% rate of return. The county made changes to its other post-employment benefits (OPEB) retiree health care program in 2010 that reduced the unfunded obligation from $5.2 million to $1.8 million, a nominal 0.01% of market value. OPEB is funded on a pay-go basis. Combined carrying costs for debt service, pension, and OPEB were low at 6.2% of fiscal 2014 fund spending.
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 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, Underwriter, Bond Counsel, Underwriter Counsel, Trustee, US Federal Government (non-public information), and the Municipal Advisory Council of Texas.
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
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=993032
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=993032
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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