AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AAA' rating to the following Plano, Texas (the city) tax-supported obligations:
--$67.8 million general obligation (GO) refunding and improvement bonds, series 2016.
The Rating Outlook is Stable.
SECURITY
The bonds are payable from a limited ad valorem tax pledge of $2.50 per $100 of taxable assessed valuation (TAV) levied against all taxable property within the city.
KEY RATING DRIVERS
DIVERSE, AFFLUENT RESOURCE BASE: The city benefits from a diverse corporate base and prominence in the broad and resilient Dallas-Fort Worth (DFW) economy. Residents are affluent and well-educated.
WELL-MANAGED FINANCES: Sound management practices and policies have sustained the city's strong financial profile and proactive approach to funding operational, economic development, and capital needs.
AMPLE RESERVES AND FLEXIBILITY: Operating reserves and liquidity provide a good fiscal cushion. Additional flexibility is provided by the presence of sizable capital reserves and a portion of the tax rate earmarked for discretionary economic development.
MODERATE DEBT BURDEN: The city's debt burden and total carrying costs are moderate. Future debt issuance plans should be easily managed given the currently rapid pace of debt retirement. Pensions are well-funded and other post-employment benefit (OPEB) liabilities are facilitated through a dedicated trust.
RATING SENSITIVITIES
The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely.
CREDIT PROFILE
Plano is a wealthy and mature suburb located 20 miles north of Dallas with a population of approximately 274,000.
STRONG LOCAL ECONOMY WITH EXCELLENT DEMOGRAPHICS
Plano's suburban location within the extensive DFW economy and well-educated workforce support continued private sector investment and strong employment trends. The city's economy is diverse and serves as corporate and/or regional headquarters for a number of companies, including HP Enterprise Services, JCPenney, PepsiCo's Frito-Lay North American division, Alcatel-Lucent, Capital One Auto Finance, and Dr. Pepper Snapple Group. The percentage of residents with an advanced degree is nearly twice the national average. Wealth levels are also very high, with per capita personal income at 147% of the national average.
The city and region continue to outpace the nation in job growth. Plano's January 2016 unemployment rate improved to 3.5% from 4% a year prior as employment gains outpaced labor-force gains, which compares favorably to the state (4.4%) and national averages (5.2%), respectively.
JCPenney (Fitch Issuer Default Rating (IDR) of 'B'/Positive Outlook), the city's third largest taxpayer (0.6% of TAV) and sixth largest employer, made layoffs in 2014 but has demonstrated a meaningful turnaround in its business over the last two years. Although not expected, Fitch does not believe the impact of further layoffs and down-sizing would have significant credit implications given the diversity of Plano's economy and taxing base.
HEALTHY HOUSING MARKET/COMMERCIAL DEVELOPMENT SUPPORT TAV GAINS
TAV climbed a solid 8.5% in fiscal 2016, which marks the fifth consecutive year of tax base gains since slight contraction resulting from recessionary slowdown. Per-capita market value has grown to a high $146,000 and median home sales prices continue to trend up and totaled $283,000 as of February 2016 according to Zillow.
The city continues to benefit from large corporate relocations which should further stoke the city's housing market. Toyota is constructing a $400 million campus for the relocation of its North American headquarters to Plano from California. More than 4,000 employees will work on the campus which is scheduled to open in early 2017. FedEx Office & Print Services, a subsidiary of FedEx Corp., is building a corporate headquarters that will consolidate 1,200 employees from the DFW metroplex. Liberty Mutual Insurance is also constructing a $325 million campus to consolidate 4,000 employees in the DFW metroplex. All three projects are within the high-density Legacy West multi-use development in west Plano. Fitch believes prospects for continued tax base growth are positive.
STRONG FINANCIAL MANAGEMENT PRACTICES AND RESULTS
Conservative budgeting, interim reporting, and long-term forecasting practices are hallmarks of the city's financial management, and this approach has led to results that consistently outperform budget projections. Significant budget flexibility is apparent through the large annual general fund operating transfers to a capital reserve fund (5%-8.8% of spending since fiscal 2008), which could be reduced, deferred, or eliminated if necessary. In addition, 4% of the tax rate is earmarked for economic development purposes and could be re-directed by the city council to general operations.
Management successfully navigated modest recessionary pressures with spending reductions while prudently continuing the transfers to the capital reserve fund. Strong growth in property and sales taxes, the two leading sources of operating revenues, as well as continued conservative budgeting yielded positive margins in fiscal years 2011-2013, totaling 1.7% to 3.9% of spending. An increase in capital reserve transfers led to a modest drawdown (2.1% of spending) in fiscal 2014.
The fiscal 2015 audit posted a net general fund surplus of $279,000 (0.1% of spending), closing the budgeted deficit of $20 million through greater than budgeted sales tax revenues and positive expenditure variances. Actual sales tax collections totaled $76.8 million or 117% of budgeted collections. The planned deficit was driven primarily by rising transfers to the capital reserve fund which reflects the city's goal of funding 75% of estimated annual depreciation. The resulting unrestricted fund balance totaled a strong $51.1 million or 19.9% of spending and year-end liquidity covered current liabilities 5.3x.
The fiscal 2016 budget includes a $16 million (5.7% of appropriations) drawdown resulting from a similarly sized capital reserve fund transfer. This is commensurate with past budgets which appropriated fund balance reserves above the policy floor of 30 days for capital and non-recurring items. The operating budget also funds moderate 3% pay hikes and the addition of 31 new positions (equal to a 2% increase).
City policy requires budgeted sales tax revenue projections to equal the average of the last three years' collections (net of audit adjustments). As a result, sales taxes are budgeted at $72.7 million or a modest 94.5% of fiscal 2015 actual collections. Sales tax collections for the first five months of fiscal 2015 are down 3.1% over the same period the prior year but still within budget. Given prior-year performance, Fitch expects the city will again significantly outperform the forecast draw-down. The presence of $52 million of unrestricted funds in the capital reserve fund (20% of fiscal 2015 general fund spending) further enhances the city's strong fiscal profile.
MODERATE DEBT BURDEN
The city's overall debt ratios are moderate at 3.4% of market value and $4,995 per capita. Amortization of tax-supported debt is rapid at 69 % of principal retired in 10 years and all repaid in 20 years.
The city actively maintains a comprehensive capital improvement program. The city's remaining GO authorization totals $122 million including $94 million of bonds approved by a large margin of voters in May 2013. No tax rate impact is anticipated for the city's GO bonds due to the rapid retirement of existing debt. The city's next planned issuance is scheduled for 2017 in an amount of $40 million. Debt issuance will be supplemented by continued pay-go capital spending.
PENSIONS NOT A PRESSURE
Employee pension benefits are substantially provided through the city's participation in the Texas Municipal Retirement System (TMRS), an agent-multiple employer plan. The city also maintains a single-employer Retirement Security Plan (RSP) for employees in lieu of participation in federal social security. The actuarially required contributions (ARC) for both plans are consistently funded and together consumed 8.8% of fiscal 2015 governmental fund spending. Under GASB 67 and 68, assets of TMRS and RSP cover liabilities by 89.5% and 101.3%, respectively, as of Dec. 31, 2014 using an adjusted 7% investment return.
Unfunded liabilities for OPEB are a nominal 0.04% of market value and the city proactively established an OPEB trust in fiscal 2008. Combined fixed costs for debt service, pension and OPEB consumed an above-average 21.6% of fiscal 2015 governmental fund spending but this is mostly a result of the higher annual debt cost from rapid amortization.
Additional information is available at 'www.fitchratings.com'.
Fitch recently published exposure drafts of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015 and Exposure Draft: Incorporating Enhanced Recovery Prospects into U.S. Local Tax-Supported Ratings, dated Feb. 2, 2016). The drafts include a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published in the second quarter of 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, Zillow Group and Lumesis.
Applicable Criteria
Exposure Draft: Incorporating Enhanced Recovery Prospects into US Local Tax-Supported Ratings (pub. 02 Feb 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=875108
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
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1002387
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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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