Fitch Rates Farmers Branch, Texas' Series 2016 COs 'AA+'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned an 'AA+' rating to the following Farmers Branch, Texas certificates of obligation (COs):

--$2.6 million combination tax and revenue COs, series 2016.

The series 2016 COs are expected to sell competitively on May 3. The bond proceeds will be used to construct and improve the city's police facilities and justice center.

In addition, Fitch affirms the city's Issuer Default Rating (IDR) at 'AA+' and the 'AA+' rating on approximately $13.4 million outstanding COs and GO bonds.

The affirmation of the IDR reflects application of Fitch's revised criteria for U.S., state, and local government credits, which was released on April 18, 2016.

The Rating Outlook is Stable.

SECURITY

The COs are secured by a limited ad valorem tax pledge of the city, not to exceed $2.50 per $100 taxable assessed valuation (TAV). The COs also carry a nominal pledge (limited to $1,000) from the surplus revenues of the city's waterworks and sewer system.

KEY RATING DRIVERS

The 'AA+' rating reflects solid expenditure flexibility and ample revenue-raising ability that allows the city to maintain a stable operating profile, characterized by a sound reserve cushion even in periods of economic stress. Fixed carrying costs are moderate despite rapid principal amortization. Fitch expects long-term liabilities to remain a moderate burden on the resource base.

Economic Resource Base:

Farmers Branch is a mature city with a modestly-sized, stable population base (estimated at 30,350 in 2016) in the robust Dallas-Fort Worth metropolitan statistical area (MSA) economy, well positioned with accessibility from major highways, a light rail station, and proximity to downtown Dallas. Unemployment is low. Most of the city's taxable resources are derived from commercial properties, and the top 10 taxpayers contribute a moderately high portion (about 15%) of its taxable resources. The city typically realizes moderate annual TAV growth, although a relatively short-lived recessionary TAV decline was realized. Further economic growth and diversity appears likely in the intermediate term given recently completed improvements to transportation corridors and development projects underway that expand upon the city's fundamental economic underpinnings.

Revenue Framework: 'aa' factor assessment

Fitch expects solid growth in the city's operating revenues going forward based on economic development underway and the city's participation in the expanding MSA economy. Revenue-raising flexibility is strong, supported by ample tax rate capacity.

Expenditure Framework: 'aa' factor assessment

Spending growth is likely to be in line with revenue gains based on the city's spending profile and mature nature. Strong workforce flexibility underpins management's demonstrated ability to cut spending as needed. Moderate fixed carrying costs incorporate a self-determined, rapid pace of principal amortization.

Long-Term Liability Burden: 'aa' factor assessment

The liability burden is moderate at 11% of personal income and is characterized by low pension liabilities using a 7% internal rate of return (IRR).

Operating Performance: 'aaa' factor assessment

Fitch believes the city's fundamental financial flexibility is very high. Sound expenditure flexibility and limited use of its ample revenue-raising ability has preserved the city's strong and stable reserve cushion through the economic cycle while allowing for annual pay-go capital investment. An unaddressed moderate economic decline shows an operating reserve cushion that Fitch judges to be consistent with an 'aaa' financial resilience assessment, and Fitch expects the city would take action to maintain reserves at a significantly higher level.

RATING SENSITIVITIES

Maintenance of Financial Position: The rating is sensitive to material changes in Farmers Branch's ample revenue-raising ability and solid expenditure flexibility and financial position, which Fitch expects it to maintain throughout economic cycles.

CREDIT PROFILE

The city's recent trends remain positive. Reappraisals and moderate levels of new development led to another year of strong TAV growth in fiscal 2016 at 8%; the city returned to positive TAV performance beginning in fiscal 2013 after realizing a short period of decline and has since exceeded prior recessionary TAV peaks. The city's per capita market value of $190,000 is boosted by the large percentage of commercial and retail properties in the city that sustain above-average occupancy and rental rates. Further tax base and economic growth appears likely in the near term given the city is well-positioned along key transportation corridors and the higher-end, mixed-use development occurring at Mercer Crossing and near the city's downtown, light-rail station. Fitch believes these development trends, in addition to corporate relocations to Farmers Branch (At Home flagship) and management's near-term expectations for a comparable corporate partner, should fully offset the recent loss of one of the city's larger taxpayers and water users (Maxim Integrated Products).

Revenue Framework

Property, sales taxes, and a water/sewer payment in lieu of taxes (PILOT) payment provide the bulk of general operating revenues. Sales tax performance remained resilient over the recent recession, registering only one year of decline. Gains in property tax revenue have served to offset flat sales tax performance in recent years with the sales tax performance attributed by management to recent multi-year transportation improvements in key commercial corridors (now completed) that have been disruptive to normal shopping patterns.

Historical revenue growth has approximated inflation, below the level of U.S economic performance. Fitch expects future revenue growth to be stronger given completion of the transportation projects noted above and additional economic and tax base development resulting from development underway and overall participation in the DFW MSA regional economy.

The city's total tax rate is statutorily limited to $2.50 per $100 TAV, and it is well below this threshold. An annual property tax increase in excess of 8% triggers the possibility of a voter-implemented rollback election.

Expenditure Framework

Public safety is the city's largest spending responsibility at approximately 43% of fiscal 2015 general fund spending.

Fitch expects the city's natural spending pace will remain equal to or slightly exceed revenue gains in the absence of policy action based on the city's current expenditure trends, tempered by its mature profile, out-sized commercial base that typically requires more modest service levels, and consistent city and business capital investments.

Significant flexibility exists in the city's labor costs given the lack of group and collective bargaining or contractual agreements; full managerial control is tempered by key public safety roles that frequently require adherence to best practices or recommended staffing ratios for certain certifications. Fixed carrying costs at 14% of fiscal 2015 governmental spending are about evenly balanced between debt service and pension funding requirements and incorporate the city's self-determined, rapid pace of principal amortization.

Long-Term Liability Burden

The city issues GOs and COs infrequently for its various capital needs and supplements with moderate levels of annual pay-go capital spending. The city also benefits from developer infrastructure investment, which is incentivized by the city. A $23.5 million GO bond authorization was approved by a strong voter majority in 2014 for streets and drainage projects, of which the second and final portion is expected to be issued in 2018. Fitch expects the debt burden to remain manageable as debt rolls off quickly, population gains have been modest, and the city benefits from consistent city and business investment. The long-term liability to income metric is driven largely by overlapping debt. Retiree liabilities are low in the Texas Municipal Retirement System (TMRS) pension plan, utilizing a 7% IRR. Much of the long-term liability burden is carried by the city's out-sized proportion of commercial properties.

Operating Performance

Superior inherent budget flexibility underpins the city's high level of financial resilience through the economic cycle and also has allowed for the maintenance of a strong and stable operating reserve cushion. An unaddressed, moderate economic decline scenario shows this reserve cushion to remain above the level consistent with Fitch's judgment of an 'aaa' financial resilience assessment. Fitch believes the reserves would in fact be managed to much higher levels.

In times of economic recovery, the city balances adding modestly to reserves from net surplus operations with relatively steady pay-go capital investment while maintaining full funding of actuarially required pension contributions and a rapid pace of debt pay-off. General fund operations have consistently generated roughly break-even to net surplus results in recent years, preserving a strong and stable reserve cushion of no less than 19% of spending since fiscal 2010. Financial performance was comparable in fiscal 2015 as the city modestly boosted unrestricted general fund balance to $12.6 million or 24% of spending. The fiscal 2016 budget was structurally balanced as adopted at approximately $52 million and management indicates year-to-date performance is comparable or slightly above budgeted expectations. Fitch believes these projections are reasonable given the city's historical financial trends.

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

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478

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Contacts

Fitch Ratings
Primary Analyst
Rebecca Moses
Director
+1-512-215-3739
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Shane Sellstrom
Associate Director
+1-512-215-3727
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Rebecca Moses
Director
+1-512-215-3739
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Shane Sellstrom
Associate Director
+1-512-215-3727
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com