AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA+' rating to the following city of Denton, Texas (Denton) obligations:
--$80.83 million certificates of obligation (COs), series 2016;
--$28.425 million general obligation (GOs) refunding and improvement bonds, series 2016.
The COs and bonds are scheduled for a competitive sale on May 24. GO proceeds will be used to refund outstanding obligations for interest savings and to fund street improvements, public safety, drainage, and park improvements. CO proceeds will be used to fund governmental and enterprise renovations and improvements, and vehicles and equipment.
In addition, Fitch affirms the following ratings:
--Issuer Default Rating (IDR) at 'AA+';
--$566.2 million (pre-refunded) in limited tax debt at 'AA+'.
The Rating Outlook is Stable.
SECURITY
The GOs and COs are secured by an annual property tax levy, limited to $2.50 per $100 of taxable assessed valuation (TAV). The COs are additionally payable from a limited pledge of utility system surplus revenues.
KEY RATING DRIVERS
The 'AA+' GO and IDR ratings reflect exceptionally strong operating performance, supported by solid revenue growth and expenditure flexibility, and a manageable long-term liability burden.
Revenue Framework: 'aaa' factor assessment
Denton's diverse and expanding tax base bodes well for continuing revenue growth in excess of U.S. GDP. Strong revenue-raising capacity is supported by a tax rate well below the statutory cap.
Expenditure Framework: 'aa' factor assessment
The city's current pace of spending is in line with revenue growth. Control over workforce costs and moderate carrying costs provide the city with flexibility to address future uncertainties including an economic slowdown.
Long-Term Liability Burden: 'a' factor assessment
The city's long-term liability burden is elevated, but still considered moderate at 21.3% of personal per capita income. Fitch expects the long-term liability burden to remain manageable based on issuance plans to address the city's growth needs, an average debt amortization rate, and well-funded pensions.
Operating Performance: 'aaa' factor assessment
Fitch anticipates Denton would maintain strong financial flexibility in an economic downturn based on stable revenues and sound expenditure flexibility. The city consistently maintains a solid financial cushion.
RATING SENSITIVITIES
Financial Flexibility: The GO and IDR ratings are sensitive to maintenance of financial flexibility including the affordability of debt and pension obligations as reflected in the city's carrying costs.
CREDIT PROFILE
Denton is located at the convergence of IH 35 East and IH 35 West, approximately 35 miles north of Dallas and Fort Worth. The city is known for its institutions of higher education and regionally prominent medical sector. Denton is home to the University of North Texas (UNT) and Texas Woman's University (TWU), with combined enrollment exceeding 48,500. The city's growing heath care facilities serve north Texas and southern Oklahoma. These institutions include Columbia Medical Center Denton, Texas Health Presbyterian Hospital, and The Heart Hospital Baylor Denton.
Growth across the city's residential and commercial/industrial properties is demonstrated by strong 7.2% compound annual rate of growth (CAGR) of taxable assessed valuation (TAV) between fiscal 2012 and 2016. Recent gains include development within the city's reinvestment zones, Rayzor Ranch mixed-use Public Improvement District and several business parks. A variety of manufacturing, industrial and commercial projects are still under development. The city's first convention center/hotel, slated for commercial operation in 2017, is expected to spur further development. Fitch anticipates the combination of significant regional transportation improvements currently underway and the city's ample developable land will likely result in ongoing growth for the near- to intermediate-term.
Revenue Framework
The 4.1% CAGR of Denton's general fund revenues over the last 10 years reflects growth in excess of U.S. GDP, mirroring an expanding regional economy. Property taxes contribute about 40% to operating revenues, followed by sales taxes (32%) and franchise fees (13%). Revenues remained stable throughout the recession, benefitting from an expanding regional economy. Fitch expects ongoing revenue strength based on the city's diverse and expanding property and sales tax bases.
The city of Denton's fiscal 2016 tax rate of $0.69 per $100 of TAV provides ample capacity below the statutory cap of $2.50.
Expenditure Framework
Public safety accounts for 57% of general fund spending.
The pace of spending is likely to remain at the level of revenue growth based on the expected moderate pace of population growth and the ongoing strength of revenues, incorporating a diverse tax base and robust sales tax along the city's transportation corridors.
The city maintains flexibility with respect to headcount and salary arrangements. Carrying costs represent a moderate 18.6% of governmental spending and incorporate an average 10-year debt amortization rate of 59%.
Long-Term Liability Burden
Fitch anticipates Denton's long-term liabilities, currently 21.3% of personal income, to remain elevated but manageable over the medium-term horizon based on the impact of regional growth on direct and overlapping issuances. The city has $70.9 million of remaining GO authorization subsequent to this issuance. Denton's fiscal 2016 five-year (2016-2020) capital plan includes an estimated $769 million of funding primarily for utility infrastructure and is supported by utility operations. Five-year projected general government capital of $129 million will likely result in tax supported debt issuance somewhat above that retired during the same period.
The city participates in the Texas Municipal Retirement System (TMRS) for all eligible employees except firefighters. Under GASB Statement 68, the city reports fiscal 2015 net pension liabilities (NPL) of $66.2 million and $13.9 million for both plans, with fiduciary assets covering 82.8% and 83.7% of total TMRS and fire fighter plan pension liabilities, respectively, at the plans' 7% investment return assumption.
Operating Performance
Fitch expects Denton to maintain solid financial performance through an economic downturn. As demonstrated in Fitch's analytical sensitivity tool (FAST) 1% decline in GDP scenario, the city has a strong financial cushion to address a moderate economic downturn. Fitch expects the city would maintain a satisfactory cushion given its ample ability to raise revenues and sound expenditure flexibility.
The city completed fiscal 2015 with$27.4 million in unrestricted reserves, 29% of spending. The city's five-year forecast reflects moderate revenue growth, with maintenance of reserves at a level consistent with the city's 20% of spending policy floor.
The city takes advantage of improving trends to rebuild reserves.
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
Additional Disclosures
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1003989
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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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