Fitch Affirms Huntsville (TX) GOs at 'AA'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the following ratings on the city of Huntsville, Texas:

--$13.54 million in limited tax general obligation (LTGO) bonds and combination tax and revenue certificates of obligation (COs) at 'AA';

--Issuer Default Rating (IDR) at 'AA'.

The Rating Outlook is Stable.

SECURITY

The LTGOs and COs are secured by an ad valorem tax pledge limited to $2.50 per $100 taxable assessed valuation (TAV) levied on all taxable property within the city. The COs are further secured by a limited pledge of $1,000 of the city's water and wastewater system net revenues.

KEY RATING DRIVERS

The 'AA' rating reflects the city's moderate liability burden and Fitch's expectation that the city will maintain healthy financial flexibility throughout the economic cycle based on its strong revenue performance and control, solid ability to cut spending as needed, and established reserve position.

Economic Resource Base

Huntsville, located approximately 70 miles north of Houston, is the county seat of Walker County, Texas. The economic resource base is predominately based on the city's role as home of the Texas prison system headquarters and Sam Houston State University (SHSU). The city's population is estimated at about 40,000 and has grown modestly over the past decade.

Revenue Framework: 'aaa' factor assessment

Revenues are concentrated in the sales tax, followed by property tax income. Revenue growth has been strong, largely due to performance of the sales tax, and Fitch believes future growth prospects suggest continued strength. Statutory limitations on sales tax rates limit the city's ability to increase revenues from that source, but property tax rates are well below the state cap, providing the city ample flexibility to raise revenues.

Expenditure Framework: 'aa' factor assessment

Fitch expects expenditure growth to remain generally in line with expected revenue growth. The city's solid ability to lower expenditures as needed comes primarily from its control over workforce spending.

Long-Term Liability Burden: 'aa' factor assessment

The city's long-term liabilities present a moderate burden on resources. Fitch expects liabilities to remain in this range based on planned borrowing and changes to the pension liability accounting procedures.

Operating Performance: 'aaa' factor assessment

The city's inherent budget flexibility is high, as are unrestricted reserve levels. The city has demonstrated its commitment to supporting its financial position throughout economic cycles.

RATING SENSITIVITIES

The 'AA' rating assumes that the city will continue its conservative budgeting practices and maintain reserve levels that provide sufficient cushion against an inherently volatile sales tax-based revenue system.

CREDIT PROFILE

Revenue Framework

The revenue base is dominated by sales taxes at about 52% of total general fund revenues and property taxes at another 28%.

Over the last decade, the city's general fund revenues have grown at a rate in excess of both U.S. economic performance and CPI.

Statutory limitations on sales tax rates do not allow for any rate increases. However, the current property tax rate offers a high level of flexibility, as it is well below the legal limit of $2.50 per $100 of taxable assessed valuation (TAV).

Fiscal Year 2015 proved to be a strong year for the city with an 8% increase in sales tax revenues and an 8% increase in the TAV. These numbers reflect economic expansion in the retail and education arenas. The city anticipates that this increase in revenue will bolster sales tax revenues for years to come and continued modest tax base growth is anticipated.

Expenditure Framework

The city's largest spending area is public safety, which makes up 40% of general fund spending.

Average spending growth is generally on par with the growth of revenues, a trend that Fitch expects to continue.

The city's carrying costs for debt service, pension and other postemployment benefits equal about 18% of governmental expenditures. This moderate fixed-cost burden coupled with full control over the city's labor force provides ample flexibility to cut spending as needed.

Long-Term Liability Burden

The city's long-term liability burden is moderate as a percentage of personal income and is expected to remain at this level. Pensions are provided through the Texas Municipal Retirement System, an agent multiple-employer defined benefit plan. Under GASB 68, the city reports a fiscal 2015 net pension liability (NPL) of approximately $15.5 million, with fiduciary assets covering about 80% of total pension liabilities at the plan's 7% investment return assumption.

The city anticipates seeking voter approval for the ability to issue additional debt at an estimated $40 million to fund wastewater and water system improvements to be issued on an as needed basis over an anticipated five-year time frame. This debt is expected to be self-supporting and should not place additional burden on the tax base.

Operating Performance

The city has maintained robust reserve levels and continued to do so during the most recent economic cycle. The city is expected to manage through economic downturns while maintain a high level of fundamental financial flexibility. General fund reserves are well above the city's reserve policy, a level that withstands the moderate economic downturn stress evaluated using the Fitch Analytical Sensitivity Tool (FAST).

Historically, the city has practiced conservative budgeting and has implemented cost savings initiatives when necessary. Fitch believes that the city will continue these financial practices. The city reported an unrestricted general fund balance of $11 million, or an ample 60% of general fund spending, at fiscal 2014 year-end.

The preliminary $19.5 million fiscal 2016 general operating budget is structurally balanced with the proposed use of $975,000 in reserves, largely for one-time capital spending. Even with the projected drawdown, reserves would remain healthy at $9 million, or a still-high 47% of budgeted spending.

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

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1004692

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004692

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Natalie Smith
Analyst
+1-212-908-0500
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Rebecca Moses
Director
+1-512-215-3739
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
Natalie Smith
Analyst
+1-212-908-0500
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Rebecca Moses
Director
+1-512-215-3739
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com