Fitch Rates Midland County, TX's GOs 'AAA'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned a 'AAA' rating to the following Midland County, Texas obligations:

--$13.11 million general obligation (GO) refunding bonds, series 2016.

The bonds are scheduled for a negotiated sale the week of May 23. Proceeds will be used to refund outstanding obligations for debt service savings.

In addition, Fitch has affirmed the following ratings:

--Issuer Default Rating (IDR) at 'AAA';

-$17.2 million GO bonds outstanding (pre-refunding) at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The GO bonds are payable from an annual county-wide property tax levy limited to $0.80 per $100 of taxable assessed valuation (TAV).

KEY RATING DRIVERS

The 'AAA' IDR and GO rating reflect the county's strong operating performance, expenditure flexibility, revenue-raising capability, and low long-term liability burden.

Economic Resource Base

Midland County is located in the Permian Basin region of west Texas and includes the city of Midland.

Revenue Framework: 'aaa' factor assessment

Midland County has realized very strong 10-year average revenue growth of 9.4% through fiscal 2015 and maintains sizable ad valorem tax rate capacity. Revenue raising capacity is strong, supported by ample tax rate capacity. The 'aaa' assessment incorporates the local economy's energy concentration and associated revenue base volatility, but recognizes long-term strength of the revenue base and viability of the U.S. energy industry.

Expenditure Framework: 'aaa' factor assessment

Ample expenditure flexibility results from strong workforce control and low carrying costs. Fitch expects expenditures to grow in line with revenues on average given the county's maturity and a lack of growth pressures.

Long-Term Liability Burden: 'aaa' factor assessment

The county typically cash-funds capital needs, resulting in a low debt burden. Pensions are well funded, and near term capital needs are modest.

Operating Performance: 'aaa' factor assessment

Fitch expects the county to demonstrate financial resilience during an economic downturn based on its healthy reserves, strong expenditure flexibility and revenue raising capabilities.

RATING SENSITIVITIES

Financial Flexibility: The IDR and GO rating are sensitive to maintenance of strong financial flexibility.

CREDIT PROFILE

The Permian Basin is one of the country's oldest and largest oil and gas reservoirs whose exploration and drilling has fueled strong economic activity. Fiscal 2016 market value per capita is a high $147,000. Real oil, gas and other mineral values comprise 16.7% of the fiscal 2016 tax base, with the top 10 taxpayers making up 14% of taxable assessed valuation (TAV). Accounting for approximately 4.8% of TAV, Pioneer Natural Resources has remained the county's top taxpayer for over 10 years. Fitch anticipates the potential for a decline in the county's energy-rich TAV in the next couple of years depending on oil price and energy sector trends. This expectation is incorporated in the current rating. Top employers include the education, medical, and governmental sectors. Other area industrial and business operations in the county include semi-conductor products, telecommunications, dairy products, plastics, and household goods.

Revenue Framework

Sales tax revenues make up about 50% of Midland County's general fund revenues, followed by property taxes at about 30%.

Midland County's rapid general fund revenue growth reflects 15% sales tax revenue and 13.6% ad valorem tax base compound annual growth (CAGR) between fiscal 2005 and 2015. The county's fiscal 2016 sales tax budget of $30.8 million represents a steep 31% decline from fiscal 2015. However, the county's fiscal 2016 TAV of $22.3 billion realized 4.8% growth associated with ongoing drilling and new residential and commercial development. Zillow reports a 1.6% annual decline and predicts a 3.7% annual rise in Midland County home prices. Fitch's 'aaa' assessment incorporates volatility of the county's revenues, particularly sales tax revenues, to the energy sector but recognizes the long-term viability of the industry.

Strong sales tax revenue growth has allowed the county to reduce its ad valorem tax rate from $0.29 per TAV in fiscal 2005 to $0.14 per $100 of TAV in fiscal 2016, providing ample capacity below the statutory cap of $0.80. This sizable revenue-raising capacity mitigates the 4.4% decline in general fund revenues indicated for the county from Fitch's analytical sensitivity tool (FAST) modeling of a 1% decline in a U.S. GDP moderate downturn scenario.

Fitch anticipates the potential for a decline in the county's energy-rich TAV in the next couple of years depending on the direction of oil prices and energy sector trends. The 'aaa' revenue framework assessment incorporates Fitch's expectation that the county will raise tax rates, as it has historically, to maintain sound revenue growth during the downside of economic and energy cycles.

Expenditure Framework

Public safety and corrections account for 37.6% of general fund expenditures, followed by judicial functions (25.8%).

The pace of spending on operating functions is likely to remain in line with revenue growth. Fitch does not anticipate pressure on service levels given the county's maturity.

Midland County exercises considerable expenditure flexibility through full control of workforce costs and low carrying costs. Fiscal 2015 carrying costs, 6.7% of governmental spending, reflect low direct debt of $17.2 million subsequent to redemption of $6.5 million of limited tax debt during fiscal 2014. Principal amortization is very rapid.

Long-Term Liability Burden

Midland County's low long-term liability burden, 4% of personal income, reflects a history of cash funding capital from surplus results and modest overlapping debt. Recent projects funded with general fund monies include an 11-story county court house, library, multi-purpose arena/pavilion, and ongoing road maintenance projects. Near-term capital plans are modest; the county does not have immediate debt issuance plans.

The county participates in the Texas County and District Retirement System (TCDRS), an agent multiple-employer pension plan. Under GASB 67 and 68, the county reported a fiscal 2015 net pension liability (NPL) of $11.3 million, with fiduciary assets covering 91.3% of total pension liabilities at the plan's 8.1% investment return assumption (approximately 81.5% based on a lower 7% investment rate assumption).

The county's fiscal 2014 audit received a qualified opinion for the exclusion of its other post-employment benefits (OPEB) expense and liability from its statement of governmental activities. However, the county includes the required OPEB disclosure in its financial statement notes. Texas Law Government Code, Chapter 175 requires counties to make continued health benefits coverage available under certain circumstances to retirees and their dependents but does not require counties to fund any portion of the cost. Midland County funds OPEB on a current paygo basis for a single fiscal year through an annual appropriation authorized by Commissioner's Court during the budget process and does not acknowledge a long-term OPEB obligation. The current OPEB obligation is modest in relation to the county's market value. Fitch will monitor the growth of the liability and will continue to assess the county's approach to financial reporting in the future.

Operating Performance

Fitch expects Midland County to demonstrate a high level of financial resilience through an economic downturn, consistent with the county's history of strong financial flexibility and its general fund balance target equal to 50% of spending. Strong revenue raising capacity and expenditure flexibility, coupled with Midland County's robust reserves position the county to maintain sound finances through a sustained energy downturn.

The county completed fiscal 2014 with unrestricted reserves of $65 million (76.4% of spending), after funding $17.6 million in capital and $11 million in road and bridge projects. Unaudited fiscal 2015 unrestricted reserves of $68.3 million represent 88.9% of spending. Fitch anticipates the county to complete fiscal 2016 favorable to budget with an application of reserves to fund one-time and capital projects and to maintain a financial cushion exceeding its 50% of spending target.

The county regularly applies surplus results to fund facility, road and other governmental capital projects and to replenish reserves.

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

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

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=1004710

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004710

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

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Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer
Director
+1-512-215-3733
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Steve Murray
Senior Director
+1-512-215-3729
or
Committee Chairperson
Karen Ribble
Senior Director
+1-415-732-5611
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer
Director
+1-512-215-3733
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Steve Murray
Senior Director
+1-512-215-3729
or
Committee Chairperson
Karen Ribble
Senior Director
+1-415-732-5611
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com