AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA' rating to the following general obligation (GO) bonds of Boerne, Texas:
--$19.4 million GO refunding bonds, series 2016.
The bonds are scheduled to price via negotiation as early as June 6. Proceeds will be used to refund a portion of the city's outstanding obligations for debt service savings.
In addition, Fitch has upgraded the rating on $13.5 million in outstanding GO bonds, series 2007, 2009, and 2011, and the city's Issuer Default Rating to 'AA' from 'AA-'.
The Rating Outlook is revised to Stable from Positive.
SECURITY
The bonds are general obligations of the city, payable from an ad valorem tax levied against all taxable property in the city, subject to a constitutional limit of $2.50 per $100 of taxable assessed valuation (TAV).
KEY RATING DRIVERS
The rating upgrade to 'AA' reflects the city's strong financial performance and conservative budget practices that have maintained financial flexibility while addressing growth-related needs. Long-term liabilities are expected to remain a moderate burden on resources given the city's debt issuance plans.
Economic Resource Base
Boerne is located 30 miles northwest of San Antonio and is the commercial hub of Kendall County. The city's location on Interstate Highway 10 provides residents with ready access to the broad and diverse San Antonio employment base. Increasing levels of commercial development help to diversify the local economy anchored in tourism, agribusiness, and manufacturing. The city's estimated 2015 population was 13,674.
Revenue Framework: 'aaa' factor assessment
Fitch expects the city's revenue growth will continue to outpace growth in U.S. GDP based on significant economic development planned and underway. The city has ample legal ability to raise operating revenues.
Expenditure Framework: 'aa' factor assessment
Boerne's expenditures are expected to grow in line with to marginally above revenues as the city continues to develop. Management's control over workforce spending offsets moderately high carrying costs to provide solid expenditure flexibility.
Long-Term Liability Burden: 'aa' factor assessment
Fitch expects that the long-term liability burden will remain moderate based on rapid amortization offset by growth-related capital needs.
Operating Performance: 'aaa' factor assessment
Boerne's superior budget control, solid operating reserves and conservative budgeting practices provide exceptionally strong financial resilience throughout the economic cycle.
RATING SENSITIVITIES
Financial Management: The Stable Rating Outlook reflects Fitch's expectation that the city will continue its conservative financial management and budget practices that provide sufficient cushion against economic cyclicality.
CREDIT PROFILE
Steady population growth spilling over from San Antonio has spawned a variety of housing development projects in Boerne over the past decade. Residential and commercial building permits have increased each year following the recession; new construction planned and underway supports management's expectations of continued moderate TAV growth. Significant public infrastructure investments from the city, county, and state also position Boerne for continued expansion. The city's affluence relative to the region and state are reflected in above-average wealth metrics, low unemployment, and a high market value per capita.
Revenue Framework
Sales tax revenues contribute about 42% to general fund revenues, followed by franchise fees (18%) and property tax revenues (15%). Sales tax receipts have grown steadily over the past 10 years by 6.5% on average with just one modest dip, in contrast to sharp swings sometimes seen in municipal sales tax trends during economic cycles.
Overall general fund revenues grew at an average rate of 7.7% over the past 10 years. Ongoing population growth and business development support Fitch's expectation that the natural pace of revenue growth will continue at a rate in excess of U.S. GDP.
The city has ample legal ability to raise property tax revenues, as its fiscal 2016 tax rate of $0.47 per $100 of TAV is well below the state's rate cap of $2.50.
Expenditure Framework
General fund spending is led by public safety at about half of ongoing spending and the budget typically includes moderate capital outlay. Boerne transferred a portion of fiscal 2015 savings ($1.5 million) from a recent electric contract renegotiation to the general fund for pass-through financing of quality-of-life projects. Management anticipates future transfers for these projects at $1 million per year.
The city's spending profile is driven largely by the current trend of population growth. In the absence of policy action, Fitch expects operating expenditures to grow in line with or slightly above Boerne's typically solid revenue growth.
The city retains flexibility in its timing of capital spending, a portion of which is for non-essential quality-of-life projects. When combined with strong management control over workforce and a lack of contractual labor agreements, this flexibility helps to offset moderately high carrying costs for debt service and other post-employment benefits (OPEBs). Fixed costs comprise 19% of fiscal 2015 governmental spending, a figure that is somewhat understated due to the city's large capital expenditures during the year.
Long-Term Liability Burden
Boerne's long-term liability burden, which includes overlapping county and school district debt, is moderate at 12% of personal income. Although the city's outstanding direct debt of approximately $34 million amortizes rapidly, the city's planned borrowing under its capital improvement plan (CIP) and the large amount of overlapping debt ($49 million) will likely keep the burden at this moderate level.
The city participates in the Texas Municipal Retirement System (TMRS), an agent multiple-employer joint contributory hybrid defined benefit pension plan. Under GASB Statement 68, the city reports a fiscal 2015 TMRS net pension liability (NPL) of $13.4 million, with fiduciary assets covering 72% of total pension liabilities at the plan's 7% investment return assumption and based on a Dec. 31, 2014 valuation date. The city's unfunded liability for OPEBs is minimal at 0.1% of personal income.
Currently planned debt issuance includes up to $21 million for city facilities in late 2016, which will be repaid partially from utility revenues and is not projected to require a property tax rate increase. Boerne's CIP also reflects borrowing approximately $10 million in 2017 for roadway projects, with a tax rate impact of up to $0.03 per $100 of TAV (6% increase in the total rate).
Operating Performance
The city has maintained robust reserve levels and continued to do so during the most recent economic recession, which was relatively mild in the region. Fitch expects the city to manage through cyclical downturns while preserving a high level of financial resilience. General fund reserves -- 48% of spending at fiscal 2015 year-end -- are historically well above the city's 25% reserve policy, a level that is far above the reserve safety margin that Fitch would look for under the moderate economic downturn stress evaluated using the Fitch Analytical Sensitivity Tool (FAST).
Boerne's budget practices are generally conservative and have included various cost controls when necessary. The city has shown a commitment to maintaining operational balance with no deferral of required spending. Management expects to outperform its fiscal 2016 budget with a modest drawdown (1.2% of budgeted spending) for capital outlay items.
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, InvestorTools, and the Municipal Advisory Council of Texas.
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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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005413
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