Fitch Upgrades Princeton (TX)'s IDR and Limited Tax Debt to 'A+'; Outlook Stable

AUSTIN, Texas--()--Fitch has upgraded the following Princeton, Texas obligations:

--$860,000 series 2007 general obligation (GO) refunding bonds to 'A+' from 'A-';

--$1.1 million series 2007 combination tax and surplus revenue certificates of obligation (COs) to 'A+' from 'A-';

--Long-Term Issuer Default Rating (IDR) to 'A+' from 'A-'.

The Rating Outlook has been revised to Stable from Positive.

SECURITY

The bonds and COs are direct obligations of the city payable from ad valorem taxes limited to $2.50 per $100 of taxable assessed valuation (TAV). The COs also carry a pledge of surplus net revenues of the city's water and sewer system.

KEY RATING DRIVERS

The upgrade of the Long-Term IDR rating to 'A+' reflects a combination of positive credit trends and application of Fitch's revised criteria for U.S. state and local governments, released on April 18, 2016. The rating change incorporates a more focused consideration of the impact of the local economy on revenue growth prospects under the new criteria as well as the improved financial cushion. The rating also recognizes the city's solid expenditure flexibility and elevated but moderate long-term liability burden.

Economic Resource Base

Princeton is located 30 miles northeast of Dallas, adjacent to the city of McKinney on U.S. Highway 380. The city's 2016 population of 9,440 has grown 170% from 3,477 in 2000.

Revenue Framework: 'aaa' factor assessment

Revenue growth prospects are strong, benefiting from regional population gains. The city has ample ability to independently raise revenues.

Expenditure Framework: 'aa' factor assessment

Fitch expects the city's expenditures to generally grow in line with revenues. Princeton exercises discretion over its largest operating cost: labor, without restrictions based on collective bargaining or contractual labor agreements. Additionally, the city's moderate carrying costs, at 16% of spending, do not hinder its expenditure flexibility.

Long-Term Liability Burden: 'a' factor assessment

Long-term liabilities, driven by debt, are 24% of personal income. Fitch expects the city's long-term liability burden to remain elevated but moderate based on regional growth pressures. The city's net pension liability is negligible.

Operating Performance: 'a' factor assessment

Fitch expects Princeton to demonstrate financial resilience through a moderate economic downturn based on its ample revenue raising capacity and solid expenditure flexibility. The city depleted its reserves during fiscal 2010 and 2011, largely to fund infrastructure improvements. The rating assumes that the city will continue to maintain reserves sufficient for the current rating assessment as demonstrated since that time.

RATING SENSITIVITIES

Growth Management: The 'A+' IDR assumes the city's ongoing ability to manage growth as demonstrated by maintenance of an adequate financial cushion and affordable debt carrying costs.

CREDIT PROFILE

Rapid population growth north from Dallas into Collin County has fueled Princeton's local economy. The city's taxable assessed valuation (TAV), two-thirds of which are residential properties, realized a 17% compound annual growth rate (CAGR) between fiscal 2014 and 2016. The city reports significant new construction projects including subdivisions, big-box and other commercial growth. The city's fiscal 2016 top ten taxpayers contribute 7.5% to total TAV and are mostly related to residential real estate and construction. Ongoing growth through the medium term is likely based on the city's availability of developable property within commuting distance to the Dallas metroplex. Median household income trends below the regional and U.S. averages.

Revenue Framework

The city's diverse general fund revenues include property tax revenues (43%), licenses and permits (19%), and sales tax revenues (16%). Growth has largely shielded the city's revenues from volatility during recent economic cycles.

Princeton's general fund revenues 10-year CAGR has exceeded that of U.S. GDP due to the city's expanding ad valorem and sales tax base. Significant growth remains as developers undertake residential, multi-use and commercial projects in varying stages of planning and start-up.

Princeton's fiscal 2016 tax rate of $0.6919 per $100 of TAV provides ample capacity below the statutory cap of $2.50. If a proposed tax rate results in an 8% year-over-year levy increase (based on the prior year's values), the rate increase may be subject to election if petitioned by voters.

Expenditure Framework

Public safety accounts for 44% of the city's general fund expenditures. Fitch expects these to grow in line with the city's anticipated revenue growth, along with its other operating expenditures.

Princeton retains flexibility over its largest functional operating expenditure, workforce costs and does not participate in any contractual labor agreements. The city's carrying costs, driven primarily by debt service, are a moderate 16% of fiscal 2015 spending. Pension and other post-employment benefit contributions are modest with a stable trajectory. Fitch expects carrying costs to remain moderate to the extent that these grow at a pace consistent with the city's expanding operational budget. The city's 10-year principal amortization rate is a slow 38%.

Long-Term Liability Burden

Long-term liabilities are an elevated but still moderate 24% of personal income. The city's $77.9 million long-term liability burden consists almost entirely of debt ($77.7 million), $58.3 million of which is overlapping. The burden includes an $8.5 million fiscal 2016 issuance to fund roads, facilities and parks. Issuance plans over the next couple of years include a modest amount of additional limited tax debt and public improvement district debt, the latter to be funded from property special assessments. Fitch expects Princeton's long-term liability burden to remain elevated but moderate because population and income growth are likely to be aligned with additional debt needs and full actuarially-based funding should limit growth in net pension liabilities.

The city's pensions are provided through the Texas Municipal Retirement System, an agent multiple-employer defined benefit plan. Under GASB Statement 68, the city reports a fiscal 2015 net pension liability (NPL) of $151,894, with fiduciary assets covering 96.4% of total pension liabilities at the plan's 7% investment return assumption.

Operating Performance

Princeton maintains strong gap-closing capacity to manage through a moderate economic downturn while maintaining an adequate level of fundamental financial flexibility. The 'a' assessment suggests that although operations would more likely be challenged in a downturn than would be the case for higher rating levels, Fitch expects the city would recover financial flexibility. The city's gap-closing capacity is provided through ample revenue-raising capacity and solid expenditure flexibility.

Princeton completed fiscal 2015 with unrestricted general fund reserves of $850,000, representing 22% of spending. The city anticipates favorable fiscal 2016 performance to boost reserves in excess of its 25% target.

Princeton experienced general fund accumulated deficits during fiscal 2011 and 2012 due largely to growth pressures associated with cash funding of its infrastructure needs. Strong revenue growth has helped the city to restore structural balance and replenish its reserves between fiscal 2013 and 2015. The rating incorporates Fitch's assumption that the city will adhere to its commitment to maintenance of an adequate financial cushion as it continues to manage growth pressures.

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 and InvestorTools.

Applicable Criteria

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

https://www.fitchratings.com/site/re/879478

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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
George Stimola
Associate Director
+1-212-908-0500
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
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
George Stimola
Associate Director
+1-212-908-0500
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com