AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned a 'AA+' rating to the following city of Mansfield, Texas obligations:
--$15 million Mansfield Economic Development Corporation (MEDC) sales tax revenue bonds, taxable new series 2016.
The sales tax revenue bonds are scheduled for sale the week of Oct. 3 subject to market conditions. Proceeds will be used to fund street, water, sewer, and drainage improvements.
Fitch's Issuer Default Rating (IDR) on the city of Mansfield is 'AA+'.
The Rating Outlook is Stable.
SECURITY
The MEDC bonds are payable from a subordinate lien on and pledge of a separate 0.5% sales and use tax levied within the city for the benefit of MEDC.
KEY RATING DRIVERS
Sales Tax Bonds: The assignment of a 'AA+' to the MEDC sales tax revenue bonds, new series 2016 reflects application of Fitch's revised criteria for U.S. state and local government credits, which was released on April 18. Under the new criteria, Fitch considers debt service coverage in light of the sensitivity of the dedicated revenue stream to downturns. The additional bonds test minimum coverage level provides ample cushion to absorb a downturn in expected revenues in a moderate recession. The sales tax rating is limited by the city of Mansfield's 'AA+' IDR.
The 'AA+' IDR is based on Mansfield's strong operating performance, enabled by solid revenue raising capacity and expenditure flexibility, supplemented by a healthy financial cushion. The rating also reflects the city's moderate long-term liability burden.
Economic Resource Base
Mansfield is located in the southeastern portion of Tarrant County and is directly connected to nearby Dallas and Fort Worth, the DFW International Airport, and surrounding communities by a robust and expanding transportation network. The city's population of 65,984 is more than double that of the 2000 census. A significant amount of developable land remains within the city's 36.69 square miles.
Revenue Framework: 'aaa' factor assessment
Rapid revenue growth mirrors expansion of the city's ad valorem and sales tax base over the past decade. Mansfield has a strong ability to independently raise revenues based on ample latitude to adjust its ad valorem property tax rate.
Expenditure Framework: 'aa' factor assessment
The city maintains control over compensation within its planning and budgeting processes, contributing to solid expenditure flexibility. Carrying costs, 19.4% of spending, are on the high side of moderate. Fitch expects carrying costs to remain moderate based on projected alignment between debt service, pension and other post-employment benefit (OPEB) contributions with overall spending.
Long-Term Liability Burden: 'aa' factor assessment
Mansfield's long-term liability burden is 15.3% of personal income. The long-term liability burden is likely to remain moderate as the city's population and income grow in tandem with regional debt needs. The city's net pension liability is modest.
Operating Performance: 'aaa' factor assessment
Fitch expects the city to demonstrate strong financial resilience in a moderate economic downturn based on its ample revenue raising capacity, solid expenditure flexibility, and healthy financial cushion.
RATING SENSITIVITIES
Sound Coverage Cushion: The sales tax revenue bond rating is sensitive to maintenance of a sound coverage cushion consistent with the current rating level.
Expenditure Management: The IDR is sensitive to maintenance of strong financial health including the affordability of debt and pension obligations as reflected in the city's carrying costs.
CREDIT PROFILE
Mansfield has enabled growth by providing economic development and infrastructure assistance, a well-developed transportation network and by virtue of its significant availability of developable land. The city's local economy is diversified across manufacturing, health and medical services, utility services, distribution, retail, property management, and leisure services. The city's five industrial parks are home to a reported 115 industries. The city's large employers include Mouser Electronics, Methodist Mansfield Medical Center, SJ Louis Construction of TX, Wal-Mart Super Center and Klein Tools. Above-average education attainment contributes to the city's strong employment trends.
A notable medical and health services presence is evidenced by Methodist Hospital's $300 million capital investment. The hospital system reportedly has plans for future expansion on a 22-acre site. Hospital Corporation of America and Texas Health Resources also are reportedly slated for future hospital development totaling $227 million.
Revenue Framework
Mansfield's general fund operating revenues are provided primarily by ad valorem property taxes (50%) and sales taxes (21%). The city's revenues have fared well through recent economic cycles, supported by the city's rapid expansion.
Mansfield's revenues grew by a compound annual growth rate (CAGR) of 7% over the 10 years from 2004-2014, far exceeding the rate of U.S. GDP growth. The city's strategy to focus on expansion of its commercial and industrial sectors, as well as health services and entertainment venues over the past decade contributed to an expanding tax base that buffered revenues from the regionally flat housing values associated with the most recent economic downturn. Fiscal 2016 taxable assessed valuation (TAV) has grown a solid 4.7% on average over the past five years reflecting property appreciation and new development. Fitch anticipates ongoing growth based on extensive commercial and industrial expansion plans underway.
Mansfield's fiscal 2016 ad valorem tax rate of $0.71 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
As is typical city governments in Texas, public safety accounts for the majority of operating costs, 59% of the city's fiscal 2015 general fund expenditures.
Fitch expects the city's natural pace of spending to be generally in line with revenue growth.
Mansfield maintains solid expenditure flexibility. This is accomplished through a disciplined budgeting and control function through which the city manages compensation and benefits. The city does not participate in collective bargaining or meet and confer processes. The expectation for carrying costs to remain moderate is based on reasonable prospects for growth in overall spending in line with increases in the city's debt service, pension, and OPEB contributions. Principal amortization is about average at 60% in 10 years.
Long-Term Liability Burden
Mansfield's long-term liability ($569 million) is moderate at 15% of personal income. Fitch expects long-term liabilities to increase but remain moderate based on anticipated growth in population and income to support regional debt needs and the city's modest unfunded pension obligations. The city's strategic plan includes about $135 million for general fund improvements over the next 10 years (2017 to 2026), somewhat above principal amortization over the same period. The current series 2016 MEDC sales tax revenue bonds will fund infrastructure within and surrounding the city's Shops at Broad development.
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 city-wide fiscal 2015 net pension liability (NPL) of $14.8 million, with fiduciary assets covering 87.9% of total pension liabilities at the plan's 7% investment return assumption.
Operating Performance
Fitch expects Mansfield to demonstrate strong financial resilience during a moderate economic downturn based on its strong independent revenue raising capacity, solid expenditure controls, and healthy reserve position.
The city typically outperforms its conservative budget and maintains ample reserves in compliance with its 25% policy target.
Dedicated Tax Analysis
The MEDC is a 4A corporation, formed in 1997 with the passage of a separate 1/2 of 1% sales tax. The MEDC's goal is to attract business to the city through location assistance and infrastructure improvements. In addition to sales tax revenues, the corporation receives gas royalty monies that are applied to its mission objectives.
Excise tax revenue collections reflect a very strong 8.8% CAGR over the decade from 2004-2014 and growth prospects remain strong. Legal provisions provide adequate bondholder protections. These include an additional bonds test of 1.35x maximum annual debt service (MADS) using an historical test for bonds outstanding plus bonds to be issued.
To evaluate the sensitivity of the dedicated revenue stream to cyclical decline, Fitch considers both revenue sensitivity results (using a 1% decline in national GDP scenario) and the largest decline in revenues over the period covered by the revenue sensitivity analysis. Given its rapid growth trajectory, the city has not experienced a year-over-year sales tax revenue decline in the 15-year pledged revenue history that Fitch analyzes. As such, Fitch's analytical sensitivity tool (FAST) generates a default 1% scenario decline in MPFDC and MEDC pledged revenues based on Fitch's criteria guidance because actual revenue performance would suggest 3.4% growth in pledged revenues in a moderate national recession. Fitch takes into account that there is economic sensitivity inherent in the revenue stream.
Assuming issuance up to the 1.35x ABT, below actual current coverage levels, debt service would be covered even with a 26% drop from fiscal 2015 revenues.
Fiscal 2015 pledged revenues of $4.8 million cover MEDC all-in MADS (2018) at 2.18x.
Issuing Entity Exposure
The dedicated tax bond rating is limited by the city of Mansfield's 'AA+' IDR as Fitch does not believe that the security insulates the bonds from the general credit of the issuer. Fitch does not view the pledged excise tax revenues as special revenues under section 902(2)(B) of the bankruptcy code, which defines 'special excise taxes imposed on particular activities or transactions' as special revenues.
Date of Relevant Rating Committee: Nov. 30, 2015
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/site/re/879478
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