AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned a 'AAA' rating to the following Sugar Land, TX (the city) limited tax obligations:
--$7.38 million general obligation bonds, series 2016.
Proceeds will fund park and festival site improvements, hiking and bike trails, and to pay the costs of issuance.
The series 2016 GOs are expected to price via competitive sale Oct. 18.
In addition, Fitch affirms the following ratings:
--Issuer Default Rating (IDR) at 'AAA';
--$294 million in limited tax debt at 'AAA'.
The Rating Outlook is Stable.
SECURITY
The limited tax obligations (GOs and COs) are payable from an ad valorem tax levied on all taxable property within the city, limited to $2.50 per $100 taxable assessed valuation (TAV). The COs are additionally secured by a nominal pledge of subordinate net revenues (limited in amount to $1,000) from the city's waterworks and sewer system.
KEY RATING DRIVERS
The 'AAA' IDR and limited tax obligation rating are based on Sugar Land's strong operating performance supported by its ability to independently raise revenues, solid expenditure flexibility and ample reserves. The rating also reflects the city's moderate long-term liability burden.
Economic Resource Base
Sugar Land is part of the expansive Houston metropolitan statistical area (MSA) economy, which has outpaced the nation in job and income growth due to a strong energy sector and diversification in other sectors. The city's population of about 92,000 is highly educated with above average income. The regional economy remains sensitive to energy sector trends.
Revenue Framework: 'aaa' factor assessment
Growth prospects are strong as indicated by 10-year historical revenue trends well above that of U.S. economic performance and ongoing economic growth that has continued despite soft oil prices of the past several years. The city has ample independent ability to raise revenues without external approval.
Expenditure Framework: 'aa' factor assessment
Fitch expects the natural pace of spending to be in line with revenue growth. The city maintains discretion over workforce costs and its moderate carrying costs do not impede expenditure flexibility.
Long-Term Liability Burden: 'aa' factor assessment
The city's long-term liability burden is moderate in relation to personal income and pensions are well-funded. Fitch expects the burden to remain moderate because population and income are expected to grow at a pace similar to regional debt needs.
Operating Performance: 'aaa' factor assessment
Fitch expects the city to demonstrate financial resilience during a moderate economic downturn based on its revenue raising capacity, solid expenditure flexibility, and currently healthy financial cushion.
RATING SENSITIVITIES
Strong Fiscal Health: The rating is sensitive to shifts in fundamental credit characteristics, including the city's ongoing economic growth and strong operating performance.
CREDIT PROFILE
Sugar Land is located in the broad Houston MSA and residents have direct access to Houston's central business district via a major highway. The broad area economy includes biomedical research, healthcare, aerospace, and international trade, supplementing its energy and petrochemical roots. The MSA is home to 26 Fortune 500 corporate headquarters.
Top Sugar Land employers include Fort Bend ISD, Fluor Enterprises, Inc., Schlumberger, Houston Methodist Sugarland Hospital, United Healthcare, and Nalco/Champion. Management reports additional investment is underway with planned expansion by some of its top employers, including Methodist Hospital, Memorial Hermann Healthcare Systems, the relocation of Nalco/Champion and Schlumberger headquarters, and a new Texas Instruments research & development facility. Fitch expects these developments will further strengthen the city's employment and tax base.
Revenue Framework
Sales tax receipts contributed 49% to the city's fiscal 2015 general fund revenues, followed by property tax revenues (24%) and charges for services (11%).
Strong growth prospects reflect current economic and development trends and the city's resilience to economic and energy downturns driven by population and residential real estate construction and value growth. The city's general fund revenues grew by a strong compound annual growth rate (CAGR) of 6.5% during fiscal 2004 through 2014, on the strength of 5.2% average annual sales tax growth and expansion of the ad valorem property tax base. The city expects transportation improvement plans to spur ongoing development in its Imperial Redevelopment District, which has already seen single-family and assisted living construction during fiscal 2016.
Sugar Land's fiscal 2017 tax rate of $0.31595 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
Similarly to other Texas municipalities, public safety accounts for almost half of Sugar Land's general fund operating budget.
The city's natural pace of spending is generally in line with its revenue growth.
Sugar Land exercises discretion over its workforce rules and costs and does not participate in collective bargaining or labor agreements with employee groups. Carrying costs are a moderate 17% of fiscal 2015 governmental spending, driven primarily by debt service (12.5% of spending). These do not hinder the city's expenditure flexibility. Fitch expects the city's carrying costs to remain moderate based on its 59% 10-year principal amortization rate, downward trending debt service schedule, and anticipated moderate growth in pension and other post-employment benefit (OPEB) contributions, consistent with overall spending trends.
Long-Term Liability Burden
Sugar Land's long-term liability burden is a moderate 14% of estimated personal income. The city's $922 million long-term liability burden consists primarily of debt ($902 million), $635 million of which is overlapping. The city-wide five year capital plan totals $175.5 million. Funding sources include sales tax revenues, limited tax obligations (including non-voted certificates of obligation), developer contributions and donations. Governmental spending is focused on street and drainage projects. Sugar Land has $10.2 million of remaining unissued authorization, which it expects to issue in fiscal 2018 or 2019. The city does not anticipate seeking additional general authorization from voters at this time. Fitch expects Sugar Land's long-term liability burden to remain 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 of $19.2 million, with fiduciary assets covering 89.3% of total pension liabilities at the plan's 7% investment return assumption.
Operating Performance
Fitch expects Sugar Land to demonstrate financial resilience during an economic downturn, consistent with its history of strong operating performance. The 'aaa' assessment is informed by the city's revenue raising capabilities, solid expenditure flexibility and is further supported by its currently ample financial cushion.
The city's strong budget management is demonstrated by reserve replenishment during periods of economic expansion and funding of pension contributions at 100% of the actuarially determined levels.
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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