Fitch Rates Ellis County, TX's $34.6MM GO Rfdg Bonds 'AA'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'AA' rating to the following bonds of Ellis County, TX:

--$34.6 million general obligation (GO) refunding bonds, series 2016.

In addition, Fitch has affirmed the following ratings at 'AA':

--$43.1 million in outstanding GO bonds, series 2002 and 2007;

--the county's Issuer Default Rating (IDR).

The Rating Outlook is Stable.

The bonds are scheduled to sell Oct. 25 via competition. Proceeds will be used to refund a portion of the county's outstanding bonds for interest savings.

SECURITY

The bonds are payable from an ad valorem tax levied on all taxable property in the county, limited to $0.80 per $100 of taxable assessed valuation (TAV).

KEY RATING DRIVERS

The 'AA' IDR and GO rating reflect the county's prudent financial management practices that preserve flexibility, including action to raise revenues in response to economic downturn and demonstrated expenditure controls to address growth in public safety costs. Economic and revenue growth prospects in the county are strong and Fitch expects that the liability burden will remain in the moderate range based on current needs.

Economic Resource Base

The county is located in north central Texas, immediately south of and accessible to the larger Dallas-Fort Worth (DFW) metro economy and employment base. The county's estimated 2016 population of about 166,500 represents an increase of 11% since 2010.

Revenue Framework: 'aaa' factor assessment

General fund revenues are expected to continue on a trajectory of strong growth due to ongoing residential development. The county's independent legal ability to increase its property tax rate provides ample revenue flexibility.

Expenditure Framework: 'aa' factor assessment

Ellis County's solid degree of expenditure flexibility is derived from strong management control over workforce spending and moderate carrying costs; the county has demonstrated its ability to curtail spending during times of economic decline. Fitch expects the natural pace of expenditure growth to remain in line with, to slightly above, revenue gains.

Long-Term Liability Burden: 'aa' factor assessment

The moderate liability burden is largely driven by overlapping debt. The county consistently contributes to pensions at actuarially determined levels and the net pension liability is modest.

Operating Performance: 'aaa' factor assessment

Fitch expects the county to maintain a high level of financial flexibility throughout economic cycles, given its solid levels of revenue and expenditure flexibility and its substantial operating reserves.

RATING SENSITIVITIES

Shift in Fundamentals: The 'AA' rating is sensitive to material change in the county's strong revenue-raising and expenditure flexibility and solid financial position, which Fitch expects the county to maintain throughout economic cycles.

CREDIT PROFILE

Ellis County is fairly rural but benefits from its proximity to the larger DFW economy; improving road infrastructure has spurred residential development in recent years for new residents who commute to DFW. The county's unemployment rate is consistently below U.S. rates. Income metrics are mixed--per capita income is below average while median household income exceeds state and U.S. averages.

The county tax base grew at a healthy compounded annual rate of 4.2% for fiscal years 2006-2016 despite some recessionary stagnation. Major taxpayers include a historically stable industrial base of cement and steel manufacturers, large retail distribution centers, and utility plants. New development is largely residential, accompanied by modest industrial and retail investment. TAV for fiscal 2017 grew by a sizable 16.5% over the prior year due to a combination of new construction and reappraisal gains.

Revenue Framework

Property taxes account for over 80% of general fund revenues. Favorable revenue trends have been aided by steady tax base gains and modest increases in the operating tax rate.

Fitch expects the natural pace of revenue growth to continue at or above the pace of inflation and U.S. GDP growth, given ongoing and expected development activity in the county.

Ellis County's combined tax rate for operations and debt service ($0.38 in fiscal 2017) is well below the statutory cap of $0.80 per $100 of TAV, providing the county with ample revenue-raising ability. If a proposed tax rate results in an 8% year-over-year levy increase (based on prior year's values), the rate increase may be subject to election if petitioned by voters.

Expenditure Framework

Public safety accounts for roughly half of general fund expenditures. Stabilization of the inmate population in county jails with moderate remaining capacity, accompanied by implementation of inmate-related expenditure controls in recent years, supports Fitch's expectation that public safety costs will continue to grow on pace with the overall budget.

The pace of spending growth absent policy actions is likely to be generally in line with strong projected revenue growth but pressured somewhat by a modestly expanding population and resultant service needs.

Ellis County's fixed cost burden is moderate, with carrying costs for debt, pensions, and other post-employment benefits equaling 15% of fiscal 2015 governmental spending. Expenditure flexibility is aided by management's high level of control over workforce spending, as the county has no collective bargaining agreements and pay adjustments for all employee classes are determined annually by management.

Long-Term Liability Burden

The long-term liability burden of overall debt and net pension liabilities is moderate at 17% of personal income; about 95% of the burden is attributable to overlapping debt of area school districts and cities. Fitch expects the burden to remain in the moderate range relative to the resource base, as regional capital needs and debt issuance have historically been accompanied by steady gains in personal income.

County employees participate in the Texas County and District Retirement System, an agent multiple-employer plan. The county consistently contributes to pensions at the actuarially determined level and the net pension liability is modest at 0.2% of personal income, using Fitch's adjusted 7% rate of return.

Operating Performance

The three-year scenario revenue estimate generated by Fitch's analytical sensitivity tool (FAST) depicts low revenue sensitivity to economic shifts and maintenance of operating reserves well above the level needed for an 'aaa' financial resilience assessment throughout the economic cycle. The unrestricted general fund balance ending fiscal 2015 was a very high 39% of spending. Ellis County has historically raised its property tax rate to counter economic softness, and Fitch expects that the county will continue to employ this flexibility and its strong fiscal cushion to maintain a solid financial position throughout economic cycles.

When faced with economic downturn and a growing inmate population, the county implemented spending controls, including renegotiation of jail service contracts, with no deferrals of annual pension contributions or other required spending. Ellis County increased its general fund balance in each of the past five fiscal years, and unaudited financials for fiscal 2016 point to another surplus of about $900,000 (2% of budgeted spending). The fiscal 2017 budget is balanced with conservative revenue assumptions, includes a 3% pay hike with no major capital spending, and assumes similar personnel numbers as the prior year.

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/site/re/879478

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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013098

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013098

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https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst
Shane Sellstrom
Associate Director
+1-512-215-3727
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Leslie Cook
Associate Director
+1-512-215-3740
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations
Elizabeth Fogerty
+1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Shane Sellstrom
Associate Director
+1-512-215-3727
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Leslie Cook
Associate Director
+1-512-215-3740
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations
Elizabeth Fogerty
+1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com