Fitch Affirms La Porte, TX's GOs and COs at 'AA'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has affirmed the following La Porte, Texas ratings at 'AA':

--Issuer Default Rating (IDR);

--$540,000 general obligation (GO) bonds series 2005 and 2006;

--$405,000 certificates of obligation (COs) series 2005 and 2006.

The Rating Outlook is Stable.

SECURITY

The GOs and COs are payable from annual property tax levy limited to $2.50 per $100 taxable assessed valuation (TAV). The COs are additionally payable from net revenues of the city's combined waterworks, electric, and sewer system (not to exceed $1,000).

KEY RATING DRIVERS

The 'AA' IDR and CO and GO ratings reflect the city's robust financial resilience, moderate fixed-costs supporting solid expenditure flexibility and moderate long-term liability burden.

Economic Resource Base

The city is located southeast of Houston, with portions lying along the Houston Ship Channel, Galveston Bay, and the Bayport Channel. The Port of Houston ranks first among U.S. ports in terms of foreign tonnage and second by total tonnage. With an estimated population of about 35,000, the city is characterized by a combination of energy-related industries, warehousing, and residential development.

Revenue Framework: 'aa' factor assessment

La Porte has realized strong revenue growth over the past 10 years through tax base expansion and increased economic activity. The city holds ample independent legal ability to raise revenues. The 'aa' assessment incorporates the local economy's energy concentration and associated exposure to revenue-base declines.

Expenditure Framework: 'aa' factor assessment

Solid expenditure flexibility results from strong workforce control and moderate carrying costs. Fitch expects expenditures to grow in line with revenues.

Long-Term Liability Burden: 'aa' factor assessment

The long-term liability burden remains on the low end of the moderate range relative to the resource base. Fitch expects the burden to remain stable given modest tax-supported capital needs and a low net pension liability.

Operating Performance: 'aaa' factor assessment

Fitch expects the city to demonstrate a superior degree of gap closing ability and financial resilience during an economic downturn based on its strong expenditure flexibility and high independent revenue-raising capacity, supplemented by robust reserves.

RATING SENSITIVITIES

Expenditure Flexibility: The rating is sensitive to maintenance of solid expenditure flexibility and continued moderate carrying costs.

CREDIT PROFILE

The city's economy plays an integral role in the overall operations of the Port of Houston, as evidenced by the significant presence of warehousing and chemical processing in the city's top 10 taxpayers. Inventories and industrial/commercial properties make up a bit less than half of the tax base, though concentration would likely appear more significant if the extra-territorial jurisdiction (ETJ) were annexed.

Revenue Framework

Industrial district fees and property taxes make up roughly half of general fund revenues, followed by charges for services and sales and franchise taxes.

General fund revenues grew at a compound annual growth rate (CAGR) of 5.8%, in excess of U.S. economic performance in the decade leading up to 2014. Growth in industrial district fees over this period was particularly strong due to a fee increase in 2007 as well as an increase in the number of outstanding industrial district agreements.

General fund revenues have begun to soften given the city's exposure to the energy sector; fiscal 2016 sales tax revenues were running 10% lower than last year with nine months reported. Despite exposure to economically sensitive revenues, the city's beneficial location and continued industrial and commercial investment in the local economy bode well for healthy growth to continue.

Management has held the ad valorem tax rate at $0.71 per $100 TAV for at least two decades, providing 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.

Industrial district fees or payments in lieu of taxes (PILOTs) have historically generated over 30% of general fund revenues. The industrial entities are located outside of city limits but within the city's ETJ. The companies agree to pay for a portion of what would be taxed if the land were annexed by the city in exchange for the city's agreement not to annex the area. The city is obligated to provide only minimal services to the area under these agreements.

The last ETJ contract renewal process occurred in 2007 and the contracts have a 12-year term. Currently 149 companies participate in industrial district contracts, a notable increase from 118 in fiscal 2010. These contracts have served the city as a valuable economic development tool for more than 50 years.

Expenditure Framework

The city's largest spending area is public safety, which makes up just less than half of general fund spending. Spending growth in that area has trended in line with overall general fund expenditure growth.

The pace of spending on operating functions is likely to remain in line with revenue growth. Fitch does not anticipate pressure on spending given the majority of large-scale projects fall within the industrial district for which the city provides minimal services.

The city exercises expenditure flexibility through significant control of workforce costs and moderate carrying costs. Fiscal 2015 carrying costs were 19.8% of governmental spending and principal amortization is swift with a descending debt service schedule.

Long-Term Liability Burden

The city's overall debt is on the low end of the moderate range at about 12% of personal income. Capital needs primarily fall under the purview of the utility system and will be self-supporting in nature. General government capital needs will be funded with a mix of paygo and a modest debt issuance.

The city participates in the Texas Municipal Retirement System (TMRS), an agent multiple-employer defined benefit plan. Under GASB Statement 68, the city reports a fiscal 2015 TMRS net pension liability (NPL) of $14.3 million, with fiduciary assets covering 90% of total pension liabilities at the plan's 7% investment return assumption and based on a Dec. 31, 2014 valuation date. The NPL represents 1% of personal income.

Operating Performance

The city has historically maintained very high reserve levels and has added significantly to fund balance since the last recession. The city is expected to manage through periods of economic weakness while preserving a superior level of fundamental financial flexibility. General fund reserves are well above the city's reserve policy, a level that withstands a moderate economic stress scenario using the Fitch Analytical Sensitivity Tool (FAST) even without the offsetting policy action that Fitch expects the city would take to address related declines.

The city prudently uses excess revenues for pay-go capital spending, annually making a transfer to the capital projects fund while maintaining a very high level of general fund reserves. The fiscal year that ended Sept. 30 is expected to have a surplus of $3 million despite the softening of sales tax revenues, adding to the already robust unrestricted fund balance of $32.5 million (76% of spending) at the end of fiscal 2015. The fiscal 2017 adopted budget is largely similar to prior years and included a 3% salary increase for personnel, a $2 million transfer for capital projects, and conservative estimates of economically sensitive revenues.

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, the Municipal Advisory Council of Texas, and InvestorTools.

Applicable Criteria

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

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

Additional Disclosures

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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013145

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013145

Endorsement Policy

https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst
Leslie Cook
Associate Director
+1-512-215-3740
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Rebecca Moses
Director
+1-512-215-3739
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Leslie Cook
Associate Director
+1-512-215-3740
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Rebecca Moses
Director
+1-512-215-3739
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com