AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has affirmed the following ratings of Andrews County (the county), Texas:
--Issuer Default Rating (IDR) at 'AA-';
--$65.1 million permanent improvement bonds, taxable series 2010 at 'AA-'.
The Rating Outlook is Stable.
SECURITY
The bonds are payable from an annual property tax levy limited to $0.80 per $100 taxable assessed valuation (TAV) on all taxable property within the county.
KEY RATING DRIVERS
The 'AA-' rating reflects the county's robust financial cushion and independent revenue-raising ability, coupled with high exposure to energy industry volatility.
Economic Resource Base
Andrews County is located in far-west Texas in the Permian Basin, one of the largest mineral reserves in the U.S., about 50 miles northwest of the cities of Midland and Odessa. Estimated population is around 18,000, and the local economy is narrow, focused on oil/gas exploration, associated industries, and agribusiness.
Revenue Framework: 'aa' factor assessment
Andrews County has realized strong revenue growth and maintains ad valorem tax rate capacity, despite tax rate increases to offset a contracting base. The 'aa' assessment incorporates the uncertain impact of the local economy's energy concentration on future revenue growth prospects in addition to Fitch's belief that the long-term viability of the U.S. energy industry is sound.
Expenditure Framework: 'aa' factor assessment
Adequate expenditure flexibility results from strong workforce control and somewhat elevated carrying costs. Fitch expects expenditures to grow in line with revenues.
Long-Term Liability Burden: 'aa' factor assessment
The long-term liability burden is on the low end of moderate relative to the resource base and Fitch expects it to remain level. There are no near-term debt plans and unfunded pension contributions are modest.
Operating Performance: 'aaa' factor assessment
Fitch expects the county to demonstrate a superior degree of financial resilience during an economic downturn based on its superior budget flexibility and sufficient level of reserves to compensate for expected revenue volatility.
RATING SENSITIVITIES
High Economic Concentration: The rating is sensitive to fundamental changes in energy sector activity, which anchors the county economy. A non-cyclical decline in activity could have significant, negative impacts on county finances and lead to downward rating action.
CREDIT PROFILE
The county's tax base is heavily concentrated in mineral values; at peak levels mineral values made up as much as three-quarters of TAV. The top 10 taxpayers, of which nine are associated with oil/gas exploration, accounted for 37% of the fiscal 2016 tax base and are led by XTO Energy at 10%. Large swings in TAV are generally correlated with energy prices as evidenced by the most recent boom and bust cycle; recent tax base losses have resulted in an almost 60% contraction in TAV since the fiscal 2015 peak.
Revenue Framework
Property taxes dominate the general fund, averaging about 80% of revenues. Recently, property taxes have been supplemented by revenues from Waste Control Specialists (WCS), a treatment, storage, & disposal company dealing in radioactive, hazardous, and mixed wastes. WCS is legally required to transfer 5% of gross receipts to the county, which have averaged roughly $1.5 million annually and are typically used for one-time uses as they are unpredictable by nature.
General fund revenues have grown at a compound annual growth rate (CAGR) of a very high 9%, in excess of U.S. economic performance, over the 10 years through 2014. Growth in general fund revenues will continue to be very closely tied to energy prices, making future long-term results difficult to anticipate.
Management adjusts the tax rate annually to account for changes in the tax base. The county's fiscal 2017 ad valorem tax rate was adopted at $0.5655 per $100 TAV, up from $0.3413 just two years prior, but remains with solid margin under the statutory cap of $0.80. 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
The bulk of the general fund budget is spent on general government administration, which drives the trend for overall general fund expenditure growth. Spending for public safety is much smaller at about 15% of the budget; services include a sheriff's department and the county jail. Jail capacity has been stressed in recent years, requiring the county to send inmates to other jurisdictions at a nominal incremental cost.
The pace of spending on operating functions is likely to remain in line with revenue growth. Fitch does not anticipate pressure on service levels given the county's stable population.
The county exercises adequate expenditure flexibility through strong control of workforce costs and moderately elevated carrying costs. Fiscal 2015 carrying costs were 20.5% of spending. The county funds debt service with monthly lease payments from WCS, which will continue through the maturity of the bonds, rather than levying for debt service. The county maintains an amount equivalent to one year of debt service in escrow; in case of a WCS payment shortfall, the county would use this reserve to cover debt service until a tax levy could be applied.
Long-Term Liability Burden
Overall debt is on the low side of moderate at around 10% of personal income. The county issued the 2010 bonds to acquire real property that is leased by the county to WCS for the expansion of their existing hazardous waste facility. No other borrowing is planned or anticipated.
County employees participate in an agent multiple-employer defined pension plan administered by the Texas County and District Retirement System. The county consistently funds its pension at the actuarially determined level and the net pension liability was $14.3 million using a 7% rate of return, or a low 1.4% of personal income.
Operating Performance
The county used the revenues from the recent energy sector boom to more than double reserves; fiscal 2015 unrestricted general fund reserves were close to $20 million, or a very high 85% of spending. The year that ended September 30, 2016 is estimated to be break-even or have a modest surplus given the lean adopted budget for the year.
Superior inherent budget flexibility helps the county maintain financial resilience during economic downturns. Fitch expects the county's financial position to remain strong throughout the current energy sector slump despite high revenue volatility.
The adopted budget for fiscal 2017 includes across-the-board spending cuts to manage the decrease in property tax revenues; the adopted tax rate of $0.5655 is $0.16 lower than the effective rate. Despite the 20% budgeted decline in revenues, the fiscal 2017 budgeted was adopted as balanced and provides further evidence of the county's solid budgetary flexibility.
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, 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
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013417
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https://www.fitchratings.com/regulatory
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