Fitch Affirms Victoria, TX LTGOs, Sales Tax Revs at 'AA'; Outlook Stable
AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has affirmed its 'AA' on the following Victoria, TX bonds:
--$102.9 million limited tax general obligation (LTGO) bonds;
--$2.9 million Victoria sales tax development corporation sales tax revenue bonds.
The Rating Outlook is Stable.
The LTGOs are secured by an ad valorem tax levied against all taxable property in the city, limited to the constitutional tax rate of $2.50 per $100 of taxable assessed value (TAV). The sales tax bonds are secured by the corporation's 0.5% sales tax.
KEY RATING DRIVERS
STABLE ECONOMY & TAX BASE: The city benefits from its position as an important regional service and supply center, as well as continuing development across key taxable sectors and a fairly stable housing market.
GOOD FINANCIAL POSITION: The city maintains healthy operating reserves and ample liquidity, reflecting responsive management that has been willing to cut spending to maintain structural budgetary balance.
PRUDENT BUDGETING OF SALES TAX: Sales tax revenues, one of the city's main revenue sources, have plateaued after surging in recent years. City officials continue to prudently appropriate sales tax receipts in excess of the budget for non-recurring expenditures.
AMPLE DEBT SERVICE COVERAGE: Sales tax revenue bonds exhibit ample debt service coverage, resiliency to revenue fluctuations, and a short maturity. The city does not plan to further leverage this revenue source.
MIXED DEBT PROFILE: Overall debt levels are moderate to high but amortization is rapid, debt plans are manageable, and total carrying costs are moderate.
Victoria, Texas is located 30 miles inland from the Gulf of Mexico and equidistant between the cities of Houston, San Antonio, and Corpus Christi. The estimated 2013 population totals 65,100.
INLAND PORT CITY WITH MODEST BUT DIVERSE ECONOMY
A barge canal connects the city and the Port of Victoria to the gulf intra-coastal waterway, allowing access to ports on the Gulf and Atlantic coasts, as well as destinations on the Mississippi River. The city is a regional center for trade and a service and supply center for heavy industry, including petrochemical and plastics manufacturing. The development of the service, retail, and health care sectors has complemented the industrial base and added a measure of diversity and stability to the local economy.
Recent upticks in sales activity, apparent by the sharp climb in sales tax receipts in fiscal 2011 and 2012, have been in part associated with increased economic activity from drilling in the nearby Eagle Ford shale, a large oil and natural gas formation spanning the southern portion of Texas and edging into Victoria County.
EXPANDING TAX BASE
TAV surged 9% in fiscal 2014 to $3.8 billion as a result of upward revaluation of existing commercial, industrial, and residential properties, as well as ongoing development. Recent noteworthy activity includes a $200 million Caterpillar Inc. manufacturing plant that opened in 2012 and is expected to employ 800 workers at full capacity. Absent marginal contraction in fiscal 2010, the city's TAV has steadily appreciated over the past decade. City officials anticipate moderate TAV growth to continue over the near term, a projection which Fitch views as reasonable based on review of local economic data and the development underway.
RAPID ECONOMIC GROWTH; AVERAGE SOCIECONOMIC PROFILE
The city's economic expansion is evident in the large gains in employment since 2011, which have averaged 2%-3% annually. For the 12 months ending April 2014 employment within the city grew by a large 3.7%, pushing the unemployment rate down by more than 25% during the same period to a modest 3.6%. By comparison, the state and national unemployment averages for April 2014 totaled 4.7% and 5.9%, respectively. Top employers are in government and manufacturing, and the expansion of the new Caterpillar plant and a new hospital are expected to add jobs over the next few years.
The positive trajectory of the city's economic base is fueling strong growth in median household income, which grew by a compound annual average of 2.8% since 2007. However, income levels remain moderately below the state and national averages. The city's per capita market value, also a measure of wealth, is average at $69,000. The city's poverty rate remains elevated at 19.5% as of 2011.
STABLE FINANCIAL PROFILE; RELIANCE ON SALES TAX REVENUES
Finances are a credit positive, with available general fund balance exceeding 25% of spending in each of the past five fiscal years. The maintenance of large reserves was aided by surges in sales tax receipts of 23% and 19% in fiscal 2011 and 2012, respectively. In fiscal 2013 and the current period, the rapid sales tax growth has dissipated and receipt totals have leveled out. As a result of the growth, the general fund composition of sales tax revenues grew from 30% in fiscal 2009 to 39% in fiscal 2013, further expanding its margin as the largest revenue source for the city.
PRUDENT USE OF RESERVES FOR CAPITAL
The city's growing exposure to economically volatile sales tax receipts presents increased risk, which the city has tempered in several ways. For example, management uses current resources for large one-time capital outlays. In fiscal years 2012 and 2013, the city's pay-go capital outlays and transfers to the capital projects fund totaled a significant 10% and 11% of general fund spending, respectively. Such outlays can be adjusted annually and are a source of spending flexibility when economic activity falters.
STRENGTHENED FUND BALANCE POLICY
Management also bolstered its reserve policy recently as a buffer against sales tax revenue declines. Officials increased the city's minimum fund balance policy to 23.5% from 20% in fiscal 2012 (and 15% in fiscal 2009). In addition, while not a formal policy, management routinely budgets sales tax revenues in excess of budget for non-recurring expenditures.
Due to $5.1 million in pay-go capital outlays, fiscal 2013 posted a moderate $1.3 million (2.7% of spending) net general fund deficit after transfers. The resulting unrestricted fund balance remained large at $17.6 million or 38% of spending. Fiscal 2013 liquidity remained ample with cash totaling about five months of operating expenses.
The projected $3.5 million (7% of spending) drawdown in fund balance for fiscal 2014 reflects additional planned one-time expenditures, although Fitch notes that the city often outperforms its projections. The proposed fiscal 2015 budget continues the practice of using current resources for capital outlays and conservatively projects a 1% gain in sales tax revenues. Despite the proposed $2.1 million draw-down (4.2% of spending), budgeted operating reserves would remain above the city's minimum fund balance target.
PENSION BENEFITS ADEQUATELY FUNDED
The city fully funds its annual required contribution for pension benefits, which are provided through the Texas Municipal Retirement System (TMRS), a state sponsored agent multiple-employer plan. The city's funded ratio is adequate 77.3% as of the December 2012 actuarial valuation using a 7% investment return. Other post-employment benefits (OPEBs) for retiree health-care are funded on a pay-go basis.
MIXED DEBT PROFILE
Overall debt ratios are moderate to high at $3,698 per capita and 5.4% of full market value, with the higher debt ratio largely reflecting the debt of an overlapping school district. Principal amortization of the city's LTGO debt remains rapid with 67% retired in 10 years. The city presently has no GO debt authorization. Its future debt plans include the issuance of $7 million in certificates of obligation this fall, which Fitch considers manageable.
The $2.9 million in outstanding sales tax revenue bonds are secured by the city's sales tax development corporation's 0.5% sales tax -- which is separate from the 1% sales tax accruing to the general fund. Debt service coverage totaled a strong at 8.2x in fiscal 2013, providing ample margin to weather revenue stress. In addition, the bonds have a relatively short final maturity (2017), no further leveraging is planned, and annual debt service is level at about $1.1 million. Excess sales tax revenues, after payment of debt service, are used for capital projects.
Fitch considers the combined fixed cost burden for debt, pension ARC, and OPEB pay-go moderate at 20% of fiscal 2013 governmental expenditures. Beginning in the current fiscal year, a portion of the annual debt cost is being offset by state transportation aid for the city's outstanding series of LTGO pass-through toll revenue bonds.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, and National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria