Fitch Rates Seguin, Texas' GOs 'A+'; Outlook Stable
AUSTIN, Texas--(BUSINESS WIRE)--Fitch assigns an 'A+' rating to Seguin, Texas' (the city) $8.15 million general obligation (GO) bonds, series 2008. Additionally, Fitch affirms its 'A+' ratings on the city's outstanding $24.4 million GO bonds and $210,000 tax notes. The Rating Outlook is Stable.
Scheduled for a negotiated sale the week of Jan. 14, the bonds are direct obligations of the city, payable from the levy and collection of a direct and continuing ad valorem tax within the limits prescribed by law, on all taxable property located within the city. The city operates under a Home Rule Charter, which adopts the constitutional provision limiting the city's maximum ad valorem tax rate to $2.50 per $100 of assessed valuation. Proceeds will be used to fund various city improvements and pay the costs of issuance.
The 'A+' rating reflects Seguin's consistent trend of strong general fund performance, growing tax base and local economy, benefiting from its proximity to the San Antonio metropolitan area. Solid financial reserves and low tax rates provide flexibility to manage rising debt levels and slowing amortization resulting from the current bond program. Although declining, some concentration exists in terms of tax base and employment in a large automobile components manufacturing facility owned by Continental AG. The city maintains solid general fund balances, with reserves in excess of the city's three-month goal used to fund one-time capital projects. Historically, pay-as-you-go financing has helped moderate the debt ratios. Given the rapid issuance of the entire $14.15 million bond program and the city's large capital needs, maintenance of healthy financial reserves and manageable debt ratios - which are expected to benefit with anticipated gains in population and tax base - are key credit drivers.
Seguin is located in Guadalupe County approximately 35 miles east of San Antonio along Interstate Highway 10 (I-10). The city's population is estimated at 25,349 for 2007, an increase of 15% since the 2000 census. The city has a good mix between residential and commercial/industrial properties within its tax base. Gains in taxable assessed valuation (TAV) have averaged 6.5% annually since fiscal 2003. Although TAV gains in fiscal 2007 were lower than prior years, in fiscal 2008, TAV rebounded with a notable 13% jump due to a combination of revaluations and a mix of new residential and commercial construction. County unemployment rates remain well below state and national norms. Growth in area wealth levels, while below the statewide average, has outpaced that of the state.
Temic Automotive of North America, Inc., a subsidiary of Continental AG is the largest taxpayer and employer although taxpayer concentration continues to decline, with the company now representing only about 3.5% of total TAV, down from nearly 15% in 2001. Reduced inventory levels attributed to the reduction in the company's TAV and the growth of the overall tax base has provided additional diversification of the tax base. The plant was acquired by Continental AG (senior unsecured debt rated 'BBB' by Fitch) from Motorola in calendar year 2006 and currently employs 1,500. The company consolidated its Telematics manufacturing activities in Seguin with its plant in Nogales, Mexico.
The Seguin facility manufactures electronic components for power train and chassis and pressure sensors. Consolidation activities are expected to result in about 100 job losses; however this is mitigated by the general economic health of the area, as well as the extensive employment base of metropolitan San Antonio. In addition, a relatively recent power plant is expected to eventually assume the largest share of TAV as plant values are gradually added back to the property rolls, possibly absorbing some of the plant's TAV losses. While power plant values will gradually create some taxpayer concentration, continued population and tax base growth will likely result in economic expansion and diversification, given that the new state highway 130 is expected to pass through the city.
Solid financial performance remains a key credit consideration. Operations have benefited from the city's conservative budgeting practices as well as growth in the local economy. Sales taxes, which represent about one-third of general fund operating revenues, rebounded in 2004, increasing 7.7%; a 9.2% increase was recorded in calendar 2005, 6% in 2006 and 8.4% gain for 2007. The fiscal 2006 general fund balance of approximately $4.2 million represented about 32% of operating expenses and transfers out. For the close of fiscal 2007, officials project an operating surplus of $1.5 million and a general fund balance representing nearly 42% of expenditures and transfers out. This reserve level remains well in excess of the city's informal policy of maintaining at least three months of operations in reserve. Additional financial flexibility is afforded by the city's relatively low overall property tax rate and the establishment of a separate emergency fund. This fund typically maintains a balance of $2 million or greater. The city is prone to flooding, and the emergency fund was created to provide interim funding for damaged infrastructure pending receipt of insurance settlements or for city infrastructure not covered by insurance.
Historically, the city has provided a sizable amount of pay-as-you-go financing for capital projects and plans to continue to transfer reserves in excess of three months of operations to the capital improvements fund. The current offering represents the second and final phase of a $14.15 million borrowing approved by the voters in May 2006. The eight propositions all received solid voter support, ranging from about 60%-69%. The bond program addresses a variety of capital needs, including new and existing park development; fairgrounds and coliseum improvements; streets, drainage, utility, lighting, and land acquisition improvements; and structural improvements to the city's hydroelectric plant.
The city expects to stay below the $0.10 per $100 of TAV debt service tax rate impact proposed to the voters. Assuming a 3% annual increase in TAV, the impact is now estimated at $0.08 per $100 of TAV for the entire authorization; a five cent increase became effective in fiscal 2007 and the additional increases will be made over the next two fiscal years. Direct and overall debt ratios are moderate, and payout, which was about 50% in 10 years prior to implementation of the bond program, is now below average with 41% of the bonds maturing in ten years. The city plans to issue another $1 million in tax notes for fire department equipment within the next few months. Including the proposed additional debt does not significantly increase the debt ratios.