AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns a rating of 'AA+' to the following City of Denton, Texas (the city) obligations:
--$28.3 million general obligation (GO) refunding bonds, series 2014.
The GOs are scheduled for a competitive sale the week of Aug. 18. GO proceeds will refund outstanding obligations for interest savings.
Fitch also affirms its 'AA+' rating on the following outstanding city obligations (COs):
--$130 million GO bonds (pre-refunding);
--$285 million COs;
--$47 million combination tax & revenue refunding bonds.
The Rating Outlook is Stable.
The GOs and COs are secured by an annual property tax levy, limited to $2.50 per $100 of taxable assessed valuation (TAV). The COs are additionally payable from a limited pledge of utility system surplus revenues.
KEY RATING DRIVERS
SOLID FINANCIAL POSITION: Management's commitment to structural balance is reflected in sound reserves and strong liquidity. Budgeting is conservative with results that are typically than better the city's forecasts. Revenues exhibit relatively low volatility and the city's cost structure retains ample flexibility.
STABLE LOCAL ECONOMY: Denton benefits from participation in the broad Dallas-Fort Worth (DFW) economy as demonstrated by a growing population and employment base. The city's education levels are strong and per capital personal income is on par with the national average.
WELL-POSITIONED TAX BASE: The tax base is diverse with below average cyclicality. Situated along the North American Free Trade Agreement corridor, the city's tax base includes a broad array of industrial, warehousing and commercial interests. A growing transportation network positions the city for future growth.
HIGH, BUT MANAGEABLE DEBT: Fitch expects the city's debt to remain elevated given local and regional growth needs. However, the burden on the budget for debt service and pensions is manageable.
CONTINUED FINANCIAL FLEXIBILITY: The rating is sensitive to shifts in fundamental credit characteristics, including the city's strong financial management and ability to service utility COs from enterprise operations without pressuring general fund resources. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
Denton is located at the convergence of Interstate 35 East and Interstate 35 West, approximately 35 miles from downtown Dallas and Fort Worth.
DIVERSE LOCAL ECONOMY WITH GROWTH PROSPECTS
The city is known for its institutions of higher education and regionally prominent medical sector. Denton is home to the University of North Texas (UNT) and Texas Women's University (TWU), with combined enrollment exceeding 48,500. In addition to the educational sector, large employers include governmental and health sector concerns. The city's growing medical facilities serve north Texas and southern Oklahoma. Most recently, Heart Hospital Baylor Denton invested over $20 million in the completion of a renovation and surgical equipment upgrade. Additionally, three assisted living facilities are scheduled to begin construction in 2015.
A number of recent industrial expansions and relocations have contributed to the city's low 4.2% unemployment rate as of May 2014. Further expansion and development plans position the city for growth in the next several years, including the creation of the city's first public improvement district in May 2014. The Public Improvement District (PID Number One) is being developed for commercial/retail and multi-family uses.
New commercial and retail development continues to accompany the city's recovering residential market. Fitch believes that significant transportation improvements over the next several years combined with the city's ample capacity will likely result in ongoing growth.
SOUND FISCAL MANAGEMENT
A diversified revenue base of ad valorem tax (38%), sales tax (31%), and franchise fees (16%) support the city's governmental operations. Management continued to align expenditures with revenue growth to maintain healthy unrestricted reserves of $25.8 million or 30% of spending at the end of fiscal 2013.
The fiscal 2014 budget continues funding in support of the city's competitive salary structure and applies increased franchise fee revenues ($624,339) to the city's street improvement fund. Officials conservatively project a modest decline in fiscal 2014 reserves associated with nonrecurring expenditures.
The city's five year plan reflects regional growth pressure. However, officials have communicated a commitment to structural balance with maintenance of reserves at a level consistent with the city's 20% of spending policy floor.
MANAGEABLE DEBT BURDEN; ONGOING NEEDS
Overall debt is above average at 7.6% of market value due largely to high overlapping debt of local school districts. The burden of the city's debt service, pension and other employment benefits on its budget is moderate. At 22.5% of governmental spending, the burden reflects rapid amortization.
The city's fiscal 2015 capital plan includes an estimated $530 million to $600 million of debt through fiscal 2019, primarily for aging utility infrastructure and reflecting carry forward projects from fiscal 2014. Most of the plan's debt is supported by the city's enterprise operations and Fitch will monitor timeliness of rate relief to service the enterprise-supported debt.
The city council has approved a development agreement with public and private partners to build a convention center and hotel. Pursuant to the outcome of a feasibility study underway, the city is considering issuance of approximately $25 million later this year to fund construction of the convention center. The convention center debt service will be supported by project related taxes and a dedicated rent from project investors sufficient to fully satisfy the city's debt obligation; no city funds will be expended on the hotel.
The city participates in the Texas Municipal Retirement System, which had a strong fiscal 2013 funded ratio of 80% based on an investment assumption of 7%. The city also provides other post-employment benefits (OPEB) to its employees. The city's firefighters' pension is funded at an adequate level of 72% based on the plans 7% investment rate assumption. Pension and OPEB costs represent a modest obligation in relation to the city's market value.
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, 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