Fitch Rates Seguin, TX's LTGO Refunding Bonds 'AA'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'AA' to the following city of Seguin, Texas (city) limited tax obligations:

--$8.4 million limited tax general obligation (LTGO) refunding bonds, series 2014.

The bonds will sell competitively the week of Oct. 6. Proceeds will be used to advance refund a portion of the city's currently outstanding LTGOs for interest rate savings.

Fitch also affirms its 'AA' rating on the following outstanding limited tax obligations:

--$42.7 million LTGOs, series 2005, 2006, 2007, 2008, 2011 and 2014;

--$13.3 million of combination tax and limited pledge revenue certificates of obligation (COs), series 2010 and 2011.

The Rating Outlook is Stable.

SECURITY

The bonds and outstanding LTGOs and COs are secured by a limited ad valorem tax levied against all taxable property in the city.

Outstanding COs are secured further by a limited, de minimis pledge (not to exceed $1,000) of the net revenues of the city's combined electric, waterworks, and sewer system.

KEY RATING DRIVERS

SOUND FINANCIAL PROFILE: The city consistently achieves general fund surpluses, adding to fund balance and yielding a robust fiscal cushion. Surplus operations are aided by conservative budgeting practices.

HEALTHY, GROWING ECONOMY: The local economic base is small and somewhat concentrated in manufacturing. However, the city benefits from its location in the robust San Antonio metropolitan statistical area (MSA) economy and well-located transportation networks. In addition, development activity and job growth in the city have been strong coming out of the recession.

WEAKER DEBT PROFILE: Debt levels are slightly above average following recent issuances by the city and local school district. Carrying costs for debt service and retiree costs remain manageable though are rising due to recent debt issuances.

CONTINGENT LIABILITY FOR LOCAL HOSPITAL: The city has a contingent liability for 50% of any operating deficits by the Guadalupe Regional Medical Center (city-county hospital). The city and Guadalupe County (county) maintain significant oversight over hospital operations and budget and neither has ever been required to transfer funds to cover a shortfall.

RATING SENSITIVITIES

SHIFT IN FUNDAMENTALS: The rating is sensitive to shifts in the city's credit fundamentals, including the sound fiscal profile and healthy economy, which are key mitigants to the above average debt burden. The Stable Outlook reflects Fitch's view that such shifts are unlikely.

HOSPITAL OPERATING RISK: Self-sufficiency of the city-county hospital remains key to offsetting credit concerns over the city's exposure to this contingent liability.

CREDIT PROFILE

Seguin is located in Guadalupe County, approximately 35 miles northeast of San Antonio along Interstate Highway 10. The city's estimated 2013 population of 26,700 reflects 21% growth since 2000.

DIVERSE LOCAL ECONOMY FAVORABLY POSITIONED NEAR SAN ANTONIO

The local economy is somewhat concentrated in manufacturing though government, healthcare, and education add diversity. The city benefits from easy access to the extensive and broad employment base of the San Antonio MSA via major highways, including a recently completed toll road that connects San Antonio with Austin. The favorable location, highway access, and management's economic development efforts, including the use of tax abatement incentives, have facilitated economic development in the city, particularly in manufacturing.

The natural gas boom occurring in south Texas has also spurred recent economic and job growth in the area. The Eagle Ford shale is a highly profitable natural gas play that stretches across the state to just south of Seguin and has attracted business investment, jobs, and retail sales to the city. As a result, unemployment fell one percentage point year-over-year to 5.4% as of July 2014, below the state (5.6%) and nation (6.5%). Nonetheless, demographic indices remain mixed and include lower income and educational attainment levels and a higher poverty rate relative to state and national norms.

The tax base is more diversified since the top taxpayer, Rio Nogales Power Plant, was purchased by the municipally-owned City Public Service Energy (CPS) and is now tax-exempt. As a result of the conversion of the power plant to tax-exempt, the city's taxable assessed value (TAV) declined by 4% in fiscal 2014. However, as part of the purchase agreement, CPS Energy made a one-time payment-in-lieu-of-taxes (PILOT) to the city of $9.6 million for lost future tax revenues, relative to the estimated tax yield from the plant of $700,000 in fiscal 2012.

Certified values for fiscal 2015 show a 2% uptick in TAV, with future prospects for growth favorable given the positive economic metrics, current developments underway, and tax abatements that are scheduled to expire on a rolling basis over the medium- to long-term. Seguin's average new home price is increasing along with additional properties to the residential base and property tax collection rates remain strong.

STRONG FINANCIAL MANAGEMENT PRACTICES AND PERFORMANCE

General fund revenues, led by sales and property taxes, have exhibited strong 5.7% compound average annual growth coming out of the recession (fiscal years 2008-2013). Sales taxes have performed particularly well, increasing by an annual average of 9.5% from fiscals 2009-2014, although this period also includes significant volatility. Fitch recognizes the volatility associated with economically sensitive sales taxes, particularly when derived from highly cyclical oil and gas activities. Fitch views as prudent management's use of a portion of surplus revenues for non-recurring capital outlays, as well as the city's continued adherence to its formal policy of maintaining fund balance at or above 30% of spending.

Fiscal 2013 operating results were break-even after transfers and included approximately $2.2 million in pay as you go spending (paygo) for capital projects. The year ended with $17.9 million in unrestricted fund balance (95% of spending) from $19.6 million (114% of spending) in fiscal 2012, due to the reclassification of $2 million of unrestricted to restricted funds. The funds will be used for future roadway improvements and will be reimbursed over the intermediate term through taxes received as development occurs in the area.

The city expects fiscal 2014 results to be better than the budgeted $1.8 million deficit due to several factors, including higher than projected property tax revenues. As planned, the city used the PILOT payment for general fund recurring expenses ($350,000) and a transfer to the debt service fund ($770,000), which allowed for a modest increase in the tax rate despite the drop in TAV for fiscal 2014. After transfers for one-time expenses, management estimates ending the Sept. 30, 2014 fiscal year with a $1 million draw on fund balance, or about $16.8 in unrestricted reserves.

General fund reserves at year-end contain $7.2 of the $9.6 million PILOT payment, which management plans to draw down over the next several years. The city plans to transition away from this use of reserves for ongoing spending as the funds are depleted, timed to coincide with the expiration of large tax abatements in out-year budgets.

CONSISTENT 2015 BUDGET

The current-year budget projects a 5.2% increase from the previous year, driven in part by property tax revenues. The city will again tap the PILOT funds for operations and debt service in fiscal 2015. A $1.8 million deficit is presently forecast, which is consistent with prior-year budgets. Fitch expects that the city will maintain its positive financial performance and robust fiscal cushion over the near term based on its strong track record and financial policies.

DEBT LEVELS ASCEND

The city's overall debt ratios are above average levels at 5.7% of market value and $4,834 on a per capita basis. The $24 million fiscal 2014-2018 capital plan identifies $10 million in debt issuance, with the remainder to be funded by a mix of paygo, enterprise revenues, state appropriations, and grants. However, the city does not currently have plans to issue tax-supported debt in the near term. Additional debt issuance beyond what is currently planned could be a negative credit consideration without commensurate TAV growth.

Carrying costs for debt service, the pension ARC, and OPEB paygo made up a moderate 21.5% of fiscal 2013 governmental expenditures, though carrying costs rise to an elevated 25% if maximum annual debt service is used. The fairly strong levels of community support for the debt issuance and the good tax base growth prospects for the area temper Fitch's concerns over the recently heightened debt burden.

WELL-FUNDED LEGACY COSTS

The city participates in the Texas Municipal Retirement System (TMRS) for its retirees' pension program, and its annual contributions have been at or above the required amounts in recent years. Recent system-wide restructuring of internal fund balance reporting and actuarial assumptions benefitted many cities contributing to the system, including Seguin. Seguin's funded position improved to an estimated 86.9% as of Jan. 1, 2013 from an estimated 72% in 2008 (using an investment return assumption of 7%). Other post-employment benefits for retiree healthcare are funded on a paygo basis. The OPEB plan is closed to new employees and the UAAL is a de minimis 0.1% of market value.

CONTINGENT LIABILITY FOR COUNTY-CITY HOSPITAL

The city and county each have a 50% contingent liability for any operating deficits. Hospital operations have historically been positive, and although the hospital incurred a deficit in fiscal 2012, operating margins were positive in fiscals 2013 and 2014 as utilization and revenues improved. Fitch would be concerned if hospital deficits exerted financial pressure on the city, but to date, the city has never made a subsidy payment to the hospital, other than indigent care costs for which the city is contractually responsible.

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=888314

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Contacts

Fitch Ratings
Primary Analyst
Leslie Ann Cook, +1 212-908-0507
Analyst
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Rebecca Moses, +1 512-215-3739
Director
or
Committee Chairperson
Karen Ribble, +1 415-732-5611
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Leslie Ann Cook, +1 212-908-0507
Analyst
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Rebecca Moses, +1 512-215-3739
Director
or
Committee Chairperson
Karen Ribble, +1 415-732-5611
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com