Fitch Rates Lubbock, Texas' Taxable Series 2015 GO Rfdg Bonds 'AA+'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings assigns an 'AA+' rating to the following Lubbock, Texas (the city) general obligation (GO) bonds:

--$28.3 million GO refunding bonds, taxable series 2015.

The Rating Outlook is Stable.

The taxable series 2015 bonds are expected to price via negotiation April 21, 2015. The taxable 2015 GO refunding bonds will be used to refund certain outstanding obligations for debt service savings.

SECURITY

The GO bonds are payable from a limited ad valorem tax pledge of the city, not to exceed $2.50 per $100 taxable assessed valuation (TAV).

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: The city maintains a solid financial position, characterized by robust reserve levels in line with adopted policy. Management's proactive forecasting and ongoing monitoring of financial results as well as strengthened sales tax trends have assisted recent fiscal performance.

RELIANCE ON SALES TAXES: The general fund relies on economically volatile sales taxes, although credit concerns are partially mitigated by the city's healthy reserve levels and resilient economy.

HEALTHY TAX BASE: The city's TAV is stable and diverse. TAV continues to grow at a steady pace annually. Fitch believes continued, moderate TAV gains over the near term are likely given current development trends.

STABLE REGIONAL ECONOMY: Lubbock serves as the education and medical center as well as retail/commercial hub for this highly mechanized agricultural area. Unemployment is low and below state and national levels. Income levels are below average due in part to a large student population, but have grown more quickly than the national average and are somewhat offset with the area's lower cost of living.

MODERATELY HIGH DEBT; MIXED RETIREE COSTS: The overall debt burden is high relative to market value. The city maintains a large, comprehensive capital improvement program (CIP), much of which is planned to be funded from city enterprise systems. The city's largest pension program is well-funded in contrast to a separate, firefighters' pension program with a lower funded position. Carrying costs are currently manageable.

RATING SENSITIVITIES

CONTINUED STRONG FINANCIAL POSITION: The rating is sensitive to shifts in fundamental credit characteristics including strong fiscal practices and planning efforts by management as well as the financial flexibility provided by the city's stout reserves. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

DEBT, CAPITAL PROGRAM: An expanded list of capital projects largely for the city's enterprise systems is balanced against Fitch's expectation of some flexibility in the existing five-year CIP and implementation of the city's debt and capital program as projected over the near term. Healthy enterprise operations (Lubbock Power & Light [LP&L] revenue bonds rated 'A+'; Stable Outlook by Fitch) and proactive forecasting that include plans to increase rates and charges also offset credit concerns somewhat.

CREDIT PROFILE

With an estimated population of about 240,000, the city is located in west Texas and covers about 119 square miles in Lubbock County. Steady population gains since 2000 average 1.5% annually, which is slightly below the state average. Educational attainment is comparable to national levels while income/wealth levels as measured by median household income are between 15%-20% below state and U.S average.

STABLE ECONOMY; MODERATE TAV GAINS CONTINUE

Other major economic indicators, the unemployment rate and TAV, also continue to perform well. Year-over-year unemployment edged down slightly to a very low 3.4% in January 2015, which was down from 4.2% in January 2014 and below the state (4.6%) and national (6.1%) averages for the same time period. Health care, education, and government make up the area's largest non-agricultural employment sectors.

TAV continues to steadily expand at a moderate pace. Gains have averaged about 3.5% annually over the past six fiscal years, which brought TAV to $14.2 billion in fiscal 2015. The city's tax base is largely residential with minimal taxpayer concentration. Fitch believes management's expectations for further, moderate TAV gains appear reasonable with various residential and retail/commercial projects underway or planned on the west side of the city and near Texas Tech University's large 35,000 student campus.

SOLID FINANCES MAINTAINED

The city's financial position is strong, aided by formula-driven transfers to the general fund from the city-owned enterprises and management's continued attention to cost control and conservative budgeting. In addition, long-range fiscal and capital planning have been key components of management's sound financial practices. General fund operations have notably incorporated annual pay-go spending for capital projects that averaged $5.8 million per year over the last six fiscal years while maintaining stable-to-growing reserves. Sales taxes from a 1% levy have historically been the largest general fund resource, accounting for a somewhat above-average 37% or $59 million in fiscal 2014, followed by property taxes (29%) and payments in lieu of taxes from enterprises (19%).

Fiscal 2014 year-end results improved upon budget with healthy expenditure savings as well as some modest revenue outperformance, softening the originally budgeted drawdown on reserves for pay-go capital spending to $3.2 million (2% of spending) from the $8 million budgeted. Unrestricted general fund balance totaled $30.5 million at fiscal 2014 year-end or a sound 19% of spending. General fund cash/investments held steady $25.7 million at fiscal 2014 year-end, or slightly over two months of operations.

For fiscal 2015, the $160.9 million operating budget was adopted as structurally balanced, increasing less than 2% from the prior year's budget. Key revenue assumptions included sales tax growth of 3% (or $2.2 million) above fiscal 2014 actuals as well as an added $4.9 million in property taxes from the year's TAV gain and increase to the operating tax rate. Additional staffing costs for a new fire station and some market and step-pay adjustments consumed much of the year's increased revenues. Sales tax revenues are reportedly up by a healthy 6.5% over budget ($1.1 million) for the first three months of the fiscal year and operations remain in line with budget year-to-date. Management anticipates that reserves will be maintained above the adopted policy level of no less than 20% of operating revenues despite an unbudgeted $1.2 million draw on reserves (less than 1% of spending) to purchase a building for the new city hall. Fitch favorably acknowledges maintaining reserves according to policy, but points out a lack of robustness in this policy as it does not factor in the rising, annual transfers from city-owned enterprises that provide key revenue support for general operations.

MODERATELY HIGH DEBT BURDEN; LARGE CIP TEMPERED BY HEALTHY ENTERPRISE OPERATIONS

The city's overall debt burden is high relative to market value at approximately 6.3%, but more moderate on a per capita basis at about $3,820. Direct debt amortization is above average with 68% of principal retired in 10 years. All of the city's tax-backed debt is fixed-rate. Historically, the city has not issued revenue bonds for its various enterprise systems with the exception of LP&L. Instead, much of the city's outstanding tax-backed debt is self-supporting with the use of enterprise system revenues and therefore not included in Fitch's debt burden calculations.

The city continues to implement a large CIP. The city adopts only the current fiscal year of its CIP, which totaled $213 million in fiscal 2015 and is largely driven by various wastewater and electric utility projects. The city's rolling five-year CIP (inclusive of the electric utility) for fiscal years 2016 through 2020 totals $702 million. Fitch has some concern over the size of the city's capital program, although recognizes some flexibility exists in its implementation over future years. Most projects are planned to be financed with self-supported debt. The city models increased rates and charges corresponding to the additional cost to support the enterprises' future capital projects in its five-year financial forecast. The proposed rate increases were adopted by city council in their fiscal 2015 budget action for the water, wastewater, and solid waste enterprise funds.

MIXED PENSION & OPEB LIABILITIES POSITION

The city's primary pension plan is through the Texas Municipal Retirement System (TMRS), a statewide agent multiple-employer plan. Contribution rates are determined each calendar year. The city's annual pension cost (APC) has remained fairly steady over fiscals 2012-2014 at roughly $17 million. The city chose to end the prior years' phase-in of increased annually required costs with TMRS beginning in fiscal 2012, and paid TMRS' full required rate of contribution. Structural and actuarial changes to TMRS in recent years also significantly boosted the city's funded position. The pension's funded position remained good and stable as estimated at 80% at actuarial date Dec. 31, 2013.

The city also participates in a single-employer pension plan for its firefighters. Trends over the last three fiscal years (2012-2014) reflect some catch-up by the city, as the most recent payment was $6.2 million or 111% of fiscal 2014 APC. At the latest actuarial valuation of Jan. 1, 2013, the plan's funded position dropped slightly to 74.5% from 79.4% at Dec. 31, 2010. Fitch estimates the current funded position at a lower 67% after adjusting for a more conservative 7% investment rate of return. Using Fitch's calculation, the UAAL totaled $79.2 million or well under 1% of market value.

OPEB offered by the city include an implicit rate subsidy for health and dental insurance coverage for retirees and their dependents. The city funds OPEB annually on a pay-go basis, which has covered about 30% of the actuarially determined annual OPEB cost in the last three fiscal years (2012-2014). The unfunded actuarial accrued liability totaled $155 million at the Oct. 1, 2013 actuarial date or about 1% of market value. Carrying costs for the city (debt service, net of self-supporting enterprise debt, pension, OPEB costs,) totaled a moderately high but manageable 26% of governmental spending in fiscal 2014 due in part to the above-average pace of debt principal amortization

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in the 'Tax Supported Rating Criteria', this action was informed by information from Credit Scope, Texas Municipal Advisory Council, and Global Insights.

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=982842

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Contacts

Fitch Ratings
Primary Analyst
Rebecca C. Moses, +1-512-215-3739
Director
Fitch Ratings, Inc.
111 N. Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Matt Reilly, +1-415-732-7572
Director
or
Committee Chairperson
Karen Ribble, +1-415-732-5611
Senior Director
or
Media Relations
Peter Fitzpatrick, London, +44 20 3530 1103
peter.fitzpatrick@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Rebecca C. Moses, +1-512-215-3739
Director
Fitch Ratings, Inc.
111 N. Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Matt Reilly, +1-415-732-7572
Director
or
Committee Chairperson
Karen Ribble, +1-415-732-5611
Senior Director
or
Media Relations
Peter Fitzpatrick, London, +44 20 3530 1103
peter.fitzpatrick@fitchratings.com