Fitch Rates Carrollton, TX's Series 2015 LTGOs 'AAA'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned an 'AAA' rating to the following Carrollton, Texas (the city) bonds:

--$42.7 million limited tax general obligation (LTGO) improvement and refunding bonds, series 2015.

The bonds are scheduled for a negotiated sale the week of April 20. Proceeds will be used for street, traffic, drainage, parks, and public safety improvements as well as to refund certain outstanding maturities for annual debt service savings.

In addition, Fitch affirms the 'AAA' rating on approximately $161.8 million in outstanding GO improvement bonds (pre-refunding).

The Rating Outlook is Stable.

SECURITY

The bonds are payable from a limited ad valorem tax pledge of $2.50 per $100 taxable assessed valuation (TAV) levied against all property within the city.

KEY RATING DRIVERS

DIVERSE ECONOMY: The city's economic base is diverse, led by large manufacturing and distribution concerns and complemented by healthcare and technology. Carrollton's economic base also benefits from its location within the fundamentally strong Dallas-Fort Worth (DFW) metro economy.

GOOD SOCIOECONOMIC INDICATORS: Residents' income and educational attainment levels are above state and national norms and the area continues to register strong job and labor force growth.

SOUND FINANCIAL POSITION: City finances are well managed, characterized by the maintenance of solid financial reserves over a sustained period of time, ample liquidity, strong management practices, and adherence to prudent fiscal policies.

STRENGTHENING AV: Assessed valuation continues to expand after a brief period of moderate, cumulative decline, providing stability in property tax revenues and debt affordability without pressuring tax rates.

MODERATELY HIGH DEBT BURDEN: Overall debt levels are above average for such a highly rated credit. Future capital needs are manageable and debt is retired swiftly, but Fitch expects continued direct and overlapping debt issuance will keep city debt ratios elevated.

RATING SENSITIVITIES

The city's exemplary 'AAA' rating is most vulnerable to changes in its debt metrics and financial performance. The Stable Outlook reflects Fitch's opinion that such changes are unlikely.

CREDIT PROFILE

Carrollton is located northwest of Dallas along Interstate 35 East, in parts of Dallas, Denton, and Collin counties in the DFW metropolitan statistical area (MSA). The estimated 2015 population is approximately 124,400, a 13.5% increase from 2000 census levels.

DALLAS SUBURB WITH STRONG SOCIOECONOMIC PROFILE

Carrollton is accessible by three major highways and is home to a number of manufacturing, distribution, and service concerns, and serves as the national or regional headquarters for several companies.

The city's labor force exhibits educational attainment above the national standard as measured by the proportion of residents possessing a four-year college degree. Per capita income is about 22% above the state average and 13% above the national average. Full value per capita is strong at $103,000.

Employment in Carrollton contracted during the recession but is now in its fifth consecutive year of growth. Strong employment growth of 5% in 2014 reduced the unemployment rate to 3.9% in January 2015, down from 5.1% the year prior and below the state and U.S. averages for the same time period (4.6% and 6.1% respectively).

DIVERSE TAX BASE; TRANSIT-ORIENTED DEVELOPMENT CONTINUING

The city's tax base is made up of about one-half residential and one-fourth each commercial and industrial properties. Assessed values were not immune to the economic downturn and contracted modestly in fiscal 2011 and 2012; however, tax base trends have steadily strengthened since then. TAV rose by nearly 8% to $10.3 billion in fiscal 2015, bolstered by a variety of commercial/industrial, retail and medical investment. Management projects 3% TAV growth in fiscal 2016, which appears reasonable to Fitch given development that has occurred, and increased building permit trends.

In addition, development around three Dallas Area Rapid Transit (DART) light-rail stations located within the city is continuing. Carrollton's multiple rail lines are expected to facilitate the city's transition to becoming one of three mass transit rail hubs in the DFW MSA.

SOUND FINANCIAL PROFILE BUILT ON PRUDENT MANAGEMENT PRACTICES

Prudent financial policies, conservative budgeting practices, proactive long-term planning, and a responsive management team underpin the city's strong financial profile. Unrestricted/unreserved general fund balance has remained at or above 20% of spending for several years, despite revenue pressure that occurred with the economic downturn and modest fund balance draw-downs for pay-go capital needs.

The city relies significantly on property and sales tax (approximately 35% and 28% in fiscal 2014, respectively) to fund operations, although sales tax reliance is down slightly given the city's recent implementation of an operational funding cap. The capped fiscal 2014 amount of $23.6 million equaled about 85% of the total sales tax revenue recorded in the general fund. Both revenue streams demonstrated some weakness over the recession, resulting in lower total revenues. However, management reduced expenditures during this period through a combination of furlough days, layoffs, a pay freeze for non-civil service personnel, careful monitoring of hiring, and departmental efficiencies.

SURPLUS RESULTS IN FISCAL 2014

Fiscal 2014 operations yielded a healthy $2.4 million surplus after transfers (about 3% of spending) in line with prior projections, resulting in an unrestricted general fund balance of $20.8 million or a solid 22.4% of spending. Notably, these results included about $10 million in transfers out for capital expenditures.

Such transfers have been increased in recent years and they represented a sizable 8%-10% of budgeted outlays these past three years. Management budgets reserves in excess of its formal 60-day fund balance floor for one-time and/or capital initiatives. The modestly increased transfer in fiscal 2014 was supported by strong sales tax revenue growth of 9% year-over-year, which more than offset operating expenditure growth (before capital transfers) of 5% over fiscal 2013 spending levels.

In recognition of the growth in sales tax revenues and the greater economic sensitivity of this revenue stream relative to other revenue sources, management formally capped the level of sales taxes that are permitted to be used for general fund purposes. This policy requires sales tax revenues in excess of this cap (adjusted annually for inflation) to be transferred out of the general fund and used for non-recurring purposes. Fitch views this as a prudent budgeting strategy.

FAVORABLE REVENUE TRENDS YEAR TO DATE IN FISCAL 2015

The adopted $88.7 million fiscal 2015 budget operating budget was structurally balanced and includes a manageable 5.5% increase in the level of recurring general fund expenditures from last year's budget. The budget incorporates a 1% net increase in full-time equivalents (FTEs), staff pay increases, higher health insurance costs, and stable pension contributions. The increased spending is supported by increased property tax revenues due to the TAV growth as well as sales tax growth. Management is currently projecting surplus general fund results, after transfers out for non-recurring purposes, due to solid year-to-date revenue performance (sales taxes are up 6% over fiscal 2014 actuals).

MODERATE DEBT BURDEN; RAPID AMORTIZATION

Fitch considers Carrollton's overall debt burden to be elevated on a per capita basis at $4,605 but moderate relative to full value at 4.5%. The overall debt load stems mainly from the large amount of debt from two local school districts. Inclusive of the current offering, the city maintains a rapid pace of principal amortization (73% retired in 10 years), which Fitch views as a credit strength.

The city has $62 million in remaining GO authorization, comprised mostly of $54 million approved by voters in November 2013. The remaining bonds will be structured to limit the peak debt service tax rate to a moderate $0.226 per $100 TAV, compared to the current rate of $0.198, reasonably assuming 1%-3% TAV growth each year through the life of the bonds.

PENSION/OPEB LIABILITIES NOT A CREDIT PRESSURE

The city contributes to the Texas Municipal Retirement System (TMRS), an agent multiple-employer plan. The city's actuarially determined contribution to the plan ($6.5 million) consumed a manageable 4.8% of fiscal 2014 governmental expenditures. Recent structural and actuarial changes to TMRS have continued to benefit the city's funded position, which now stands at 92% as of the Dec. 31 2013 actuarial valuation compared to 73.2% as of Dec. 31 2009 (using an estimated 7% investment return for both years).

The cost of other post-employment benefits (OPEB) makes up a nominal 0.3% of fiscal 2014 governmental spending, and management took action to reduce its long-term OPEB cost by closing this benefit in fiscal 2009. Only existing employees meeting the age/years of service requirement were allowed to remain in the city-subsidized retiree health plan. Combined debt, pension, and OPEB costs are a manageable 19.4% of fiscal 2014 governmental expenditures and are not expected to further pressure the budget given the modestly descending debt service schedule projected with this issuance and a closed OPEB plan.

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, the Texas Municipal Advisory Council, and IHS Global Insight.

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=983032

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Contacts

Fitch Ratings
Primary Analyst:
Rebecca C. Moses, +1-512-215-3739
Director
Fitch Ratings, Inc.
111 Congress Ave, Suite 2010
Austin, TX 78701
or
Secondary Analyst:
Leslie Cook, +1-212-908-0507
Analyst
or
Committee Chairperson:
Amy Laskey, +1-212-908-0568
Managing Director
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Rebecca C. Moses, +1-512-215-3739
Director
Fitch Ratings, Inc.
111 Congress Ave, Suite 2010
Austin, TX 78701
or
Secondary Analyst:
Leslie Cook, +1-212-908-0507
Analyst
or
Committee Chairperson:
Amy Laskey, +1-212-908-0568
Managing Director
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com