AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AAA' rating to the following Bexar County, Texas (the county) obligations:
--$18.6 million pass-through revenue and limited tax (LT) bonds series 2015A (FM 471 project);
--$31.4 million pass-through revenue and limited tax bonds series 2015B (1604 east project).
The Rating Outlook is Stable.
The bonds are payable from an annual property tax levied against all taxable property within the county, limited to $0.80 per $100 taxable assessed valuation (TAV) for operations and debt service. The bonds are additionally secured by payments received by the county pursuant to a pass-through toll agreement between the county and the Texas Department of Transportation.
KEY RATING DRIVERS
SOUND FINANCIAL MANAGEMENT: The 'AAA' rating on the bonds reflects the general credit quality of the county driven by its solid financial position. Prudent stewardship during the recent economic slowdown was evidenced by a multi-year approach to controlling expenditure growth and limiting the scale of structural imbalances.
WEAK DEBT PROFILE, SATISFACTORY PENSION POSITION: The debt profile is characterized by a high overall debt burden and slow principal amortization. However, the county fully funds the annual pension contribution requirement, its debt service tax rate is modest, and carrying costs do not present an undue burden on resources.
STABLE ECONOMY: Population growth remains rapid. The military remains a major economic factor although the local economy has diversified notably. The county is benefitting from rapid employment gains, enabling the unemployment rate to remain well below state and national averages despite robust labor force increases.
TAX-BASE STABILIZED: The return to sound tax base growth has been aided by the area's affordable home prices, ample developable land, and surging oil and gas activity at the nearby Eagle Ford Shale.
RATING PARITY: The LT bonds are rated on par with outstanding ULT bonds due to the significant rate-raising flexibility under the rate limitation supporting the LT bonds. The county currently levies a combined $0.29 operations and debt service tax rate compared to the limit of $0.80.
GROWING DEBT BURDEN: Rising debt beyond current expectations could pressure the rating.
Bexar County, with an estimated 2014 population of 1.7 million, is home to San Antonio (general obligation bonds rated 'AAA' with a Stable Outlook by Fitch), the seventh largest city in the U.S.
MILITARY STILL IMPORTANT WITHIN DIVERSE ECONOMY
Military and government sectors are prominent with four large military installations located within the county. Fitch views such military reliance cautiously, although the county has benefitted substantially from past realignment and base closure decisions. Other leading employment sectors include domestic and international trade, convention and tourism, medical and health care, financial services, and telecommunications.
EAGLE FORD SHALE IMPACTS EMPLOYMENT BASE
The ongoing recovery from the last recession was aided by employment hikes in the trade/transportation/utilities, leisure/hospitality and construction/mining sectors, fueled in part by surging oil and gas activity within the nearby Eagle Ford Shale. Due to the decline in oil prices, such activity has contracted substantially as evidenced by a large 51% drop in the Eagle Ford Shale rig count over the last 12 months per the Baker Hughes rotary rig count. The impact to the county's overall employment base has been muted so far by its' diverse economy.
Notably, the county's unemployment rate declined to a low 3.8 % in February 2015 from the 5.4% rate posted a year prior and compares favorably to state and national averages of 4.3% and 6.2%, respectively, for the same period. Nevertheless, the inherent volatility of oil and gas prices remains a source of some uncertainty for the local economy.
TAX BASE STABILIZED
The county's tax base has returned to a steady growth mode after declining modestly in fiscal 2012 due to the steep building downturn and falling base values of the last recession. TAV grew by 5.7% and 7.5% in fiscal years 2014 and 2015, respectively, mostly due to reappraisal gains. County officials are conservatively projecting modest rates of TAV growth beyond fiscal 2015. About 70% of general fund revenue is derived from ad valorem taxes.
STRONG FINANCIAL PROFILE
The county's financial position remains strong, boosted by a multi-year strategy to control growth of or reduce general fund expenditures starting in fiscal 2009 in order to minimize any budget gaps by fiscal 2011. This proactive approach enabled the county to maintain its reserves above its 10% fund balance policy level despite sluggish tax-base trends during the economic slowdown.
The county posted its fifth consecutive net operating surplus in fiscal 2014. The surplus equaled $8.5 million (2.4% of general fund spending) and increased its unrestricted fund balance to $75.4 million or a high 21.5% of spending. Fiscal 2014 results were aided by the county's practice of budgeting contingency appropriations which helped offset a budgeted $14.4 million net deficit
The adopted fiscal 2015 budget includes a moderate 5% increase in appropriations over the previous year's budget. The budget again includes both a draw on fund balance ($17.6 million or 4.6% of appropriations) and sizeable contingencies ($20 million or 5.2% of appropriations) which Fitch expects will support balanced results. A 3% cost of living increase and market adjustments for exempt employees is also included in the budget. Current projections point to a $7 million (1.9% of spending) net deficit although the county typically outperforms it's interim forecasts.
HIGH DEBT BUT MODEST PLANS
The county's overall debt burden is high at $5,940 per capita and 8.4% of market value. Direct debt includes a rising level of bonds secured by HOT and MVRT receipts which now comprise 19% of the county's debt portfolio. However, overall debt levels have risen mostly from substantial debt issuances by the county's large number of overlapping jurisdictions, which include 15 school districts. The principal amortization of property tax-supported debt remains well below-average at 25% in 10 years.
The current offerings are not projected to require an increase in the county's modest combined debt service and flood control tax rate of $0.07 per $100 AV. The county's plan of finance is based on TAV growth of 2%-3% annually, which Fitch considers conservative, and includes support for debt service by Texas Department of Transportation reimbursements for outstanding pass-through toll road bonds and revenues derived from the county-wide advanced transportation district sales tax receipts.
The county's future property tax-supported debt plans include $35 million of certificates of obligation (COs) for road improvements and $50 million for flood control projects in 2016. Continued large debt issuances beyond these expectations, without offsetting tax base growth, could result in negative rating pressure given the county's high overall debt burden.
MANAGEABLE PENSION AND OPEB COSTS
The county and all of its full-time employees contribute to a statewide agent multiple-employer defined benefit pension plan administered by the Texas County and District Retirement System (TCDRS). The county fully funds the annual required contribution (ARC), leading to a solid 82.6% funded position as of Dec. 31, 2013. Adjusted to reflect Fitch's assumption of a 7% rate of return, the funded position is still adequate at an estimated 74.4%.
The county's other post-employment benefits (OPEB) are modest and funded on a pay-as-you-go basis. Carrying costs for the county's debt service, pension ARC and OPEB payments are moderate at 19.5% of total fiscal 2014 governmental spending. The combined pension and OPEB UAAL of $314.3 million represents a modest 0.2% of fiscal 2015'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, Zillow.com, 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