Fitch Affirms Aransas County, Texas' COs at 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings affirms the ratings on the following Aransas County (the county), Texas' certificates of obligation (COs):

--$10.4 million outstanding COs, series 2007, 2009 and 2011 at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The series 2007 and 2009 COs are payable from a lien on and pledge of the proceeds of a county ad valorem tax with a tax rate limit of $0.80 per $100 assessed valuation. The series 2007 and 2009 COs are additionally secured by a limited pledge of the surplus revenues from the operation of the county's airport (series 2007) and solid waste disposal system (series 2009).

Series 2011 COs are payable from a lien on and pledge of the proceeds of a county flood control ad valorem tax not to exceed $0.15 per $100 assessed valuation. In addition, they are secured by a limited pledge of the surplus revenues from the operation of the county's solid waste disposal system.

KEY RATING DRIVERS

SOLID FINANCIAL RESERVES: Despite recent draws in fiscal 2014 and budgeted for fiscal 2015, reserve levels remain solid at policy levels.

NARROW BUT STABLE ECONOMY: The county's economy is stable but somewhat narrow, centered on tourism. County unemployment is below the nation's but above the state's. Wealth indicators are mixed and reflect a large tourism and retiree population.

MODERATE DEBT PROFILE: County debt levels are moderate and no near-term debt issuance is planned. Combined debt service and pension costs are manageable.

RATING SENSITIVITIES

MAINTENANCE OF STRONG RESERVES: Management's maintenance of strong reserve levels is important for the current rating level to mitigate the risks posed by the county's limited economy, reliance on tourism and potential revenue volatility.

CREDIT PROFILE

Aransas County is located on the Texas coast within 30 miles of Corpus Christi. The county's estimated 2014 population of about 24,972 represents an increase of about 11% since the 2000 census. The area is largely a vacation and retirement community, with tourism an important economic factor.

ADEQUATE RESERVE LEVELS DESPITE MIXED FINANCAL RESULTS

Between fiscal years 2010 and 2013, the county experienced four years of general fund operating surpluses. Based on preliminary unaudited figures, 2014 (calendar year ended Dec. 31 with final audit expected by end of July 2015) ended with a deficit of $767,000 (after transfers) resulting in a decline in unrestricted fund balance to $5.1 million (37% of spending). This deficit was driven by salary increases, addition of staff positions and capital spending. Likewise, general fund revenues decreased by 2.9% as result of declines in fines & forfeits and charges for services, in part related to a decrease law enforcement related fines and fees.

Property taxes are the county's primary operating revenue source, accounting for over 50% of total general fund sources followed by charges for services (which include federal inmate revenue). Federal inmate contract revenues (19.6% of 2014 general fund revenues) have been volatile in recent years with a 6.9% decline in fiscal 2013 and a subsequent 29.8% increase in fiscal 2014. As a result of this unpredictability, the fiscal 2015 budget assumes essentially flat federal inmate revenue. The county's ability to estimate this revenue is challenging because of fluctuations in federal inmate population and the county's capacity to house both its own and federal inmates.

The county levies a 1/2-cent sales tax for property tax relief (9.5% of general fund revenues) and a 1/2-cent sales tax for health services. After three years of decline, general fund sales tax revenues returned to growth in 2011 with fiscal 2014 revenue growing 5%. Year to date sales tax collections for fiscal 2015 have grown 4.8% over the prior year.

Fiscal 2015 was budgeted with a deficit of $325 thousand (2.25% of spending) due to one-time capital spending related to technology upgrades and vehicle replacements. The budget estimates an unrestricted fund balance of about $4.7 million or 32.9% of spending, although current projections estimate the deficit will be lower due to better than budget revenue (particularly sales tax) and expenditure performance. Despite recent and expected draws on fund balance in fiscal 2014 and 2015, the county is expected to maintain adequate reserve levels in compliance with its informal total fund balance policy of 25% plus additional funds to cover potential storm related needs. This target is calculated to be about $4.8 million or 33% of fiscal 2015 general fund spending.

Fitch believes that strong reserves are critical to the rating given the area's potentially volatile sales tax and federal inmate revenues.

STABLE ECONOMY WITH STRONG TOURISM SECTOR

The county's stable but narrow local economy is centered on tourism and second and retirement homes. The county's TAV continued to increase in fiscal 2014 (1.8%) and fiscal 2015 (3.6%), with additional growth expected in fiscal 2016. The county is expecting continued near-term positive performance reflecting improved economic conditions including reported stronger real estate investment activity. The county's low property tax rates afford additional operating flexibility.

The county's April 2015 unemployment rate of 4.7% was higher than the state (4.2%) and lower than the national (5.6%) rate. Recent year county employment performance has been positive, with 2.2% growth in 2014, and continued March 2015 year-over-year growth (1.1%). Income indicators are mixed and reflect a large retiree and tourist population that result in a limited number of full-time residents.

MODERATE DEBT PROFILE

Fitch expects debt levels will remain manageable given the county's moderate overall debt burden, $2,967 per capita and 2.4% of market value (as of June 30, 2015), and no near-term plans for debt issuance. Principal amortization is rapid, with about 68% repaid within 10 years.

County pension, disability, and death benefits for county employees are provided through the Texas County and District Retirement System (TCDRS). The pension plan's funded position was 88% as of the Dec. 31, 2012 valuation, assuming an 8% rate of return, and is estimated at 79.3% using a Fitch-adjusted 7% rate of return. The county has made 100% of its actuarially required contribution (ARC) for the plan annually.

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

In addition to the sources of information identified in Fitch's Master 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

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

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

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

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

Additional Disclosures

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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=987870

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=987870

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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Rupali Mahida
Analyst
+1-212-612-7839
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Maria Coritsidis
Analytical Consultant
+1-212-908-0514
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Rupali Mahida
Analyst
+1-212-612-7839
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Maria Coritsidis
Analytical Consultant
+1-212-908-0514
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com