AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA' rating to Longview, Texas' (the city) $9.4 million limited tax general obligation (LTGO) refunding bonds, series 2015.
The bonds are scheduled for negotiated sale the week of Nov. 30. Proceeds will be used to refund a portion of the district's outstanding debt for interest savings.
In addition, Fitch affirms the 'AA' rating on the following obligations (pre-refunding):
--$66.6 million LTGOs.
The Rating Outlook is Stable.
The LTGO bonds are backed by an ad valorem tax levied on all taxable property within the city, limited to $2.50 per $100 taxable assessed valuation (TAV).
KEY RATING DRIVERS
WELL-MAINTAINED FINANCIAL OPERATIONS: Prudent financial management has produced ample reserves, high liquidity, and generally balanced operations.
STABLE LOCAL ECONOMY: Retail and healthcare concerns have diversified the economy, historically anchored in oil and gas. Employment indicators are favorable, but income trends are somewhat below average.
HEALTHY TAX BASE: TAV realized stable, moderate growth with only a few mild declines since the recession. The tax base is diverse and without material taxpayer concentration.
MIXED DEBT PROFILE: Elevated overall debt levels, due primarily to substantial overlapping debt, contrast with low direct debt. Long-term obligations do not pressure the city's budget.
STABLE CREDIT PROFILE: Material changes to the city's currently strong financial management practices or a significant weakening of the local economy could pressure the rating.
The city of Longview is located in the northeastern part of Texas, 120 miles east of Dallas. The population of 81,443 has experienced moderate growth over the past decade.
HEALTHY FINANCIAL FLEXIBILITY
Ample reserves, high liquidity, structural balance, and revenue raising capacity characterize the city's strong financial position. Operating margins are routinely positive and have resulted in healthy reserves, with the city utilizing fund balance drawdowns to fund capital or other one-time projects. The city has demonstrated the willingness to increase property tax rates, with substantial remaining capacity. Fitch believes that management has the capacity to implement expenditure reductions, if required.
Fiscal 2014 revenues performed positively to the budget, with above-budget sales taxes, property taxes, and building permits, while expenditures were below budget. The $2.5 million general fund balance drawdown, equal to 4% of spending, represented a portion of the city's $3.6 million funding directed towards three capital projects. Unrestricted general fund balance of $20.6 million was a high 32.6% of spending.
CITY TO OFFSET MODEST SALES TAX DECLINES
City officials attribute recent declines in sales tax receipts to slow-downs in its manufacturing and oil sectors along with some reductions in consumer spending, following a pattern evident in other localities with a similar economic profile. Curtailed spending will preliminarily position the city for a fiscal 2015 fund balance draw down of $2.7 million, below the $4 million budgeted appropriation that had been directed to capital projects.
Continued softness in sales tax receipts coupled with a 3% employee wage hike and increased expenses for operation of a new animal shelter are expected to produce a $1.8 million shortfall in fiscal 2016. The city appropriated fund balance to compensate for the structural imbalance, a practice that could have a negative effect on credit quality. City officials hope that rising property tax collections, a recovery in sales taxes, and private fundraising for the animal shelter could eliminate the deficit in fiscal 2017 but have indicated that they will reduce expenditures and not dip below their solid fund balance policy if revenue projections prove overly-optimistic. Fitch expects that the city's strong financial management and notable expenditure flexibility will ensure the maintenance of reserves at healthy levels.
MANAGEABLE DEBT PROFILE
Overall debt is above average, at $4,466 per capita and 5.7% of market value, but the city's debt service burden represents an affordable 8.6% of fiscal 2014 governmental expenditures. Amortization remains above average at 68% in 10 years.
The city's five year capital improvement program contains a manageable list of capital improvements with various degrees of priority. Fitch expects that capital spending will remain modest, as evidenced by the $4.8 million earmarked for the coming fiscal year. Fitch does not anticipate a substantive change in the city's debt profile in the intermediate term, with planned new money issuance consisting solely of the remaining $8 million in voted but unissued bonds in 2015.
City employees participate in the Texas Municipal Retirement System (TMRS), except for firefighters covered by the city's single employer Firemen's Relief and Retirement Plan (LFRRP). The city's portion of the TMRS plan is solidly funded at 90% assuming a 7% investment rate assumption. Funding of the LFRRP plan is low at 56%, and an even lower estimated 51% based on Fitch's standard 7% investment rate assumption.
The city made additional payments of $110,000 to the LFRRP in each of fiscal years 2013 and 2015, representing an increased city contribution from 15% of payroll to 17% of payroll. The city plans to maintain the annual contribution rate at 17% of payroll, although Fitch projects that contributions will remain below the actuarial annual required contribution (ARC). Officials expect the LFRRP funding rate to improve over the next several years based on increased funding and benefit adjustments, including adjusting the average monthly salary calculation and increasing the retirement age.
Other post-employment benefit (OPEB) requirements are modest. The city's fiscal 2014 contribution of $1.3 million was below the $1.7 million ARC. The elimination of OPEB benefits for employees hired after 2015 may moderate future costs. Total carrying costs, consisting of debt service payments, pension ARC, and the OPEB actual equal a manageable 15.7% of governmental spending.
EAST TEXAS ECONOMY DIVERSIFYING AWAY FROM FOSSIL FUELS
The city's tax base has shown stability and moderate growth with only a few mild dips since the recession. The top 10 taxpayers have moderately low concentration, at 10.4% of fiscal 2013 taxable assessed value.
The city has become a major regional retail and healthcare hub over the past two decades, although other sectors have a more limited presence. Three medical centers and clinics, employing over 4,650 individuals, are among the city's top employers as is Walmart, Inc. (1,149 employees). Another of the city's largest employers, Joy Global Inc., formerly LeTourneau, Inc., an oilfield equipment producer, underscores the moderate level of vulnerability to oil and gas production in the local economy. Reported employment of 837 workers is below the 1,075 noted two years ago and supports the linkage between weaknesses in manufacturing and oil with softening sale tax collections.
Employment metrics are generally positive. The unemployment rate trends below those of the state and the nation, with the most recent September 2015 unemployment rate at a relatively low 4.8%. Employment growth was favorable during the recession, with only one year showing a modest decline, although employment has been flat over the past year. Recent employment growth, though positive, lags that of the state and nation.
Additional information is available at 'www.fitchratings.com'.
Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.
In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from CreditScope, IHS Global Insight, and Municipal Advisory Council of Texas.
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
Dodd-Frank Rating Information Disclosure Form