Fitch Rates Garland, Texas' Series 2016 COs 'AAA'; Outlook Stable

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

--$20,020,000 combination tax and revenue certificates of obligation, series 2016.

The series 2016 COs are expected to price via competitive sale May 3. The bonds will be used to fund various citywide capital projects and pay the costs of issuance.

The Rating Outlook is Stable.

SECURITY

The COs are secured by a limited ad valorem tax pledge of the city, not to exceed $2.50 per $100 of taxable assessed valuation (TAV). The 2016 COs are additionally payable from a nominal pledge (limited to $1,000) on the net revenues of the city's water and sewer system.

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: The city maintains a stable financial position and solid reserve levels, enabled by management's conservative, proactive financial practices and prudent fiscal policies. Recent financial performance has benefitted from continued improvement in revenue trends, largely reflective of a strengthening local economy.

MATURE DALLAS METRO SUBURB: The city is part of the larger Dallas-Fort Worth-Arlington (DFW) metropolitan statistical area (MSA) economy and employment base. Anchored by manufacturing and distribution, Garland's overall economic base remains sound. Year-over-year unemployment is declining and remains comparable to county and state levels, while below the U.S. average.

TAV STRENGTHENS: The city's tax base is solid and diverse. TAV continued to strengthen modestly in fiscal 2016 after a period of recessionary declines. Management anticipates further modest TAV growth over the near term, which Fitch believes is reasonable given various development projects underway.

DEBT AND OTHER LONG-TERM LIABILITIES MANAGEABLE: Overall debt levels are above average in contrast to the city's generally favorable direct debt profile. Amortization of tax-supported principal is rapid. Retiree liabilities are low.

RATING SENSITIVITIES

MAINTENANCE OF FINANCIAL POSITION: Material deterioration of the city of Garland's financial position could signal a fundamental shift in its credit profile, leading to negative rating action. The Stable Outlook reflects Fitch's expectations that such a shift is unlikely as evidenced by the city's historical financial performance.

CREDIT PROFILE

The city is located approximately 14 miles northeast of downtown Dallas, surrounded by major transportation corridors. Population growth has been minimal since 2000 as the city is near full build-out with a stable population base, currently estimated at 233,000 residents.

MATURE CITY; STABLE MANUFACTURING CENTER

The city's industrial market is the second largest in the MSA, with a diverse list of manufacturing and distribution concerns that are the primary economic engines for the city. Year-over-year unemployment declined to 3.9% in January 2016 from 4.6% in January 2015. The city's unemployment rate remained generally in line with the state and MSA for the same period, but below the U.S rate of 5.3%. Income levels as measured by median household income approximate the U.S. and slightly exceed the state's, although educational attainment metrics are below national averages.

The city's tax base is primarily residential in nature despite its industrial/commercial base. Top 10 taxpayer concentration is minimal. Recessionary pressures on property valuations led to a break in TAV gains beginning in fiscal 2010 with the city realizing modest annual TAV declines through fiscal 2012. However, TAV regained its footing in fiscal 2013 and has continued to strengthen modestly since then.

Certified values indicate TAV expanded further in fiscal 2016 by a solid 6.4%, reflective in part of the steady permitting activity and various development projects previously reported by management. Larger projects include new and expanding manufacturing and commercial facilities as well as further mixed-use and multi-family development that benefits from its proximity to the Dallas Area Rapid Transit (DART) light-rail station in downtown Garland.

SOLID FINANCIAL PROFILE

Operations are supported by a fairly diverse revenue base, aided by formula-driven transfers to the general fund from the city-owned enterprises. Property taxes provided about 27% of total general operating revenue in fiscal 2015, followed by payments in lieu of taxes/franchise fees from enterprises (23%) and sales taxes (17%).

Management's timely budget cuts and proactive oversight enabled the city to maintain a stable financial position despite the pressures associated with its relatively mature economy and slow recovery from the recession. The city posted modest net operating deficits after transfers in the general fund in two of the last seven fiscal years, but reserves as a percentage of spending have remained stable over this period and well above the city's policy to maintain a 30-day unrestricted fund balance.

Conservative revenue estimates, delayed capital spending, and below-budget spending in fiscal 2015 contributed to roughly break-even net operating performance after transfers despite the $3.2 million use of fund balance initially budgeted. Unrestricted general fund balance totaled approximately $25 million or 16% of spending, comfortably above the policy minimum. Sales tax trends remained strong in fiscal 2015 and the city realized about 7.5% year-over-year growth or roughly $1.8 million in sales tax revenues above fiscal 2014 actuals. General fund cash/investments rose slightly from approximately $29 million in fiscal 2014 to nearly $31 million or slightly more than two months of general fund spending at fiscal 2015 year-end.

The adopted fiscal 2016 $150.4 million general fund budget continues to focus on a measure of catch-up from the restraint of the recession with additional police staffing and maintaining competitive employee salaries. Expected revenue growth of about 3% or $4.1 million primarily from property and sales taxes largely underpin this budgetary direction. The year's budget also anticipates a modest use of fund balance for pay-go capital projects while maintaining reserves slightly above policy and a flat total tax rate for the seventh consecutive year.

To date, general operating revenue and expenditures are running favorably to budget and management anticipates year-end results comparable to fiscal 2015. This is a result of continued, robust sales tax gains (about $750,000 or 7% above the prior year's actuals through Feb. 2016) and similar performance from building permit and landfill fees, balanced against more moderate levels of expenditure savings. This added fiscal flexibility should allow management to fully address the unanticipated spikes in health insurance claims. Fitch believes this is a reasonable assumption as the excess claim amount remains a manageable $2.1 million to date or about 8% of fiscal 2015 unrestricted operating reserves and the obligation is expected to be apportioned to other funds outside of the general fund that also maintain healthy reserves.

DEBT AND OTHER LONG-TERM LIABILITIES MANAGEABLE

The overall debt burden is above average at 5% of fiscal 2016 market value, largely due to overlapping school district debt but more moderate on a per capita basis at about $3,000.

Self-supporting debt of the city, primarily from the electric, water, and wastewater utilities, represents about 40% of total GO debt, thereby substantially reducing the impact on the city's debt service tax rate. Fitch rates the city's senior and subordinate lien electric utility revenue bonds 'AA-'/Stable Outlook. Principal amortization of tax-supported debt is rapid, with roughly 83% retired within 10 years.

A comprehensive, five-year CIP is adopted annually, much of which is driven by various utility system capital projects that are expected to be funded by self-supporting debt. Severe weather events in calendar year 2015 did not significantly increase the city's capital needs according to management. The city maintains a measured pace of tax-supported and revenue debt issuance annually in support of its capital improvement plan (CIP) and to preserve a flat debt service tax rate. The city has elongated its use of a 2004 GO bond authorization and presently maintains about half of this original authority or about $120 million for future use.

The tax-supported portion of the fiscal 2016 CIP totals $92.4 million and is heavily weighted towards street and transportation projects. This new money issuance comprises much of the long-term, tax-supported debt issuance planned for the fiscal year, although management indicates a short-term, $4 million tax note for street improvements is again planned for issuance at fiscal year-end given current TAV projections for fiscal 2017.

WELL-FUNDED PENSION PROGRAM

All full-time city employees participate in the Texas Municipal Retirement System (TMRS), a state-wide, joint contributory, hybrid defined benefit pension plan. Under GASB 68, the city reports no net pension liability (NPL) as of the Dec. 31, 2014 measurement date. Fiduciary assets covered 100.7% of total pension liabilities at the plan's 7% investment rate of return assumption. The city made its full actuarially determined pension contribution of $14.7 million fiscal 2015.

The city provides other post-employment benefits (OPEB) through a self-funded single-employer plan. Funding is done annually on a pay-go basis, which has covered between 50%-73% of the actuarially determined annual OPEB cost in the last three fiscal years (2013 to 2015). In addition, the unfunded actuarial accrued liability (UAAL) remains modest at $85 million or less than 1% of market value.

Carrying costs (pension, OPEB costs, and debt service, net of self-supporting enterprise debt) totaled a moderately high but manageable 22% of governmental spending in fiscal 2015 due in large part to the above-average pace of debt principal amortization.

Date of Relevant Rating Committee: July 27, 2015

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, Texas Municipal Advisory Council, IHS Global Insight.

Fitch recently published exposure drafts of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015 and Exposure Draft: Incorporating Enhanced Recovery Prospects into U.S. Local Tax-Supported Ratings, dated Feb. 2, 2016). The drafts include 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 at the beginning of the second quarter of 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.

Applicable Criteria

Exposure Draft: Incorporating Enhanced Recovery Prospects into US Local Tax-Supported Ratings (pub. 02 Feb 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=875108

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

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

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1002658

Endorsement Policy

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

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Contacts

Fitch Ratings
Primary Analyst
Rebecca C. Moses, +1-512-215-3739
Director
Fitch Ratings, Inc.
111 Congress Ave.,
Austin, TX, 78701
or
Secondary Analyst
Shane Sellstrom, +1-512-215-3727
Analyst
or
Committee Chairperson
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations
Sandro Scenga, New York, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Rebecca C. Moses, +1-512-215-3739
Director
Fitch Ratings, Inc.
111 Congress Ave.,
Austin, TX, 78701
or
Secondary Analyst
Shane Sellstrom, +1-512-215-3727
Analyst
or
Committee Chairperson
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations
Sandro Scenga, New York, +1-212-908-0278
sandro.scenga@fitchratings.com