Fitch Affirms City of Dallas GOs 'AA+'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has affirmed following City of Dallas, Texas (the city) ratings:

--Issuer Default Rating (IDR) at 'AA+';

--$1.7 billion of outstanding limited tax general obligation debt at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The general obligation bonds (GOs) are payable from the city's ad valorem tax levy, limited to $2.50 per $100 of taxable assessed valuation (TAV). Certificates of obligation (COs) are additionally payable from surplus revenues of the city's utility system.

KEY RATING DRIVERS

Financial Resilience: The city's 'AA+' rating reflects strong operating performance enabled by expenditure flexibility and conservative budgeting, solid revenue growth and manageable long-term liabilities.

Economic Resource Base

Dallas is a center for technology, trade, finance and major medical centers; it also ranks as the top visitor and leisure destination in the state.

Revenue Framework: 'aaa' factor assessment

Positive growth prospects are based on expectations for generally positive trends in taxable value and sales tax revenues and ongoing economic development. The assessment also reflects the city's ample independent revenue raising capacity.

Expenditure Framework: 'aa' factor assessment

The city's pace of spending is expected to be in line with revenue growth given its mature residential base. The assessment considers expenditure flexibility, derived from workforce cost controls and moderate carrying costs, a rapid debt amortization rate, and the potential for an increase in pension contributions.

Long-Term Liability Burden: 'aa' factor assessment

Long-term liabilities, comprised about equally of debt and unfunded pension obligations, represent a moderate 17% of personal income.

Operating Performance: 'aaa' factor assessment

The city of Dallas' gap-closing capabilities and healthy reserves position it to maintain financial resilience through an economic downturn.

RATING SENSITIVITIES

Long-Term Liabilities: Pension reforms and improvement in the city's long-term liability burden could lead to positive rating action. Inability to improve the affordability and sustainability of pensions could pressure the current rating.

CREDIT PROFILE

Dallas is located in north central Texas and ranks among the top 10 cities nationwide by population. The city serves as corporate headquarters for AT&T, Southwest Airlines, Texas Instruments, 7-Eleven, Inc., HollyFrontier Corp., Pizza Hut, Inc. and other large corporate concerns. Top employers in the education, government and health services sector lend stability to the city's employment base.

The city's role as a wholesale and retail trade center is enabled by a strong transportation network of airports, rail and interstate highways. The Dallas Area Rapid Transit (DART) provides the city with easy access to a highly skilled work force to support its growing technology, finance, business and medical service sectors. Driven by professional service, construction, mining and trade sector growth, the city's employment base is in its sixth consecutive year of expansion. Top taxpayers represent utility, air transportation, developers, real estate, manufacturing and retail industries. The tax base is without concentration.

Revenue Framework

City of Dallas general fund operations are supported by a diverse mix of ad valorem tax revenues (43%), sales tax revenues (24%), service charges (17%), and franchise fees (12%). Revenue growth has exceeded inflation but has been somewhat below GDP growth over the last decade.

Medium-term growth prospects appear likely to outstrip national GDP based on the strength and trajectory of growth in the trade/transportation, professional business/services and leisure/hospitality sectors. New development continues as indicated by three years of consecutive growth in the city's residential and commercial construction valuation/building permit activity through 2015. The Federal Reserve reports that despite the rapid home-price appreciation in the metroplex resulting from strong demand and tight inventories, Dallas home prices remain much more affordable than those in other large metros such as New York and Los Angeles, contributing to affordable living costs. However, an analysis of home price and economic trends over time leads Fitch to believe home prices may be above long-term sustainable levels. (for more information, see Fitch's U.S. RMBS Sustainable Home Price Report (First-Quarter 2016 Update) - Amended, May 26, 2016.

The city of Dallas fiscal 2016 tax rate of $0.797 per $100 of TAV provides ample capacity below the statutory cap of $2.50. If a proposed tax rate results in an 8% year-over-year levy increase (based on the prior year's values), the rate increase may be subject to election if petitioned by voters.

Expenditure Framework

Public safety, 60 percent of spending, has grown at a pace supported by revenue growth over the past five years.

Fitch expects spending to continue in line with revenue growth based on a relatively mature residential tax base. The 'aa' assessment is also informed by the city's legal ability to control headcount and salary costs, as well as elevated carrying costs, 25% of fiscal 2015 governmental spending. Carrying costs reflect a rapid 71% amortization schedule and declining debt service trajectory. Fitch does not expect the cost of future debt issuance to fully replace the amount being retired annually. Additional flexibility is reflected in a modest pay go capital program.

Affordability of the city's long-term liabilities may be strained based on the city's unfunded pension liabilities, particularly for the Dallas Police and Fire Pension System (DPFP). However, the city's demonstrated ability to cut spending in the midst of previous budget pressure supports the current rating assessment.

Long-Term Liability Burden

The city of Dallas' long-term liability burden is a moderate 16% of personal income. The city anticipates the potential for additional GO authorization within the next several years to fund ongoing moderate capital needs.

Dallas participates in three single employer defined benefit plans. The Dallas Employees Retirement Fund (ERF) covers non-uniform employees. The DPFP (combined plan) and Supplemental Police and Fire Pension Plan of the city of Dallas (Supplemental Plan) cover police and firefighters.

Under GASB Statement 68, the city reports an NPL for the combined and supplemental plans of $4.9 billion and $21 million, respectively. Fiduciary assets of the combined plan cover a low 38% of liabilities based on a blended discount rate of 4.5% (the 7.25% actuarial rate of return during the period that the plan was projected to have a fiduciary net position, and a 3.3% municipal bond rate thereafter). Fiduciary assets cover 50% of the liabilities of the supplemental plan using a blended rate of 7.13% (or 49.4% based on a lower 7% return assumptions). The combined and supplemental plans have begun pursuing reforms intended to ensure longer-term sustainability, although changes are likely to result in higher employer contributions over time. The current rating assumes the city will be successful in providing structural changes sufficient to achieve affordable long-term sustainability of the plan.

Under GASB Statement 68, the city reports a net pension liability (NPL) for the ERF of $605 million, with fiduciary assets covering 85% of total pension liabilities at the plan's 8% investment return assumption (76.5% based on a lower 7% return assumption). The Dallas ERF Board approved changes to the ERF benefit plan on May 10, 2016, to improve long-term plan viability. These will be presented as an agenda item to the city council on June 15, and if approved by council, presented to the voters as a ballot initiative on Nov. 8. Proposed changes include benefit changes for new employees (increasing year of service requirement and reducing benefit multiplier), operational/governance changes and more conservative actuarial assumptions.

Operating Performance

Fitch expects Dallas to demonstrate strong financial resilience during economic downturns as demonstrated by a history of strong gap-closing capacity enabled by strong spending flexibility and sizable reserves.

The city completed fiscal 2015 with a net surplus of $19.4 (1.7% of spending) and unrestricted reserves of $181.7 (15.9% of spending). The fiscal 2016 budget is operationally balanced. . Fitch anticipates the city will outperform the budget and maintain a sound financial cushion, consistent with its 30-day target for unassigned reserves.

Strong budget management practices include programmed expenditure reductions that have enabled the city to maintain a strong financial cushion. The city has consistently underfunded the actuarially-determined contributions to the ERF pension plan, by the equivalent of about 1% of governmental spending annually.

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

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1005371

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005371

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Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer, +1-512-215-3733
Director
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Steve Murray, +1-512-215-3729
Senior Director
or
Committee Chairperson
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer, +1-512-215-3733
Director
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Steve Murray, +1-512-215-3729
Senior Director
or
Committee Chairperson
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com