Fitch Rates Bexar County, TX Limited Tax Bonds 'AAA'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned a 'AAA' rating to the following Bexar County, TX limited tax obligations:

--$252.4 million limited tax refunding bonds, series 2016;

--$100.5 million flood control tax refunding bonds, series 2016.

The bonds will be sold via negotiation during the week of June 20. Bond proceeds will be used to refund outstanding debt for interest costs savings.

Fitch also affirms the following:

--Issuer Default Rating (IDR) at 'AAA';

--$1.2 billion limited tax bonds at 'AAA';

--$25.9 million unlimited tax bonds at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The limited tax bonds are payable from an annual property tax levy limited to $0.80 per $100 assessed valuation (AV) for operations and debt service. The flood control tax bonds are payable from an annual property tax levy limited to $0.15 per $100 AV.

KEY RATING DRIVERS

The 'AAA' IDR and general obligation (GO) ratings reflect the county's strong gap-closing capacity, solid reserve position, and moderate liability burden. Management's prudent budgeting of its expansive resource base benefits the county's prospects for maintaining structural balance through economic cycles.

Economic Resource Base

Bexar County, with an estimated 2015 population of 1.9 million, is home to San Antonio (GOs rated 'AAA'), the seventh largest city in the U.S. Prominent sectors include military and government, domestic and international trade, convention and tourism, medical and healthcare, and telecommunications. Population growth and employment gains remain steady despite the contraction of the energy sector that services the nearby Eagle Ford Shale.

Revenue Framework: 'aaa' factor assessment

The county's general fund revenues are expected to continue a strong growth trajectory due to rapid population growth and economic expansion. The county's independent legal ability to raise property tax revenues provides ample flexibility.

Expenditure Framework: 'aa' factor assessment

The county's solid expenditure flexibility is derived from management's prudent budgeting practices and manageable carrying costs. The county has demonstrated a solid ability to curtail spending during times of economic decline. Fitch expects growth-related spending demands to be matched by solid revenue gains, keeping their trajectories in line with one another.

Long-Term Liability Burden: 'aa' factor assessment

The county's liability burden is moderate and driven primarily by overlapping debt. The county consistently funds its pension at actuarially determined levels and the unfunded pension liability is moderate.

Operating Performance: 'aaa' factor assessment

The combination of the county's expenditure flexibility, revenue-raising authority, and modest revenue volatility, as well as its record of reserve funding, should enable maintenance of a high level of financial flexibility during cyclical downturns. The county has demonstrated a commitment to prudent fiscal practices throughout economic cycles.

RATING SENSITIVITIES

Shift in Fundamentals: The IDR and GO ratings are sensitive to material change in the county's strong revenue-raising and expenditure flexibility and solid financial position, which Fitch expects the county to maintain throughout economic cycles.

CREDIT PROFILE

The local economy continues to expand rapidly with continued sector development in high technology, medical and healthcare, higher education, financial services, and others providing diversity beyond the military which remains a major economic factor. Lackland Air Force Base, Randolph Air Force Base, and Fort Sam Houston account for over 90,000 military and civilian personnel (about 10% of employment). These facilities benefited from very large investments and additions to troop strength in past base realignments.

The expansive employment base remains resilient in the face of low oil prices and stalled exploration activity within the nearby Eagle Ford Shale. The county's unemployment rate remained unchanged at a low 3.4% in April 2016 from a year prior, aided by a 2.6% gain in employment.

Revenue Framework

Property taxes account for 72% of general fund revenues. Favorable revenue trends have been aided by steady tax base gains and the county's goal to maintain a level O&M tax rate even during periods of AV growth.

Historical revenue growth has exceeded the level of inflation and U.S. GDP growth, aided by steady AV growth. Fitch expects the county's revenues to continue this trend given the rapidly expanding employment base and strong demographic trends. AV increased by 14% in fiscal 2016 and the preliminary AV for fiscal 2017 points to a 9%-10% gain, ensuring continued revenue growth. The preliminary fiscal 2017 budget conservatively assumes a lower estimate of a 4% AV increase.

At $0.30 in fiscal 2016, ample taxing margin remains under the $0.80 per $100 AV cap for operations and limited tax debt service. 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 spending accounts for about 50% of general fund spending and is projected to grow at a manageable pace given the declining average daily population (ADP) within the county jail. The current ADP has stabilized at about 75% of the county jail's design capacity, eliminating a potential source of significant spending pressure.

The pace of spending growth absent policy actions is likely to be in line with revenue growth but pressured by an expanding population and growing service delivery needs in the unincorporated portions of the county.

The county's fixed cost burden is moderate, with carrying costs for debt, pension, and OPEB equaling 20.5% of governmental spending. Expenditure flexibility is aided by the county's practice to annually appropriate contingencies equal to $15 million to $20 million (about 4%-5% of spending) plus the maintenance of 1% of spending as part of its unassigned fund balance.

The framework for collective bargaining agreements (CBAs) in Texas gives management control over deputy sheriff hiring and firing and staffing patterns but requires that pay hikes and benefit levels be determined via CBAs. The CBAs for deputy sheriffs expired on Sept. 30, 2015 although deputy sheriffs remain under an evergreen clause whereby the terms of the expired agreement (excluding pay hikes) are automatically renewed through Sept. 30, 2018. Talks between the county and the deputy sheriffs association are underway and agreement on a new CBA is expected shortly.

Long-Term Liability Burden

The long-term liability burden, including limited and unlimited tax bonds, venue project bonds and unfunded pension liabilities, is moderate at about 13% of personal income. The 10-year principal amortization rate for GO bonds is slow at 28%. Overall debt levels have risen mostly from substantial debt issuances by the county's large number of overlapping jurisdictions, which include 15 school districts. Continued overlapping debt issuances is likely to be accompanied by steady gains in personal income, leading Fitch to expect the county's long-term liability burden to remain moderate.

Later this summer, the county will issue $100 million of certificates of obligations (COs) to finance its contribution to county-wide mobility projects totaling $825 million in partnership with San Antonio, VIA Metropolitan Transit, Texas Department of Transportation, and the Alamo Regional Mobility Authority. These COs will be fully supported by sales tax revenues collected from the Advanced Transportation District per an agreement with VIA Metropolitan Transit. Concurrently, the county will issue another $100 million of COs this summer for general capital improvements and other road projects. No tax rate impact is anticipated for either issue given the healthy pace of recent AV gains. Relative to the county's overall debt of $10.1 billion, the planned $200 million of direct debt is modest given the self-supporting structure of one-half of the planned issuances.

County employees participate in an agent multiple-employer defined pension plan administered by the Texas County and District Retirement System. The county consistently funds its pension at the actuarially determined level and the unfunded pension liability is modest at $237 million or 0.3% of personal income based on Fitch's adjusted 7% rate of return.

Operating Performance

The county's strong financial resilience is derived from a combination of revenue and expenditure flexibility, modest revenue volatility, and solid reserve levels. Prudent budgeting allowed the county to increase its financial reserves in the wake of the last downturn, which was relatively modest for the county. Based on historical results, Fitch would expect a moderate economic downturn to result in a modest decline in revenues in the first year of a downturn, followed by a prompt rebound, and would expect the county's financial position to remain solid throughout the economic cycle.

A multi-year strategy during the last downturn relied on departmental cuts and contingency appropriations with no deferrals of annual pension contributions, leading to steady and sustainable additions to financial reserves. Moderate annual pay-go funding also provided additional expenditure flexibility.

A modest general fund operating deficit was posted in the fiscal 2015 audit, resulting in still ample unrestricted fund balance of $72.8 million or 193% of spending. Balanced results are projected for the general fund for fiscal 2016. The preliminary fiscal 2017 budget again includes both a draw on fund balance ($11 million or 2.5% of spending) and sizeable contingencies equal to 5% of spending, which Fitch expects will support balanced operations. The spending plan is also expected to maintain a level or nearly level property tax rate despite continued healthy AV gains.

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

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Contacts

Fitch Ratings
Primary Analyst
Jose Acosta
Senior Director
+1-512-215-3726
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Shane Sellstrom
Associate Director
+1-512-215-3727
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jose Acosta
Senior Director
+1-512-215-3726
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Shane Sellstrom
Associate Director
+1-512-215-3727
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com