AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned a 'AA' rating to the following Hays County, TX limited tax (LT) bonds:
--$38 million pass-through toll revenue and LT bonds, series 2016.
The bonds are scheduled to sell competitively on Sept. 13, 2016. Bond proceeds will be used for road improvements.
Fitch has also affirmed the following Hays County, TX ratings at 'AA':
--Long-Term Issuer Default Rating (IDR);
--$200.5 million LT bonds;
--$113.4 million unlimited tax bonds.
The Rating Outlook is Stable.
The bonds are payable from an unlimited annual property tax levy and from payments received by the county pursuant to a pass-through toll agreement between the county and the Texas Department of Transportation.
KEY RATING DRIVERS
The 'AA' IDR rating reflects the county's strong gap-closing capacity, solid reserve position, and manageable liability burden. Management's prudent budgeting benefits the county's prospects for maintaining structural balance through economic cycles.
Economic Resource Base
Situated between Austin and San Antonio, Hays County has been one of the fastest growing counties in the state and nation. With a current estimate of about 204,000, the population has grown by almost 30% since 2010. The county encompasses roughly 678 square miles and includes the city of San Marcos, the county seat and a commercial center. A major highway, Interstate 35, cuts through the eastern portion of the county.
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. 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: 'a' factor assessment
The county's liability burden is elevated but within the moderate range and driven primarily by overlapping debt. The county consistently funds its pension at actuarially determined levels and the unfunded pension liability is modest.
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 substantial 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.
Shift in Fundamentals: The 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.
The composition of the county's tax base is being quickly transformed from rural to urban. Residential construction has increased very rapidly as the housing pressures in Austin expand development southward, while growth in San Marcos pushes development northward. Commercial development has followed the population growth, particularly along the IH-35 corridor, with corporate investment in the community ranging from retail centers to health care.
San Marcos is home to a large and popular factory outlet mall and Texas State University (estimated enrollment of 35,000). The latter is expected to continue to grow rapidly in the next few years, facilitated somewhat by its recent transition to a Division 1 athletic program. County taxable assessed valuation (TAV) surged by 14.5% in fiscal 2017 due to equal parts new construction and reappraisal gains, increasing the compound annual average to 6.7% since fiscal 2011. Recent commercial projects planned or underway include a $190 million Amazon distribution center projected to employ 1,000, a Best Buy e-commerce operations center (50 employees), and a new H.E.B grocery store.
County wealth indicators are mixed but unemployment indicators are positive, characterized by rapid growth in total employment and an unemployment rate of a modest 3.6% in June 2016 that remains unchanged from the prior year. The unemployment rate is consistently below the state and national averages.
The county's operating revenues are comprised primarily of property taxes (54% of general fund revenue) and sales taxes (22%). General fund revenues grew by a healthy compound annual average of 6.8% over the last 10 years, posting only a single year of modest decline.
Historical revenue growth has exceeded the level of inflation and U.S. GDP growth, aided by steady AV and sales tax growth. Fitch expects the county's revenues to continue this trend given the rapidly expanding employment base and strong demographic trends. Sales tax revenues increased by 8% in fiscal 2015 and year-to-date sales tax revenues for the first 10 months are up by 11%.
At $0.42 in fiscal 2016, ample taxing margin remains under the $0.80 per $100 TAV 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
Public safety spending accounts for about 54% of general fund spending and is projected to grow further as the county jail is operating at full capacity, requiring the use of out-of-county facilities at a higher cost. Expansion of the existing jail's capacity will be one of the bond propositions presented to voters this November.
The pace of spending growth absent policy actions is likely to generally be in line with revenue growth but pressured by an expanding population and growing service delivery needs in the unincorporated portions of the county. Public safety spending is exceeding general revenue growth.
The county's fixed cost burden is moderate, with carrying costs for debt, pension, and OPEB equaling 20.4% of governmental spending, adjusted for TXDoT pass-through toll reimbursements for debt service. Expenditure flexibility is aided by the county's practice to annually appropriate capital outlays equal to about 3% of spending.
The framework for collective bargaining agreements (CBAs) in Texas gives management control over hiring and firing and staffing patterns for law enforcement personnel but requires that pay hikes and benefit levels be determined via CBA. The CBA for law enforcement personnel, which account for 25% of the county's workforce, expires on Sept. 30, 2016. Negotiations between the county and the Hays County Law Enforcement Association are expected to result in a four-year agreement shortly. The proposed terms include a 9% market adjustment in fiscal 2017 plus 2.5% - 3.5% annual merit increases in fiscal years 2018 - 2020. In the event talks stall, law enforcement personnel remain under an evergreen clause whereby the terms of the expired agreement (excluding pay hikes) are automatically renewed through Sept. 30, 2017. The existing and proposed CBAs include an annual reopener in the event the county's tax revenues decline from the previous year's level which Fitch views as providing important flexibility.
Long-Term Liability Burden
The long-term liability burden - including overall debt and unfunded pension liabilities - is elevated but still within the moderate range at 23.6% of personal income. The 10-year principal amortization rate for all bonds is slightly below average at 45%. Overall debt levels have risen, mostly from substantial debt issuances by the county's overlapping jurisdictions, led by seven school districts and the City of San Marcos. Continued overlapping debt issuances are likely to be accompanied by steady gains in personal income, leading Fitch to expect the county's long-term liability burden to remain in the current range.
The county will seek voter approval for $238 million of GO bonds in Nov. 2016 for road improvements, jail expansion, and a public safety center. If approved, the county's planned debt issuance plans are considered measured by Fitch, extended over three years or more and structured with the goal of no tax rate impact.
All county employees participate in a statewide agent multiple-employer defined benefit pension plan administered by the Texas County and District Retirement System. Annual pension payments consistently meet the actuarially required contribution and the net pension liability is modest at $32 million or 0.5% of personal income based on Fitch's adjusted 7% rate of return assumption.
The county's strong financial resilience is derived from a combination of revenue and expenditure flexibility, modest revenue volatility, and solid reserve levels. Conservative budgeting allowed management to increase 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.
Limited recessionary pressures on the county have enabled it to add to its already large financial cushion during the current economic recovery. The county's audits have posted balanced operations or better annually since fiscal 2010. A $4.3 million (6.3% of spending) general fund operating surplus was posted in the fiscal 2015 audit, resulting in an ample unrestricted fund balance of $41 million or 61% of spending. A more modest net surplus is projected for the general fund for fiscal 2016. The proposed fiscal 2017 budget includes a modest draw on fund balance ($1.7 million or 2.3% of spending) based on a conservative, flat sales tax growth projection.
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.
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
Dodd-Frank Rating Information Disclosure Form