Fitch Rates Garland, TX's $42MM Series 2016 GO Rfdg Bonds 'AAA'; Outlook Stable

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

--$41,640,000 general obligation (GO) refunding bonds, series 2016.

In addition, Fitch has affirmed the city's Issuer Default Rating (IDR) at 'AAA' and the 'AAA' rating on the approximately $483 million (pre-refunding) in outstanding GO and certificates of obligation (CO) bonds.

The Rating Outlook is Stable.

The bonds are scheduled to sell via negotiation Nov. 15. Proceeds of the bonds will be used to refund certain outstanding maturities for debt service savings and pay costs of issuance.

SECURITY

The bonds are secured by a limited ad valorem tax pledge of the city, not to exceed $2.50 per $100 of taxable assessed valuation (TAV).

KEY RATING DRIVERS

The 'AAA' IDR and bond ratings reflect the city's broad budgetary tools, supplemented by reserves, and limited revenue volatility (inclusive of sales taxes). These factors combine to provide the city with a high level of operating flexibility and anticipated financial resilience throughout the economic cycle. Modest population gains and development underway or planned should maintain the city's solid pace of revenue growth. These trends should also keep the liability burden low. Fitch expects expenditure flexibility to remain solid, with somewhat elevated carrying costs mitigated by rapidly amortizing direct debt, self-support from various enterprise funds, and the absence of pension pressure given the fully funded status of the plan.

Economic Resource Base

Garland is located approximately 14 miles northeast of downtown Dallas, surrounded by major transportation corridors. The city's nearly 237,000 residents are part of the large and robust Dallas-Fort Worth-Arlington (DFW) metropolitan statistical area (MSA) and benefit from the area's economic and employment trends that continue to outpace the nation. Population growth in the city since 2000 has been steady, but comparatively modest at less than 1% given its mature nature.

Revenue Framework: 'aa' factor assessment

General fund revenues should continue to outpace inflation, but trail U.S. GDP, supported by the likelihood of further development. Underpinning the revenue framework assessment is the city's ample revenue-raising ability inherent in its property tax levy.

Expenditure Framework: 'aa' factor assessment

Solid expenditure flexibility is derived from management's prudent budgeting practices, and ability to adjust its labor costs if needed. Fitch expects growth-related spending demands to be matched by revenue gains, keeping their trajectories aligned over time.

Long-Term Liability Burden: 'aaa' factor assessment

The long-term liability burden is low at approximately 7% of personal income.

Operating Performance: 'aaa' factor assessment

The city's significant revenue-raising ability and sound expenditure control, supplemented by the availability of its strong reserve cushion, should enable the maintenance of a high level of financial flexibility during cyclical downturns.

RATING SENSITIVITIES

RELIANCE ON UTILITY TRANSFERS: Formula-driven utility transfers provide significant support for general fund operations, having grown strongly over time. The rating is sensitive to material deterioration of this key revenue stream and/or the city's inability to realign spending accordingly.

CREDIT PROFILE

The city's industrial market is one of the largest in the MSA and a diverse list of manufacturing and distribution business concerns drive the local economy. Unemployment has steadily trended downward since peaking over the recession and remains below county, state, and U.S. levels.

The city's tax base is primarily residential in nature despite its industrial/commercial base. Top 10 taxpayer concentration is minimal. TAVs have generally grown at a steady, modest pace, although more recent annual performance has strengthened (about 2% on average over fiscals 2004-2017). Some new development as well as appreciating values contributed to the very strong 11% TAV gain in fiscal 2017.

Fitch expects new projects and expansion of the existing manufacturing/commercial base that drives much of the city's development will support further economic and TAV growth. The largest project underway includes a multi-phased data center that is scheduled to open its first phase in early 2017 and provide up to 300 jobs at full completion, according to management. New residential development that includes various mixed-use and multi-family projects is also occurring.

Revenue Framework

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/administrative costs from enterprises (23%) and sales taxes (17%).

Fitch believes solid revenue growth will be maintained, in line with historical performance. The city's commercial, industrial, and manufacturing base has historically developed in part due the city's strategic location and access to major ground transportation routes. Ongoing investment and new development planned and underway that expands this base should drive further economic expansion and support the 'aa' assessment.

At a total tax rate of approximately $0.70 in fiscal 2017, ample taxing margin exists under the $2.50 per $100 AV cap for operations and limited tax debt service. Outside of this statutory cap, there are no legal limits to management's ability to implement annual property tax increases. 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 is the city's largest operating expenditure, consuming about 53% of fiscal 2015 general fund spending. Fitch expects future spending will naturally remain paced with or marginally above the solid revenue growth anticipated, tempered by a history of moderate, steady investments in personnel and capital not projected to require significant catch-up.

Expenditure flexibility is aided by the city's lack of contracts with personnel. Management maintains strong legal control of labor costs and headcount. Flat to modestly declining, recession-related revenue performance demonstrated the city's ability to control key expenditure items. Spending adjustments included a combination of salary and position reductions/freezes in addition to deferral of annual pay-go capital spending.

The city's fixed cost burden is moderately high. Carrying costs (debt service, actuarial pension payments, and pay-go other post-employment benefit [OPEB] costs,) totaled 22% of fiscal 2015 governmental spending, which incorporates the city's policy-determined, rapid pace of principal amortization (about 80% retired in 10 years).

Long-Term Liability Burden

The long-term liability burden is low at an estimated 7% of personal income and largely attributable to overlapping debt (60% of total)). Capital needs in the city should remain manageable given the modestly-paced population expansion anticipated by Fitch coupled with further income gains that should keep the liability burden at the 'aaa' assessment, inclusive of future tax-supported debt plans in the city's own multi-year capital improvement plan (CIP).

Self-supporting debt, as calculated by Fitch from the electric, water, and wastewater utilities, represents about 43% of the city's roughly $496 million in total tax-supported debt (post-refunding), thereby substantially reducing the impact on its debt service tax rate. The city maintains a measured pace of tax-supported and revenue debt issuance annually in support of its 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.

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 its share of the TMRS net pension liability (NPL) as $0 given fiduciary assets cover slightly over 100% 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 in fiscal 2015.

Operating Performance

Fitch expects the city will be able to manage through a moderate economic downturn while maintaining a high level of fundamental financial flexibility. Revenue-raising authority and solid expenditure control provide the city with superior inherent budget flexibility. This high level of financial resilience is also underpinned by historically low general fund revenue volatility (inclusive of sales tax performance).

Sound and stable reserves have historically characterized the city's fiscal profile. Unrestricted general fund balance totaled approximately $25 million or 16% of spending at fiscal 2015 year-end, comfortably above the city's formal policy to maintain a 30-day unrestricted reserve. Management maintains an ongoing pace of capital investment with the periodic use of reserves above the stated threshold or mid-year surplus to budget for various one-time spending priorities.

Break-even operations and stable reserves are currently projected by management at fiscal 2016 year-end; improving upon the modest drawdown budgeted. The continuation of strong sales tax growth (about 13% above prior year's actuals) in addition to other positive revenue gains was largely offset by added general fund support for a portion of the year's unanticipated health insurance claim costs.

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/site/re/879478

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Contacts

Fitch Ratings
Primary Analyst
Rebecca Moses
Director
+1-512-215-3739
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Gabriela Gutierrez
Director
+1-512-215-3731
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
Rebecca Moses
Director
+1-512-215-3739
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Gabriela Gutierrez
Director
+1-512-215-3731
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com