Fitch Affirms Littlefield, Texas' COs at 'BB'; Outlook Negative
Fitch Ratings takes the following rating action on Littlefield, Texas' (the city) as part of its continuous surveillance effort;
--Approximately $1.2 million in outstanding combination tax and revenue certificates of obligation (COs), series 1997 rated 'BB.'
The Rating Outlook remains Negative.
--The majority of the city's outstanding debt is for a detention center (not rated by Fitch), which had been self-supporting from detention center operations. However, both detention center prisoners and the private operator left the facility in 2009, and despite the city's active efforts to locate prisoners or sell the facility, the detention center remains vacant.
--The lack of a debt service tax levy has resulted in considerable operating pressure.
--A fully funded debt service reserve remains in place, with the February 2010 principal and interest payment made from available funds, primarily excess water and sewer system revenues. Officials plan to make the next interest payment in August 2010 from available funds as well, although there is a possibility debt service reserve funds may be needed.
--General fund reserves are minimal; however, the water and sewer fund maintained about $800,000 in unrestricted net assets for the close of fiscal 2009. The city is considering making future detention center debt service payments from a combination of budget reductions, available city funds, and the imposition of an interest and sinking fund tax beginning in fiscal 2011.
--The city's tax base has shown moderate annual growth, and county unemployment rates, although higher than a year ago, remain below the state and nation. Proximity to the Lubbock metropolitan area offers additional employment opportunities for residents.
WHAT COULD TRIGGER A DOWNGRADE:
--Failure to identify a near-term financial solution in the fiscal 2011 budget is of immediate credit concern.
--The inability to develop a long solution may also lead to a negative credit action; such a solution may remain a challenge given current national economic conditions, tighter governmental budgets, and an overall reduction in the jail population.
The 1997 CO's constitute a general obligation of the city, payable from ad valorem taxes limited to $2.50 per $100 taxable assessed valuation (TAV). Administratively, the state attorney general will permit allocation of $1.50 of the $2.50 maximum tax rate for all general obligation debt based on 90% tax collection rate. Additionally, the COs are secured by a pledge of surplus water and sewer revenues.
The speculative grade rating and Negative Outlook reflect the uncertainty as to when and if the city can secure an operator or buyer for the detention center as well as the city's limited financial resources to repay the detention center debt. To the surprise of city officials, the state of Idaho announced their plans to leave the Littlefield facility in January 2009, citing the need to consolidate all of its out-of-state prisoners into a larger facility in Oklahoma. In addition, the detention center's private operator, the Geo Group, unexpectedly announced termination of their agreement to manage the facility effective January 2009. The move to leave Littlefield by the Geo Group is significant, given that the established private operator had made sizable equity investments in the detention center reportedly totaling approximately $2 million. In the past, the ability of the Geo Group to quickly replace prisoners with little disruption in operations, as well as their investment in the Littlefield detention center were cited as credit strengths.
Since GEO's announcement, the city has actively pursued a solution to the detention center situation, including the hiring of an outside consultant to identify potential operators and prisoners as well as buyers for the facility. The city entered into an operator agreement with Southwestern Correctional, which has been unable to successfully negotiate an agreement to house prisoners in Littlefield. The agreement with Southwestern Correctional is not exclusive and the city continues to seek discussions with other operators. Exacerbating city efforts is the current national recession, cuts in governmental spending, and a reduced jail population.
In the interim, the city continues to meet debt service obligations. The city made the February 2010 principal and interest payment from available funds, primarily from the water and sewer system. As of the end of fiscal 2009, the water and sewer fund had approximately $800,000 in unrestricted net assets. Officials believe that sufficient city funds are available to make the smaller August 2010 interest payment, although there is a possibility that the debt service reserve fund may have to be tapped. The detention center fund maintained $786,000 in restricted assets for debt service (equal to one year's debt service) as of Sept. 30, 2009.
Financial flexibility remains limited. The general fund balance is modest, with the city recording a $57,000 fund balance, or 1.4% of expenditures and transfers out. The city maintains some reserves in its other governmental funds, although their use may be restricted. While the water and sewer fund has historically provided significant general fund and detention center fund support, available surplus funds are expected to decline as excess revenues are transferred to the general fund. Officials have indicated, rather than drawing upon the debt service reserve fund, that the city is considering levying an interest and sinking fund tax to pay a portion of the detention center debt service, with the balance of detention center debt service requirements coming from expenditure reductions and available surplus funds. The city would have to almost double the property tax rate to pay for the entire detention center debt, which is not feasible. Developing a financial solution to meeting the city's debt service obligation beginning in the fiscal 2011 budget is an important credit consideration.
Littlefield, with a population of 6,500, is located approximately 35 miles northwest of Lubbock and serves as the county seat for Lamb County. The area is primarily rural in nature, with agriculture services, government, manufacturing, and trade as key components of the county's economy. County unemployment rates have risen, with a 7.9% posted for February 2010; however, the rate remains below the statewide average of 8.2%. The city's population and TAV had been flat until recently; over the past several years, the tax base has increased by a compound annual growth rate of 4.6%, with another 7.2% gain for fiscal 2010. While there is moderate taxpayer concentration among the top 10 taxpayers, there is generally a good mix of industries within the list.
Applicable criteria available on Fitch's web site at 'www.fitchratings.com':
--'Tax-Supported Rating Criteria', dated Dec. 21, 2009;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Dec. 21, 2009.
Additional information is available at 'www.fitchratings.com'.
Fitch Ratings, Austin
Mark Campa, 512-215-3727
Steve Murray, 512-215-3729
Cindy Stoller, 212-908-0526, New York