Fitch Affirms Marble Falls, TX's COs and Tax Notes at 'A'; Outlook Stable
Fitch Ratings takes the following action on Marble Falls, Texas' (the city) outstanding combination tax and limited pledge revenue certificates of obligation (COs) and general obligation (GO) limited tax notes:
--$36.5 million series 2003, 2004, 2007, and 2008 COs affirmed at 'A';
--$65,000 series 2006 GO limited tax notes affirmed at 'A'.
The Rating Outlook is Stable.
The COs and tax notes are secured by a limited ad valorem tax pledge levied against all taxable property in the city. The COs are additionally secured by a nominal pledge (not to exceed $1,000) of surplus revenues of the city's waterworks and sewer system.
KEY RATING DRIVERS:
WEAK FINANCIAL POSITION: Reserves and liquidity are improved but still thin following multiple years of unbudgeted deficits from which the city has been slow to recover. Operations are reliant on enterprise fund transfers that may be fiscally unsustainable.
SALES TAX CONCENTRATION: Economically sensitive sales taxes are the dominant revenue stream and have shown steady, modest annual improvement following recessionary declines.
STABLE, LIMITED RESOURCE BASE: The local economy, population, and tax base are limited but stable. Residents' income levels are below average but market value per capita is high due to the presence of second homes in the city.
FAVORABLE ECONOMIC OUTLOOK: Long-term economic growth prospects are positive given the city's relative proximity to the strong economy of the Austin metropolitan area. Development presently underway and the stable housing market are contributing to near term growth.
ABOVE AVERAGE DEBT BURDEN: Key debt ratios are high though the payout rate is above average. Pension liabilities are well-funded.
WHAT COULD TRIGGER A RATING ACTION:
REVERSAL OF FINANCIAL IMPROVEMENT: Deterioration in the currently minimal fiscal cushion would apply downward rating pressure, particularly given the limited economy and reliance on economically sensitive sales taxes.
The city of Marble Falls is located in central Texas about 45 miles northwest of Austin (GOs rated 'AAA' with Stable Outlook by Fitch) in the center of the Highland Lakes chain. The city's population has climbed rapidly in the past decade but is still small at 7,200 in 2012.
FINANCIAL PERFORMANCE IMPROVED BUT FLEXIBILITY IS STILL LIMITED
Operating reserves declined dramatically from fiscal years 2006 to 2009 due to consecutive years of general fund deficits resulting from a combination of planned capital outlays, unplanned costs for recovery efforts from a major flood event in 2008, and revenue declines. The city ended fiscal 2009 with a general fund balance of $337,000 or a low 3.6% of spending compared to fiscal 2006 reserves at $2.9 million.
Contributing to fiscal pressure is the city's vulnerability to fluctuations in sales taxes which make up a high 60% of general fund revenues; a 3% decline in sales taxes in fiscal 2009 contributed to the $1 million (11% of spending) deficit.
Some stability in the general fund was restored beginning fiscal 2010 through spending cuts despite another 4.5% drop in sales tax revenues. Management reduced the workforce, initiated a hiring and salary freeze, and cut departmental budgets to reduce expenditures 11% over fiscal years 2010 and 2011. Subsidies from the enterprise fund totaling 15% of the budget also continued, yielding a $274,000 operating surplus after transfers in fiscal 2010 but smaller fiscal 2011 $32,000 operating surplus after transfers due to declines in grant and fine revenue. Fitch is concerned that the reliance on utility fund transfers may not be sustainable.
The city concluded fiscal 2011 with an unrestricted fund balance of $670,000 or 8.2% of spending. Given the city's reliance on sales taxes, Fitch considers this level of financial flexibility somewhat weak. Liquidity also improved but was still anemic at $49,000 in cash and investments totaling only two days cash on hand, although the cashflow from operating revenues and quarterly enterprise fund transfers has been sufficient to cover without short-term or other inter-fund borrowing.
NO TIMELINE FOR RESTORING RESERVES
The modestly improved general fund position is a credit positive but the city's timeline for restoring fund balance to the its 25% policy floor remains undefined. Unaudited fiscal 2012 results are again positive, with the city increasing its unrestricted fund balance to 9.4% of spending, but were aided by enterprise fund transfers to offset what turned out to be aggressive assumptions for sales tax gains.
Management also adopted a fiscal 2013 deficit budget that shifts a portion of the operating tax rate to debt service, absorbs new capital lease costs and a 3% pay raise to staff, and assumes sales taxes rise 4% above unaudited 2012 receipts. While year-to-date sales taxes are trending 5% above the prior year and may help to narrow the deficit at year-end, Fitch believes reserves will remain below the city's policy goal and reliance on the enterprise fund will continue for some time. The ability of the enterprise fund to continue subsidizing general operations may be pressured in the near term given the new debt plans to be funded with net system revenues.
LIMITED ECONOMIC BASE; DEVELOPMENT PROJECTS UNDERWAY
The local economy is limited and anchored in tourism and retail given the city's popular location near several lakes in the Texas hill country. In addition, there are a number of small to mid-sized manufacturers and a nearby granite quarry is a major employer. The city benefits from a stable housing market that was not as severely impacted by the recession compared to the nation. Proximity to the Austin metropolitan statistical area provides more abundant employment opportunities for residents.
Some economic diversification is occurring with the multi-phase construction of a medical complex that commenced June 2011. The facility is expected to add over 400 jobs at build-out in 2017, and the taxable portions of the complex (excluding the nonprofit hospital) will add value to the city's tax roll as early as fiscal 2014. In addition, infrastructure work to support a large 1,000 acre mixed-use development has begun. This project is currently slated to be completed in phases over the next 10-20 years but has been subject to past delays.
The city's $575.5 million taxable assessed value (TAV) has grown marginally since fiscal 2011, when voter-approved homestead and senior citizen tax exemptions took effect to reduce net TAV by 10% from fiscal 2010. Fitch views management's forecasts for modest TAV growth in the near term as reasonable given the development mentioned above and stable area housing market.
MIXED DEMOGRAPHIC INDICATORS
The unemployment rate (available only at the county level) has consistently been below state and national levels and dropped to 4.9% in for the year-ending October 2012, although this was in part due to labor force contraction. Income levels are slightly below state and national averages but market value per capita is a strong $96,000, aided by the presence of second homes.
ABOVE AVERAGE DEBT BURDEN
Key debt ratios are high at 7.5% of full market value and $7,217 per capita after taking into account 32% of debt repaid from net utility revenues. Fitch also considers the debt burden on the budget high at 22% of governmental expenditures (excluding the general improvements fund). The rate of amortization is above average at 62.5% retired in 10 years. Future capital needs are mainly to expand the city's water plant and utility infrastructure and would require roughly $3 million of revenue bonds as early as fiscal 2014. The city may also sell GO tax notes or use other available revenues to support street improvements.
PENSION AND OPEB LIABILITIES NOT A CREDIT PRESSURE
Marble Falls' pension plan is administered through the Texas Municipal Retirement System (TMRS) and is fully-funded at 103.9% as of Dec. 31, 2011, based on the TMRS investment rate assumption of 7%. Other post-employment benefits (OPEB) for health care are also provided by the city through a single-employer self-funded plan. The unfunded actuarial accrued liability (UAAL) is a small $134,171 as of Dec. 31, 2010 or a nominal percentage of the city's market value.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, LoanPerformance, Inc., and IHS Global Insight
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated 14 Aug. 2012.
--'U.S. Local Government Tax-Supported Rating Criteria', dated 14 Aug. 2012.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Outlook
Blake Roberts, +1-512-215-3741
111 Congress Ave., Suite 2010
Austin, TX 78701
Rebecca Moses, +1-512-215-3729
Karen Ribble, +1-415-732-5611
Elizabeth Fogerty, +1-212-908-0526