Fitch Rates Dallas Co. Utility & Reclamation District, TX Series 2012 ULTs 'A-'; Outlook Stable
Fitch Ratings has assigned an 'A-' rating to the following Dallas County Utility and Reclamation District, Texas' (the district) unlimited tax (ULT) bonds:
--$34.1 million ULT refunding bonds, series 2012.
Fitch also affirms the 'A-' rating on the district's approximately $291 million (pre-refunding) in outstanding ULT bonds.
The Rating Outlook is Stable.
The bonds are secured by an unlimited property tax levied against all taxable property within the district.
KEY RATING DRIVERS:
UNLIMITED TAX PLEDGE; HIGH TAX RATE: The district's ability to levy an unlimited tax for both debt service and operations is a key rating factor. The overall tax rate declined somewhat in fiscal 2013, but remains high. However, the high tax rate for unabated properties is balanced against a much lower tax rate for about 55% of the property value in the district that receives some form of tax abatement.
RETURN TO SOLID TAV GAINS: TAV held steady in fiscal 2012 after a nearly 8% cumulative decline over fiscal years 2010 and 2011. A strong 13% TAV gain in fiscal 2013 was comparable to annual trends before the fiscal 2010 decline. Fitch believes further TAV growth appears likely over the near-term given development underway that has been spurred in part by light rail projects that link the district to other parts of the metroplex.
TAX BASE CONCENTRATION: The district's top 10 taxpayers represent about 25% of TAV.
DISTRICT PART OF WELL ESTABLISHED DEVELOPMENT: The district is favorably located in central Dallas and part of the larger, 12,000 acre mixed-use Las Colinas development that began in the 1970s. Nonetheless, the district operates in a competitive commercial real estate market. Development of property within the district has been largely for office and commercial/retail use, although more recent development has been residential. Roughly 20% of the district's total acreage remains undeveloped (but infrastructure-ready).
ADEQUATE FINANCIAL POSITION: Management's projections anticipate maintaining reduced but adequate reserves of $2.8 million or about 12% of spending by year-end fiscal 2012 and likely another decline to around $2.2 million by fiscal 2013 year-end. Fitch believes district operations and reserve levels will be satisfactorily maintained over the near term. However, significant operating surpluses or increased reserve levels are not expected, given recent efforts by management to maintain only modest fund balances in order to lower the tax rate. Most of the district's taxing effort is used to support annual debt service.
VERY HIGH DEBT BURDEN; MANAGEABLE CAPITAL NEEDS: Debt levels are high. Principal amortization of the district's direct debt is below average. Near-term capital needs appear manageable and there are no borrowings planned.
FAVORABLE CENTRAL DALLAS LOCATION; PART OF LAS COLINAS
Comprising roughly 3,600 acres, the district is part of the Las Colinas development, a 12,000 acre mixed-use project begun in the 1970s and located between Dallas-Fort Worth International Airport and Love Field in Dallas. The district incorporates primarily office, commercial, retail, hotel, restaurant, and more recently, some residential properties given its focus on development as the area's urban/business center. Roughly 20% of the district's total acreage remains undeveloped (but infrastructure ready).
Management reports there is development currently underway or planned to begin in 2013 that includes a number of single-family and apartment projects, some retail, and an oncology treatment facility. Fitch believes it is likely that some of this development has been spurred by the Dallas Area Rapid Transit (DART) light rail service that began to the Las Colinas Urban Center in July 2012, which was delayed from earlier projections. Two additional DART stations are planned to open in the coming months with eventual service to the DFW Airport expected by December 2014. The district's monorail, the area personal transit system (APT), is expected to link up fully with the DART stations and schedule.
TAX BASE GROWTH RETURNS; TAX RATE REMAINS HIGH
Taxable assessed valuation (TAV) held steady in fiscal 2012 at $2.1 billion after a nearly 8% cumulative decline over fiscal years 2010 and 2011. A strong 13% TAV gain was realized in fiscal 2013, comparable to annual trends before the fiscal 2010 decline. Management attributes much of the gain to rising Class A office market values. Although taxpayer concentration has declined over time, it remains a credit concern with the top 10 taxpayers representing about 25% of fiscal 2012 TAV. Management anticipates further TAV growth over the near term given the development projects underway and likely future development stemming from the DART light rail projects.
At $1.84 per $100 TAV, the overall tax rate declined somewhat in fiscal 2013 but remains high despite dropping closer to the fiscal 2010 level. However, the high tax rate for unabated property is balanced against a much lower tax rate levied on about 55% of the property value in the district that receives some form of tax abatement, implemented beginning in 1997. Fitch has previously noted the district's high tax rate and anticipates the overall tax rate will remain high despite near-term TAV gains projected. This is due largely to abatements currently offered by the district to attract development, a moderately ascending annual debt service schedule through payoff, and additional costs from expanded APT system operations necessitated by the recently opened light rail station.
SATISFACTORY FINANCIAL POSITION MAINTAINED
Almost all of the district's general operating revenues come from property taxes. General operating expenditures stay relatively slim as the district has historically transferred the majority of its ongoing maintenance and operations of its infrastructure to the city of Irving. Debt service makes up approximately 80% of general operational spending.
Financial operations remain satisfactory; the district ended fiscal 2011 with an unrestricted general fund balance equal to $4.4 million or 15.5% of spending and transfers. Reserve levels remained comparable to the prior year and modest as a relative dollar amount.
For fiscal 2012, management reports year-end projections that include slightly better than budgeted actual results due to additional property tax revenue received; results include a planned draw on reserves of about $1.6 million for operations in order to keep the year's tax rate as low as possible. The district expects to maintain an adequate $2.8 million general fund balance or about 12% of spending at year-end.
For fiscal 2013, the budget anticipates the use of about $600,000 in reserves to again allow for a lower tax rate. Also, the district shifted a portion of the year's tax rate towards operations from debt service in large part to fund expanded hours of service for the APT system. Management reports operations are running in line with the budget and consequently, general fund reserves are currently projected at approximately $2.2 million or about 9% of spending by year-end. Fitch expects reserves to be maintained at current levels for consistency with the rating category.
VERY HIGH DEBT BURDEN; MANAGEABLE CAPITAL NEEDS
Initial development of the district and the associated infrastructure necessary (water, sewer, roads, and the APT system) saw the district issue a sizeable amount of debt relative to the developing tax base. The debt burden remains very high with direct and overall debt representing 12% and 18% of fiscal 2013 TAV, respectively. This is despite the year's strong TAV gain and no new money debt issuances for additional infrastructure projects in many years. Fitch expects debt levels will remain high even with likely healthy TAV gains over the near-term as annual debt service of $22.4 million in fiscal 2013 rises moderately to reach maximum annual debt service of $31.3 million in the final year of the amortization schedule in fiscal 2029.
This refunding is for debt service savings and inclusive of this issuance, the pace of amortization remains below-average at about 42% of outstanding principal repaid within 10 years. The district has no additional borrowing plans and has leveraged various City of Irving, state, and federal dollars to cover the project costs associated with linking the APT and DART systems. Pension obligations are manageable.
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 Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, Case-Shiller, Inc., and IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
Rebecca C. Moses, +1-512-215-3739
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