Fitch Rates Webb County, Texas' Series 2012 Ltd Tax Bonds 'AA-'; Outlook Stable
Fitch Ratings has assigned an 'AA-' rating to Webb County, Texas' (the county) limited tax debt as follows:
--Approximately $9.3 million limited tax refunding bonds, series 2012.
Fitch also affirms the 'AA-' rating on the county's approximately $21.9 million (pre-refunding) in outstanding certificates of obligation (COs) and $42.4 million in outstanding limited tax bonds.
The Rating Outlook is Stable.
The bonds are secured by a limited ad valorem tax pledge of the county (up to $0.80 per $100 taxable assessed valuation [TAV]). The COs share the same security as the bonds and are additionally secured by a pledge of revenues (limited in amount to $1,000) from the county's waterworks/sewer system.
KEY RATING DRIVERS
ECONOMIC EXPANSION: Increased economic activity surrounding the Eagle-Ford Shale oil/natural gas formation has produced employment gains in recent months. At 7.1% as of August 2012, area unemployment has declined from 8.5% on a year-over-year basis with employment gains outpacing solid labor force growth. This unemployment rate is down from a recent high of 8.9% in 2010 and more closely mirrors that of the state while remaining below the U.S. average.
SOUND FINANCIAL POSITION ENABLED BY SALES TAX TRENDS: General fund reserves remain relatively stable and in line with the 'AA-' rating. The stability is due largely to very strong sales tax performance, offsetting management's adoption of structurally imbalanced operating budgets for fiscals 2012 and 2013 and aggressive budgeting of property tax collections as compared to historical trends. Fitch views these financial practices with some concern due to the volatile nature of sales taxes.
FISCAL 2013 TAX BASE GAINS: After remaining relatively flat over the past three fiscal years, TAV rose by a solid 6% in fiscal 2013, up to $15 billion. Gains are due largely to increased mineral values.
STRONG POPULATION GAINS LIKELY TO PROVIDE PRESSURE: County population has grown rapidly since 2000. A healthy pace of growth is expected to continue over the intermediate term given mining activity associated with proven mineral reserves. Fitch anticipates ongoing pressure on county operations and services from this trend.
WEAK SOCIOECONOMIC INDICATORS: Area wealth levels are well below state and national averages, but are mitigated in part by the relatively low cost of living.
MANAGEABLE DEBT BURDEN: Overall debt levels are moderate and amortization of the county's direct debt is rapid. Further capital needs appear manageable, although they could be pressured in the intermediate term given strong population gains.
WHAT WOULD TRIGGER A RATING CHANGE
A diminished financial cushion stemming from weak budgeting and financial practices and a lack of emphasis on balanced operations could evolve over the near term into a materially weaker credit profile, which would likely result in negative rating action.
POPULATION, ECONOMIC AND TAX BASE GROWTH IN SOUTHWEST BORDER COUNTY
Webb County is geographically one of the largest counties in the state, located in southwest Texas along the Texas-Mexico border. Comparable to many other border credits, wealth levels are low. Area population growth has been rapid, exceeding that of the state. The estimated 2011 population of 257,000 reflected a nearly 3% average annual gain from 2000 census levels.
The county's economic profile generally mirrors that of the City of Laredo (GO bonds rated 'AA' with a Stable Outlook by Fitch), which accounts for about 90% of the county's population. Laredo's international trade activity continues to fuel economic activity, and the area's economy revolves around Laredo's role as one of the largest inland border ports of entry in the U.S.
More recently, the area has realized expanded economic activity and resulting increase in mineral values from the Eagle Ford Shale formation. Despite growth in the local labor force, unemployment levels have declined on a year-over-year basis from 8.5% to 7.1% as of August 2012, which slightly exceeds the state average (7%) but remains comfortably below the U.S total (8.2%).
Tax base growth was modest to flat over the past three fiscal years (fiscals 2010 - 2012), but a solid 6% gain in TAV to $15 billion was realized in fiscal 2013. Taxpayer concentration remains moderate with the 10 largest taxpayers comprising about 12% of fiscal 2013 TAV and energy concerns dominate this list. At a minimum, Fitch expects that ongoing activity surrounding this recently discovered oil and natural gas formation should permit continued, modest expansion of the tax base over the near term.
GENERALLY STABLE FINANCIAL PROFILE MAINTAINED
Reserve levels of about 18% of general fund spending have typically characterized the county's sound financial position since fiscal 2007. The unrestricted general fund balance (the sum of the committed, assigned, and unassigned fund balance under GASB 54) at fiscal 2011 year-end continued this trend at $12.6 million or 17.8% of spending. According to policy, the county maintains reserves at no less than two months of budgeted spending (up to 15%) with a replenishment schedule not to exceed three years if reserves fall below the minimum. Surplus fund balance can be considered for one-time spending.
About 70% of the county's general fund operating revenue comes from property taxes and an additional 20% from sales taxes. Over the past seven fiscal years, the county's total property tax rate has remained stable at $0.42 per $100 of TAV. Recent trends for these two key revenue streams have in part offset each other. Since fiscal 2011, current and delinquent property tax collections have come in closer to the historic averages (95%-96%) rather than the higher collection rates (97%-98%) budgeted. In contrast, the more economically sensitive sales tax revenues have performed more strongly than budgeted due to the broad economic impact of the Eagle Ford Shale activity and reportedly steady retail activity from Mexican shoppers.
For fiscal 2012, the county adopted a structurally imbalanced operating budget that incorporated the use of $3.6 million in reserves largely for the addition of 55 new full-time employees. The budget anticipated a $9.1 million fund balance or 11.3% of spending that fell below the policy minimum. Fitch notes that the budgeted drawdown was a relatively modest 4.5% in relation to the year's operational spending, but more significant as a percentage of reserves at fiscal 2011 year-end (just under 30%).
Management currently expects more favorable fiscal 2012 year-end results to include a modest $600,000 addition to reserves. The result is largely driven by a $2.3 million or nearly 15% gain in actual sales tax revenues compared to budget in addition to realizing some mid-year salary savings. Year-end projections for unrestricted fund balance are better than budgeted at $13.2 million or 17.4% of the year's reduced actual spending, which remains in line with the county's reserve policy and comparable to historical trends.
For fiscal 2013, the county's recently adopted $85 million general fund budget is up nearly 6.5% from the prior year's spending level. Projections include a drawdown of nearly $2 million in reserves due largely to the addition of 45 employees. If budgeted projections materialize, reserves would drop to $11.4 million or 13.4% of spending and require replenishment within one year.
Budgeted projections also include a widening, $3.2 million operating imbalance in the county's internal health insurance fund (the county is self-insured) despite the year's additional $600,000 contribution from the general fund. Management has typically closed the health insurance fund's annual operating gap with transfers in from the general fund and workers' compensation reserves, which is reportedly again the plan for resolving the estimated $2 million deficit by fiscal 2012 year-end. Although management has taken preliminary steps to restore operating balance in this fund, the timing and availability of additional resources remain uncertain. Fitch believes this situation may erode a measure of the county's financial flexibility unless addressed decisively by management given recent health care utilization trends.
MODERATE OVERALL DEBT AND OTHER LONG-TERM LIABILITIES
Overall debt levels are moderate at 4% of market value and about $3,000 per capita. Principal amortization of the county's direct debt is rapid at roughly 81% in 10 years. Short-life capital needs are largely met through pay-go spending generated from yearly salary savings. The county has no unissued GO authorization currently. Possible near-term debt plans include up to $20 million in COs for land purchase and the construction of rehabilitation and law enforcement facilities. The county contributes to the Texas County and District Retirement System (TCDRS), an agent multiple-employer plan. Rising about 2% since 2007, the county's actuarially required contribution to the plan consumed a moderate 8.2% of fiscal 2011 spending; the unfunded liability was a minimal 1% of TAV. The county's funded position held relatively steady at nearly 80% for both fiscal 2010 and 2011 (using a 7% investment rate of return for both years). The cost of other post-employment benefits (primarily retiree healthcare) is funded by the county on a pay-go basis, which totaled less than 1% of fiscal 2011 spending.
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 report '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' (Aug. 14, 2012);
--'US 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
111 Congress Avenue, Suite 2010
Austin, TX 78701