Fitch Rates Royse City, TX COs Series 2013 'A-'; Outlook Negative
Fitch Ratings has assigned an 'A-' rating to the following Royse City, Texas certificates of obligation (COs):
--$1.585 million combination tax and surplus revenue COs, series 2013.
The COs are expected to price the week of January 8 via competition. Proceeds from this issuance will fund upgrades to the city's waterworks and sewer system.
At this time, Fitch also affirms the following outstanding obligations at 'A-':
--$308,000 general obligation (GO) bonds series 1976 and 2005;
--$16.315 million combination tax and surplus revenue certificates of obligation (COs) series 2005, 2006, 2007A, and 2007B.
The Rating Outlook is Negative.
Both GOs and COs are direct obligations of the city, payable from ad valorem taxes levied annually, limited as to rate to $2.50 per $100 assessed valuation; COs are also secured by a pledge of surplus net revenues of the city's waterworks and sewer (utility) system.
KEY RATING DRIVERS
POSITIVE BUT PRELIMINARY RESULTS: The Negative Outlook reflects Fitch's view that while the city appears to continue its trend of positive operating results and post a positive general fund balance in fiscal 2012 by outperforming the budget, results are still preliminary.
RECOVERY PLAN PROGRESS: The city remains relatively illiquid but has made some measurable progress in its multi-year recovery plan. The city is realizing ongoing savings from cost cutting and revenue enhancement measures implemented between fiscal 2009 and 2010 and appears on track to restore general fund reserves to an adequate level by fiscal 2014.
PLANNED REDUCTION OF UTILITY SUPPORT: Inter-fund transfers from the utility fund to the general fund continue to offset a structural imbalance. However, Fitch expects the city to successfully implement its plan to reduce inter-fund transfers between the general, utility and debt service funds by adjusting operating and debt service tax levies to levels sufficient to support each fund.
HIGH OVERALL DEBT BURDEN: Direct debt levels are manageable, but overall debt ratios are very high when including debt from the local school district.
STABLE TAX BASE: Rapid taxable assessed value (TAV) growth slowed in 2009 due to stalled housing construction and other general recessionary influences. TAV contracted only modestly in 2011 and 2012. Positively, sales taxes were fairly stable through the recession and expanded notably in 2011 and 2012 due to new retail activity in the city.
WHAT COULD TRIGGER A RATING ACTION
DEVIATION FROM RECOVERY PLAN: Failure to adhere to the recovery plan as currently scheduled will likely result in downward pressure on the rating.
The city is conveniently located about 35 miles northeast of Dallas predominantly in Rockwall County, but also encompassing portions of Collin and Hunt counties, off Interstate 30. With an estimated 2012 population of 9,500 (up 230% since 2000), the city is a fast-growing bedroom community in the metroplex and benefits from its close proximity to three area lakes.
MODEST FINANCIAL CUSHION ESTABLISHED
The city's historically thin financial margins turned negative at the end of fiscal 2007 when the downturn in the housing market and national economy caused revenues to fall short of budgeted expectations. Fund balances reached an alarming low of negative $1.1 million in fiscal 2008 due to cost overruns, but steadily improved, albeit slowly, to negative $272,000 in fiscal 2011.
Financial improvement was largely driven by cost cutting measures and substantial tax increases starting in fiscal 2009. While general fund performance remains weak, the city's credit profile continues to improve with preliminary fiscal 2012 (ended September 30) results showing a modest $260,000 unrestricted fund balance equal to 5% of expenditures. The unaudited operating surplus of $531,000 after transfers was driven largely by revenue growth and cost controls.
UTILITY FUND TRANSFERS SUSTAIN GENERAL FUND OPERATIONS
General fund operations remain imbalanced with recurring expenditures exceeding recurring general fund revenues in each of the seven fiscal years from 2007 through the 2013 budget.
The city has had to rely on short-term financing and interfund loans to meet operating needs.
Utility-related debt was issued as double-barreled obligations, payable from property tax levies or utility system operating revenues. In 2009 the city raised the debt service levy a notable $0.15 per $100 AV to pay utility-related debt service and free up surplus water and sewer revenue available to be transferred to the general fund to supplement operations. General fund liquidity remains weak but is improving.
REVENUE NEUTRAL TAX RATE ADJUSTMENTS TO REDUCE TRANSFERS
Management's final phase in matching revenues to spending involves small, incremental increases to the operating tax rate over the next few years (assuming flat TAV growth) with corresponding downward adjustments to the debt service tax rate. As the general fund moves towards balanced operations, inter-fund transfers will be reduced and eventually eliminated except for the usual administrative accounting reporting. Adjustments began in fiscal 2012 with a modest but measurable shift in the debt service tax rate to the operating rate.
The fiscal 2013 budget further shifts the tax rate from debt service to the operating fund. However, operations are still supported by the same $1.09 million transfer in from the utility fund recorded in fiscal 2012, equaling roughly 20% of general fund revenues. Management plans to continue to shift reserves from the utility fund (through transfers) to the general fund until general fund reserves reach targeted levels of approximately $1 million or 20% of expenditures. The city expects to reach this target in fiscal 2014.
Fitch views this temporary operating support as appropriate given the strength of the utility fund, including its large $5.2 million cash position and the competitiveness of utility rates.
STABLE LOCAL ECONOMY
TAV growth was strong from fiscal 2004-2009, averaging just over 20% annually. However, growth slowed considerably in fiscal 2010 to only 3%, and contracted modestly by 1% in both fiscal 2011 and fiscal 2012. Preliminary figures for fiscal 2013 TAV indicate another modest decline of 0.6% to $469 million.
Independent housing information indicates relatively low mortgage delinquency and foreclosure rates and officials indicate no drop in current property tax collection rates. County wealth levels are above average, while unemployment rates remain below metropolitan, state, and national averages.
Sales taxes have been remarkably stable throughout the recession, driven by growth in the city's retail corridor along a new highway interchange. Receipts for fiscal 2011 showed nearly 16% growth over the prior year, and receipts through October 2012 show 9% improvement. Wal-Mart has announced plans to build a store in the city beginning in 2013, which Fitch expects will further benefit city finances.
HIGH BUT MANAGEABLE DEBT BURDEN
Debt ratios have improved over time given rapid population and tax base growth. Overall debt ratios are high at $6,485 per capita or 10.4% of total market value, largely due to extensive borrowing by the local school district. Payout is average with 60% of debt repaid in 10 years. The city is in the process of developing a new capital plan, although given current financial and economic conditions, no additional borrowing is planned for the next five years.
The city provides pension and other post-employment benefits (OPEB) through the Texas Municipal Retirement System (TMRS). Funding levels remain low at 69% but have improved recently; the city routinely funds 100% of annual required contribution (ARC) to TMRS. In fiscal 2011, the city's total fixed cost burden (debt, pension, and OPEB) was an average 20% of combined general and debt service fund 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 Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, National Association of Realtors, Underwriter, Bond Counsel, Underwriter Counsel, Trustee, and the Municipal Advisory Council of Texas.
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
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