Fitch Affirms Schertz, Texas' GOs and COs at 'AA'; Outlook Stable
Fitch Ratings affirms the ratings of the following Schertz, TX (the city) bonds at 'AA':
--$43.4 million limited tax (LT) general obligation (GO) bonds outstanding, series 2006, 2007, 2008, 2009, and 2011;
--$8.79 million combination tax and revenue certificates of obligation (COs) outstanding, series 2005 and 2007.
The Rating Outlook is Stable.
The GO bonds and COs are secured by a pledge of ad valorem taxes levied annually within the limits prescribed by law against all taxable property in the city. The COs are further secured and payable from a limited pledge (not to exceed $1,000) of surplus net waterworks and sewer system revenues. The state constitution and city charter limit ad valorem taxes for general and debt service purposes (for GOs and COs) to $2.50 per $100 of taxable assessed valuation (TAV).
KEY RATING DRIVERS
SOLID FINANCIAL POSITION: Despite growth pressures, Schertz has maintained a sound financial position through conservative budgeting practices, as evidenced by regular operating surpluses and reduced, but still healthy fund balance levels.
STRONG ECONOMIC FOUNDATION: The stable presence of government, warehouse and distribution industries which support the well-diversified economy with low unemployment and above-average wealth levels.
NEW DEVELOPMENT CONTINUES: Ongoing development within the rapidly growing city is projected to promote growth in TAV, providing the city with tax levy flexibility for operations and debt service.
HIGH DEBT BURDEN: The city's overall debt burden is relatively high, due primarily to the overlapping debt of the local school district. Fitch believes the debt load currently is manageable due to the reasonable prospects for continued expansion of the tax base.
The rating is sensitive to maintenance of adequate reserves, given the reliance upon economically sensitive sales tax revenues. Deterioration below current levels, while not expected, would put negative pressure on the rating.
The city is located roughly 15 miles east of downtown San Antonio and is part of the sizeable San Antonio metro area. The city has a 2011 estimated population of roughly 32,500, which represents a robust 74% increase from 2000.
ROBUST ECONOMIC PROFILE
The city's location at the intersection of two major highways has proven advantageous in attracting warehouse and distribution oriented businesses. The local economy benefits from extensive retail activity along its transportation corridors. Nearby Randolph Air Force Base is another positive economic influence.
The sharp decline in residential and commercial construction area-wide in the recession also had an impact on development activity in Schertz. City housing starts dropped sharply in 2008 and 2009 and still remain approximately one-third of pre-recession levels.
Taxable values have been stable throughout the recession, growing by an average annual rate of 5.4%. TAV registered an 8.8% increase for fiscal 2013, driven by continued growth in the industrial and distribution sectors.
Wealth levels are above state and national averages. Market value per capita is strong at $89,000. Per capita money income is 120% of the Texas average and 110% of the U.S. average, and median household income is roughly 141% of the state average and 136% of the U.S. average.
The unemployment rate in the city has trended downward after spiking in 2010. The city's December 2012 rate of 5% was well below both the Texas (6%) and U.S. averages (7.6%) for the month.
STABLE FINANCIAL PROFILE; RESTORATION OF RESERVE LEVELS PLANNED
The city has managed to meet the service demands of a growing population while maintaining a sound financial profile. The city historically maintained very high levels of general fund reserves; as high as 68% of spending in fiscal 2007. However, one-time capital spending in fiscals 2008 and 2009 significantly reduced reserves, bringing the total general fund balance to only $2 million, or 10% of spending, well below the city's informal reserve policy of 25%, or three months of spending.
The city's revenue sources are diverse, with property taxes comprising 35% and economically sensitive sales taxes comprising 25% of total general fund revenues. Sales tax revenue dipped modestly during the recession, but growth has been strong over the past two fiscal years, increasing 13% in 2011 and 10% in 2012. Year to date sales tax collections for fiscal 2013 indicate a continuance of the recently positive trend.
Fiscals 2010 and 2011 each ended with a modest surplus, boosting the 2011 general fund balance to $3.2 million, or 17% of spending. Preliminary fiscal 2012 results are positive, indicating a healthy operating surplus of $770,000. The 2013 adopted budget is balanced, with another modest operating surplus planned of a similar size.
While improving from 2009 levels, Fitch notes that reserves are still substantially lower than historical levels, and roughly $2 million lower than targeted levels. Any further material deterioration of fund balance would be inconsistent with this rating level. Given past practices and results Fitch believes management will continue its proactive financial planning practices and budgetary oversight in order to maintain its sound financial position.
HIGH DEBT BURDEN; LOW PENSION FUNDING
Overall debt levels are high at approximately $6,800 per capita and 7.6% of fiscal 2013 TAV. The high debt burden is mainly driven by substantial overlapping borrowing by the Schertz-Cibolo-Universal City Independent School District (GO debt rated 'AA-' by Fitch). The pace of debt retirement is average at 48% in 10 years.
Schertz's employees participate in an agent multiple employer defined benefit pension plan administered by the Texas Municipal Retirement System (TMRS). The city routinely funds 100% of its annual required contributions; however, funding levels are low at 59% assuming a 7% investment rate of return as of Dec. 31, 2010. Other post-employment benefits (OPEB) are also provided by the city through TMRS, but limited to group-term life insurance benefits, which may be terminated by city council, resulting in no unfunded liability.
Carrying costs related to long-term debt, pension and OPEB liabilities are high at 27% of governmental spending less capital outlays.
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, National Association of Realtors, 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
Matt Dustin, +1-512-215-3727
Fitch Ratings, Inc.
111 Congress Ave, Suite 2010
Austin, TX 78801
Rebecca Moses, +1-512-215-3733
Arlene Bohner, +1-212-908-0568
Elizabeth Fogerty, New York, +1 212-908-0526