Fitch Affirms Missouri City, Texas' GOs & COs at 'AA'; Outlook
Fitch Ratings has affirmed the following ratings on Missouri City, Texas (the city) general obligation (GO) bonds and certificates of obligation (CO) at 'AA':
--$26.8 million GO bonds series 2007, 2008, and 2008A;
--$13.4 million tax and revenue COs series, 2008 and 2008A.
The Rating Outlook is Stable.
The GO bonds and COs are direct obligations of the city, payable from an ad valorem tax levied against all taxable property in the city, limited to $2.50 per $100 taxable assessed valuation (TAV). The COs are additionally payable from a secondary pledge such as net revenues from the utility system.
KEY RATING DRIVERS
HEALTHY FINANCIAL PROFILE: Fund balance levels are sound, evidencing management's prudent fiscal practices and commitment to maintaining financial flexibility.
HIGH OVERALL DEBT LEVELS: Overall debt levels are very high due to substantial overlapping debt reflecting rapid population growth. The city's carrying costs (annual debt service, pension and other post-employment benefits (OPEB) are somewhat elevated.
AFFORDABLE CIP/DEBT: The city's manageable capital improvement plan (CIP) will be largely bond-financed and adheres to its policy limiting the debt service tax rate impact.
SOLID ECONOMY AND TAX BASE: The city's tax base has realized solid post-recessionary growth. Median household income is above-average and low unemployment reflects the city's proximity to the broad and diverse Houston metropolitan area (the MSA).
STRONG FUNDAMENTALS: Material increases to the city's already elevated carrying costs could put downward pressure on the rating.
Missouri City is located about 14 miles southwest of Houston and had a 2014 population of 71,710.
SOLID FINANCIAL FLEXIBILITY
The city has sound financial operations, adding to fund balance in four out of the five years ending fiscal 2014. The $533 thousand (1.6% of spending) fiscal 2014 surplus was aided by conservative budgeting in both revenues and expenditures.
For unaudited fiscal 2015, despite weaker than budgeted revenue, spending controls allowed the city to realize a $95 thousand (0.3% of spending) deficit relative to the budgeted deficit of $855 thousand. Ending unrestricted fund balance was 23.8% of expenditures ($8.7 million), complies with the city's formal unrestricted fund balance policy of 15%-25% of spending.
The fiscal 2016 budget appropriates a small amount of fund balance for one-time purchases. Current revenues and expenditures are tracking to budget and the city expects to end the year as budgeted, with a fund balance of 20.2% of fiscal 2016 spending
MAINLY RESIDENTIAL COMMUNITY BENEFITS FROM ACCESS TO HOUSTON MSA
The city's location near the broad Houston MSA employment base has spurred development and population growth. The city's 2014 population of 71,710 was 35% over the 2000 census. An additional estimated 28,000 people live in the city's extra-territorial jurisdictions (ETJ). Future annexation of these communities, expected in the mid- to long-term, will likely significantly enhance the city's property tax base without contributing major capital needs. Fitch views Missouri City's prospects for continued tax base growth as promising.
Unemployment rates for the city have historically been low; for the month of September 2015, the city's unemployment rate was 4.4%, equal to the state but below the Houston MSA (4.6%) and nation (4.9%). City wealth levels are high, as measured by median household income, at 169% of both the state and the nation. Local employment sectors are led by government and education, retail, and some light industrial; however, many residents commute to employment throughout the broad Houston MSA.
The city's largely residential tax base (70%) shows no concentration among the top 10 taxpayers. TAV remained relatively stable through the recession and has posted solid growth in the time since. Fiscal 2016 TAV increased 15.5% over the year prior, leading the city to roll back its tax rate to $0.54 per $100 of TAV from $0.56 in fiscal 2015.
WEAK DEBT PROFILE; OTHER LONG-TERM LIABILITIES MANAGEABLE
Direct debt levels are relatively low at 2% of market value. A high overall debt burden, 9% of market value, results from substantial overlapping debt, primarily from the Ft. Bend Independent School District (GOs rated 'AA+'; Outlook Stable by Fitch). Fitch expects the city's debt to remain elevated given regional growth projections. Amortization of direct debt is above average at 65.2% maturing within 10 years.
The city's manageable CIP includes nearly $60 million in authorized but unissued bonds. A majority of the authorized bonds are for transportation and drainage projects. The city has committed not to increase the interest and sinking fund (I&S) tax rate more than $0.04 per $100 of TAV while implementing its bond program.
The city participates in the CSME Texas Municipal Retirement System (TMRS). Under GASB 67 and 68, the city reports a fiscal 2015 TMRS net pension liability (NPL) of $18 million with fiduciary assets covering 83% of total pension liabilities based on a 7% investment rate assumption. The city contributed 100% of its actuarially determined contribution of $1.4 million. Both the city's unfunded OPEB liability and NPL are considered very low as a per cent of the city's market value. Total carrying costs, which include TMRS contributions, OPEB pay-go, and debt service, were moderate at 20.5% of total governmental spending in fiscal 2014.
Additional information is available at 'www.fitchratings.com'.
Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.
In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from CreditScope, IHS Global Insight, and Zillow Group.
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
Dodd-Frank Rating Information Disclosure Form
Fitch Ratings, Inc.
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Elizabeth Fogerty, +1 212-908-0526