Fitch Rates Southlake Community Enhancement & Development Corp Sale Tax Revs 'AA+'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has assigned a 'AA+' rating to the following Southlake, Community Enhancement and Development Corporation (SCEDC), Texas obligations:
--$26.7 million sales tax revenue bonds, series 2016.
The bonds are scheduled for a competitive sale on June 7. Proceeds will fund a community entertainment and recreation center and land, buildings and equipment or improvements that provide new or expanded business enterprises that create or retain primary jobs.
In addition, Fitch has affirmed the following ratings:
--Southlake, Texas Issuer Default Rating (IDR) at 'AAA';
--$112.9 million in outstanding Southlake, Texas general obligation (GO) bonds and certificates of obligation (Cos) at 'AAA'.
Fitch also has upgraded the Southlake Parks Development Corporation (SPDC), Texas' $13.7 million in outstanding sales tax revenue bonds to 'AA+' from 'AA-'. The upgrade reflects application of Fitch's revised criteria for U.S. state and local government credits, which was released April 18, 2016. The revised criteria introduce scenario analysis consideration to the rating of dedicated tax bonds.
The Rating Outlook is Stable.
The SCEDC sales tax bonds are payable from a priority lien on proceeds of a 3/8th of 1% sales and use tax levied within the city for the benefit of the SCEDC.
The GOs and COs are payable from an ad valorem tax levied on all taxable property within the city, limited to $2.50 per $100 taxable assessed valuation (TAV). The COs are additionally payable from a nominal pledge of subordinate net revenues (limited in amount typically to $1,000) from the city's waterworks and sewer system.
The SPDC sales tax bonds are payable from a priority lien on proceeds of a 0.5% sales and use tax levied within the city for the benefit of the SPDC.
KEY RATING DRIVERS
Issuer Rating: The 'AAA' IDR and GO/CO ratings reflect the city's exceptionally strong gap-closing capabilities, driven by strong revenue growth and sound expenditure flexibility.
Sales Tax Bonds: The 'AA+' ratings on the sales tax revenue bonds reflect Fitch's expectation of continued solid growth in sales tax revenues and strong debt service coverage that provides ample cushion to absorb a cyclical downturn in revenues.
Economic Resource Base
Southlake is an affluent community with a population of about 30,000, located 15 miles northwest of Dallas and 10 miles northeast of Fort Worth.
Revenue Framework: 'aaa' factor assessment
Southlake's general fund revenues have grown at a pace well above the rate of U.S. GDP, and Fitch expects this trend to continue. The city has significant independent ability to raise revenues based on ample tax rate capacity.
Expenditure Framework: 'aa' factor assessment
Solid expenditure flexibility reflects strong control over work force spending. Fiscal 2015 carrying costs, primarily for debt service, are affordable, and principal amortization is rapid. Fitch anticipates expenditures will grow in line with revenues.
Long-Term Liability Burden: 'aa' factor assessment
Fitch expects the city's long-term liability burden in relation to personal income, currently 11%, to remain on the low end of moderate, considering limited issuance plans and incorporating the potential for an increase in overlapping debt.
Operating Performance: 'aaa' factor assessment
Fitch expects the city to demonstrate exceptional financial resilience during an economic downturn based on its strong gap-closing capacity and solid reserve levels.
Strong Fiscal Health: The rating is sensitive to shifts in fundamental credit characteristics, most notably the city's continued strong fiscal health and solid economic base..
Ample Coverage: The sales tax ratings are sensitive to continued expectations for strong pledged revenue growth prospects and maintenance of an ample coverage cushion.
Southlake lies on the southern shore of Grapevine Lake within close proximity to Dallas, Fort Worth, and the Dallas Fort Worth (DFW) airport. The largely residential area is characterized by exceptionally high wealth. Southlake's high $241,000 market value reflects a median home price of $622,900. Residential properties comprise about 70% of the fiscal 2016 tax base, followed by commercial properties at 18%, up from 9% in fiscal 2000. While the city calculates it is 83% built-out by population, significant commercial capacity remains in its zoned commercial corridors.
The city's tax base has a moderate concentration among technology, real estate, telecommunications, leisure/hotel and distribution interests with the top two taxpayers accounting for 7% of fiscal 2016 TAV. New development underway or in the planning phases include residential properties, hotels, medical and assisted living facilities, and office/industrial/warehouse projects.
The city's diverse general fund revenue stream is driven by property taxes (44% of total fiscal 2015 revenues) and sales taxes (33%).
Southlake's strong 10-year general fund compound annual growth rate (CAGR) reflects an 8% sales tax revenue CAGR and a 5% TAV CAGR over the same period. Growth prospects are strong as indicated by the trajectory of sales tax revenue and commercial development trends. Fitch expects ongoing economic growth will be strengthened by near-term completion of significant transportation improvements currently underway.
The city of Southlake's fiscal 2016 tax rate, $0.462 per $100 of TAV, provides ample capacity below the statutory cap of $2.50. Healthy growth has allowed the city to hold the tax rate steady for 13 consecutive years.
Public safety consumes about 45% of the city's general fund operating budget.
Fitch expects the city's pace of spending to remain in line with revenue growth. Fitch does not anticipate pressure on service levels given anticipated modest population growth.
Southlake's full control over work force spending and affordable carrying costs provides a sound level of expenditure flexibility. Moderate fiscal 2015 carrying costs of 22% reflect a rapid 10-year 80% amortization rate that has slowed to a still healthy 64% with issuance of the series 2016 SCEDC sales tax bonds.
Long-Term Liability Burden
Fitch expects Southlake's long-term liabilities, currently 11% of personal income, to remain moderate given limited debt issuance plans and well-funded pensions. The expectation incorporates the potential issuance of overlapping debt, currently $234 million (compared to $126 million of net direct debt inclusive of this SCEDC issuance).
This SCEDC issue will fund a community entertainment and recreation center. Southlake's fiscal 2016 long-term general fund capital plan is affordable at about $64 million to be funded with a combination of cash and debt. Near-term issuance plans are limited to between $5 million and $8 million in fiscal 2017. Southlake typically funds a portion of its annual capital plan with general fund monies through its Strategic Initiatives Fund (SIF).
Southlake's pensions are provided through the Texas Municipal Retirement System, an agent multiple-employer defined benefit plan. Under GASB Statement 68, the city reports a fiscal 2015 net pension liability (NPL) of $6.2 million, with fiduciary assets covering 91.4% of total pension liabilities at the plan's 7% investment return assumption.
Southlake is expected to maintain a strong financial position through an economic downturn, benefiting from expenditure flexibility and healthy reserves.
Robust planning and prudent cost management support maintenance of a strong financial position, evidenced by high reserves in excess of policy targets. The city's fund balance policy targets a minimum 15% of general fund budgeted operating expenditures, with the stated optimum goal of 25% applicable to unassigned general fund reserves. Funds in excess of 25% are typically committed for strategic capital initiatives, helping to reduce growth in the city's indebtedness. A sizable fiscal 2015 unrestricted general fund balance of $26 million (60% of general fund spending) was driven by the strength of sales tax revenue. The city anticipates a modest increase in fiscal 2016 reserves based on favorable fiscal year-to-date results.
The SIF, which is included in the overall reserve figure and equaled $7 million at fiscal 2015 year-end, was created in fiscal 2006 to reserve general fund monies in excess of the city's optimal 25% of spending level for infrastructure, community enhancement, and technology projects. Since fiscal 2006, 67% of SIF funds have been applied to infrastructure projects, as well as for equipment purchases, to build a facility maintenance reserve, and for other projects.
Sales Tax Bonds
The 'AA+' rating on the sales tax bonds, which share the same base and a common 1.25x additional bonds test, is supported by a solid financial cushion and strong growth prospects. The coverage provides ample cushion to absorb a downturn in expected revenues in a moderate recession.
SPDC pledged revenues and SCEDC-equivalent pledged revenues have grown at a strong 8% CAGR over the past 10 years. Fitch anticipates solid future growth, although potentially at a more moderate pace, based on regional trends, ongoing commercial development and roadway improvements expected to increase traffic through the city.
Southlake Community Enhancement and Development Corporation
In May 2015, voters approved a reduction in the Southlake crime control sales tax (in place since 1998) from 1/2 of 1% to 1/8 of 1% and voted to implement a 3/8 of 1% local sales and use tax for benefit of the SCEDC. The SCEDC was created by the city in October 2015 to promote economic development and new and expanded business enterprises and fund a community and entertainment and recreation center. For analytical purposes, Fitch has used 3/8% equivalent sales tax historical data represented by 75% of the Southlake Crime Control District sales tax revenues.
SCEDC and SPDC Coverage Cushion
The SCEDC equivalent sales tax fiscal 2015 pledged revenues of $5.48 million cover MADs ($2 million in fiscal 2036) a sound 2.7x. Fiscal year 2015 SPDC pledged revenues of $7.4 million cover MADs ($1.586 million in fiscal 2022) a strong 4.7x
To evaluate the sensitivity of the dedicated revenue stream to cyclical decline, Fitch considers both revenue sensitivity results (using the same 1% decline in national GDP scenario that supports assessments in the IDR framework) and the largest decline in revenues over the period covered by the revenue sensitivity analysis. Fitch's analytical sensitivity tool (FAST) generates a default 1% scenario decline in SCEDC and SPDC pledged revenues based on Fitch's criteria guidance because actual revenue performance would suggest a modest .7% and 0% change respectively for SCEDC and SPDC pledged revenues. The largest actual cumulative decline in historical revenues is a 5.5% decline during fiscal 2009 and 2010 for SCEDC (8% for SPDC in fiscal 2009). Assuming issuance to the 1.25x ABT, well below actual current coverage, the structure could tolerate a sizable drop in revenues, 20x the scenario results and 2.5x the largest actual revenue decline in the review period. Fitch considers these results consistent with the 'AA+' rating outcome.
The sales tax bond ratings would be capped by the city's IDR.