Fitch Rates Webb County, TX's LTGO Rfdg Bonds and COs 'AA'; Outlook Stable
--$13.7 million certificates of obligation (COs), series 2016;
--$14.6 million limited tax general obligation (LTGO) refunding bonds, series 2016A;
--$6.3 million LTGO refunding bonds, series 2016B.
Fitch currently rates Webb County's Issuer Default Rating (IDR) and its $29.8 million of outstanding limited tax debt 'AA'.
The Rating Outlook is Stable.
The GOs and COs are payable from a property tax limited to $0.80 per $100 of taxable value. The COs are additionally secured by a de minimis pledge of net utility system revenues, not to exceed $1,000.
KEY RATING DRIVERS
The 'AA' rating reflects the county's favorable revenue framework, solid reserve position, and moderate liability burden. Balanced operations are expected to persist given proactive budgetary measures to align ongoing expenses with available resources.
Economic Resource Base
Webb County is geographically one of the largest counties in the state, located in southwest Texas along the Texas-Mexico border. The county's economic profile generally mirrors that of the City of Laredo (GO bonds rated 'AA' with a Stable Outlook), which accounts for about 95% of the county's population.
Revenue Framework: 'aaa' factor assessment
Historical revenue growth in the county has been robust, though future expansion will likely be tempered in the near term due to a decline in revenue related to oil and gas industry concentration. Long-term prospects remain strong given the local economy's role in international trade. The county's independent legal ability to raise property tax revenues provides ample flexibility.
Expenditure Framework: 'aa' factor assessment
The county's solid expenditure flexibility is derived from management's conservative budgeting practices and manageable carrying costs. Fitch expects the county to make appropriate spending adjustments in light of the revenue environment, keeping spending and revenue trajectories in line with one another.
Long-Term Liability Burden: 'aa' factor assessment
Debt levels are moderate and are expected to remain a reasonable burden on resources given limited future borrowing plans and modest unfunded pension liabilities.
Operating Performance: 'aaa' factor assessment
The combination of the county's expenditure flexibility, revenue-raising authority, and solid reserves should enable maintenance of a high level of financial flexibility during cyclical downturns. The county has demonstrated a commitment to prudent budgetary practices and mid-year adjustments when pressure arises.
Expense Management: The rating is sensitive to the county's continued ability to manage its cost structure in line with available resources. Management's effort to maintain ample reserves in light of the current cyclical downturn bodes well for rating stability.
Laredo's international trade activity fuels the local economy, and the area economy revolves around Laredo's role as one of the largest inland border ports of entry in the U. S. The population of Laredo's nearby sister-city in Mexico, Nuevo Laredo, is estimated to add 375,000 to the combined metropolitan center totaling roughly three-quarters of a million people.
Oil exploration and production in the northern part of the county have recently supplemented the county's economy traditionally centered on international trade. Webb County is part of the southern extreme of the Eagle Ford Shale that borders Mexico, which was one of the most actively drilled targets for unconventional oil and gas in the United States during the recent energy boom. Its output has dropped sharply since 2015.
Wealth levels in the county are well below state and national averages, with county median household income 71% of the state and nation. Rapid area population growth has exceeded state growth rates. The county's estimated 2015 population of 269,721 reflected a nearly 3% average annual gain from 2000 census levels. Unemployment is up slightly from recent lows but remains in line with national levels.
Property taxes account for 70% of general fund revenues. Favorable revenue trends had until recently been aided by steady tax base gains, driven by oil, gas, and mineral reserves that represented over 30% of the tax base in fiscal 2016. Sales tax revenues make up the second largest revenue stream at 20%.
The compound annual growth rate (CAGR) of general fund revenues was a high 6.3% compared to 3.5% growth in U. S. GDP over the 10 years through 2014, driven by increases in both property and sales tax collections with minimal recessionary contraction. The current state of energy prices and the related decline in drilling activity tempers expectations of revenue performance in coming years, as evidenced by year-to-date sales tax collections down 10% from the prior year as of June 2016. Additionally, certified values for fiscal 2017 show a contraction of roughly 10%, driven by a decline in mineral values. Future growth prospects for revenues will be a function of these two principal revenue streams. Residential development and retail activity should help mitigate the energy sector downturn and provide stability in the county over the long term.
At $0.4147 per $100 taxable assessed value (TAV) in fiscal 2016, ample taxing margin remains under the $0.80 cap for operations and limited tax debt service. If a proposed tax rate results in an 8% year-over-year levy increase (based on the prior year's values), the rate increase may be subject to election if petitioned by voters. Fitch does not view this as a hindrance to revenue-raising ability. Management has expressed desire to reduce expenditures in lieu of raising the tax rate.
Public safety, including the sheriff's department, corrections and rehabilitation, accounts for about 70% of general fund spending and is projected to grow at a manageable pace given management's initiatives to reduce the jail population and control personnel growth in these areas.
The county's fixed cost burden is moderately low, with carrying costs for debt, pension, and other post-employment benefits (OPEB) equaling 10.6% of 2015 governmental spending. Expenditure flexibility is aided by the county's practice of using paygo spending for short-term capital projects.
The framework for collective bargaining agreements (CBAs) in Texas gives management control over deputy sheriff hiring and firing and staffing patterns but requires that pay hikes and benefit levels be determined via CBAs. The Webb County Deputy Sheriff's Association includes 320 employees under a five year contract that was most recently renewed on Sept. 30, 2015. Management reports positive relations with the organization and affordable pay increases for the duration of the contract.
Long-Term Liability Burden
The county's long-term liability burden is estimated by Fitch at a moderate 14.7% of personal income and while it may increase due to overlapping issues, it is expected to remain moderate. The current sale will fund various capital projects, including HVAC, IT, and wastewater equipment improvements. Other near-term capital needs will likely be funded through paygo.
County employees participate in an agent multiple-employer defined pension plan administered by the Texas County and District Retirement System. The county consistently funds its pension at the actuarially determined level and the unfunded pension liability is modest at $44 million or 0.5% of personal income based on an adjusted 7% rate of return.
The county's high financial resilience is derived from strong revenue growth that has led to solid reserve levels. Prudent budgeting allowed the county to increase its financial reserves in the wake of the last downturn, which was relatively modest for the county. Fitch expects the county's financial position to remain solid throughout the economic cycle.
Fiscal 2015 results were break-even, holding unrestricted fund balance steady at $19.9 million, or a solid 21% of spending. Management reports fiscal 2016 will likely yield similar results due to mid-year spending adjustments to account for the contraction in sales tax revenues. Budget discussions are underway for fiscal 2017, and the commissioners court has approved a 10%-15% across-the-board spending reduction to address the anticipated decline in revenue. Fitch believes management's commitment to stability will yield satisfactory reserves throughout economic cycles.