Fitch Rates Longview, TX's LTGOs 'AA'; Outlook Stable
--14.1 million general obligation (GO) improvement and refunding bonds, series 2016.
Fitch has also affirmed the city's Long-Term Issuer Default Rating (IDR) and the following obligations at 'AA':
--$74.2 million limited tax GOs (pre-refunding).
The Rating Outlook is Stable.
The GO bonds are backed by an ad valorem tax levied on all taxable property within the city, limited to $2.50 per $100 taxable assessed valuation (TAV).
KEY RATING DRIVERS
The 'AA' rating reflects the city's robust financial cushion, low fixed-costs supporting ample expenditure flexibility and manageable long-term liability burden.
Economic Resource Base
Longview is located in the northeastern part of Texas, 125 miles east of Dallas and is the county seat of Gregg County. The city is an industrial and retail center in east Texas, anchored by the East Texas Oil Field. The estimated population of 83,000 has experienced modest growth over the past decade.
Revenue Framework: 'aa' factor assessment
The city of Longview has realized solid revenue growth over the past 10 years, supporting Fitch's expectation of continued strong growth, and maintains sizable ad valorem tax rate capacity. The 'aa' assessment incorporates the local economy's energy concentration and associated revenue-base volatility.
Expenditure Framework: 'aa' factor assessment
Solid expenditure flexibility results from strong workforce control and low carrying costs. Fitch expects expenditures to grow in line with revenues, but notes adjustments to spending may be necessary in the case of revenue volatility.
Long-Term Liability Burden: 'aa' factor assessment
The long-term liability burden is moderate relative to the resource base and Fitch expects it to remain so. Near term tax-supported capital needs are modest and pensions are adequately funded; however, the largest component of the liability relates to overlapping debt, which can be difficult to predict.
Operating Performance: 'aaa' factor assessment
Fitch expects the city to demonstrate a superior degree of gap closing ability and financial resilience during an economic downturn based on its healthy reserves, strong expenditure flexibility and high independent revenue-raising ability in relation to expected revenue volatility.
Budget Management: The rating is sensitive to continued strong budget management and maintenance of adequate reserves to offset potential revenue volatility.
The city has become a regional retail and healthcare hub over the past two decades, diversifying the traditionally energy and manufacturing based economy. Three medical centers and clinics are among the city's top employers rounding out the retail, manufacturing, and local government presence. The recent collapse in oil prices has underscored Longview's exposure to the energy sector. Several regional layoffs/closures of oil field service companies and manufacturers have weighed on the local economy as evidenced by contracting sales tax revenues and stagnating home prices. Mineral values, however, make up less than 1% of TAV.
Property taxes comprise one-third of general fund revenue, followed by a voter-approved local sales tax at 30% and franchise taxes and charges for services making up the remainder.
General fund revenues have grown at a compound annual growth rate (CAGR) of 4.2%, in excess of both U. S. economic performance and CPI over the 10 years through 2014. Increases were driven by moderate, steady gains in both sales and property taxes.
City officials attribute softness in sales tax receipts beginning in fiscal 2015 to slow-downs in its manufacturing and oil sectors and resultant reduction in consumer spending. The city is expecting sales tax contraction to continue at least through fiscal 2017, amounting to a budgeted sales tax revenue loss of $2.4 million (4% of the budget), and tempering expectations for revenue growth at historical rates barring any policy actions.
The city's ad valorem tax rate will hold steady for the fifth consecutive year at $0.5099 per $100 TAV in fiscal 2017, providing ample capacity below the statutory cap of $2.50. 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.
The city's largest spending area is police and fire that together make up 63% of the general fund budget. Spending growth in public safety has trended in line with general fund expenditure growth and Fitch believes it will remain so. The city maintains considerable expenditure flexibility through strong control of workforce costs and low carrying costs. Fiscal 2015 carrying costs were a modest 7.8%.
Fitch does not anticipate pressure on service levels given the city's maturity.
Long-Term Liability Burden
The city's overall debt and net pension liability of $423 million represents a moderately low 10.6% of personal income, primarily composed of debt. The city's five year capital improvement program contains a manageable list of capital improvements, most of which will be funded by the utility system. Fitch does not anticipate a material change in the city's long-term liability profile in the intermediate term; this offering will utilize the remaining $8 million in bond authorization for various street and drainage improvements.
The city participates in the Texas Municipal Retirement System (TMRS), an agent multiple-employer defined benefit plan. Additionally, the city pays into the Firemen's Relief and Retirement Fund, a single-employer defined benefit pension plan.
Under GASB Statement 68, the city reports a fiscal 2015 TMRS net pension liability (NPL) of $8.2 million, with fiduciary assets covering 94.7% of total pension liabilities at the plan's 7% investment return assumption and based on a Dec. 31, 2014 valuation date. The city reports a fiscal 2015 Firemen's NPL of $61.8 million, with fiduciary assets covering only 42% of total pension liabilities. The Firemen's valuation date is Dec. 31, 2014. The combined NPL of both plans represents less than 2% of personal income. Other post-employment benefit (OPEB) requirements are modest and funded on a pay-as-you-go basis.
The city has maintained ample reserve levels and continued to do so during the most recent economic recession. The last two years of audited results included fund balance draw-downs after transfers, largely due to capital spending. Unrestricted reserves at fiscal 2015 year-end were $17.3 million (28.3% of spending). The city predicts fiscal 2016 operating results will be slightly better than the $1.8 million budgeted deficit, but the early pay off of two capital leases during the year will result in a total draw of $2.9 million. Despite the drawdowns, reserves are expected to provide a superior level of fundamental financial flexibility during an economic downturn.
Management has been proactive in light of the recent downturn in the local economy by making mid-year budget adjustments and deferring non-critical capital plans. The proposed fiscal 2017 budget is balanced and flat compared to 2016, and is schedule for adoption Sept. 1. Fitch believes that management has the ability and willingness to implement expenditure reductions if required, and will continue forward looking planning.