Fitch Rates Carrollton, TX's Series 2016 LTGOs 'AAA'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has assigned an 'AAA' rating to the following Carrollton, Texas bonds:
--$27.9 million general obligation (GO) improvement and refunding bonds, series 2016.
The series 2016 GOs are expected to price via competitive sale May 3. The bonds will be used to fund various city-wide capital projects and to refund certain outstanding maturities for annual debt service savings as well as pay issuance costs.
In addition, Fitch assigns an Issuer Default Rating (IDR) of 'AAA' to the city and affirms the 'AAA' rating on the approximately $162.6 million in outstanding GO improvement bonds (pre-refunding).
The assignment of the IDR reflects application of Fitch's revised criteria for U.S., state, and local government credits, which was released on April 18, 2016.
The Rating Outlook is Stable.
The bonds are payable from a limited ad valorem tax pledge of $2.50 per $100 taxable assessed valuation (TAV) levied against all property within the city.
KEY RATING DRIVERS
The 'AAA' rating reflects strong expenditure flexibility that allows the city to maintain a stable operating profile, characterized by a sound reserve cushion even in periods of economic stress. Fixed carrying costs are moderate despite rapid principal amortization and are largely driven by debt service costs, as the city has steadily reduced its pension liability. The long-term liability burden is low.
Economic Resource Base:
Carrollton is one of Dallas' 'inner-ring' cities nearing build-out over the intermediate term. The city's employment base is diverse; city residents also benefit from easy access to the broad Dallas-Fort Worth MSA employment base. Unemployment is low, and the city's socio-economic profile is strong as the labor force exhibits educational attainment and income levels above state and U.S averages. Long-term growth prospects appear favourable.
Revenue Framework: 'aaa' factor assessment
Fitch expects continued solid growth in the city's operating revenues given the underlying tax base fundamentals. The city maintains significant independent legal ability to raise operating revenues as needed.
Expenditure Framework: 'aa' factor assessment
Growth in spending is likely to be in line with revenue gains and management's ability to control spending is solid. Moderate fixed carrying costs incorporate rapid principal amortization.
Long-Term Liability Burden: 'aaa' factor assessment
Liabilities to income are low at 7.1% of personal income with much of the burden due to overlapping debt levels. Pension liabilities are low.
Operating Performance: 'aaa' factor assessment
The city's demonstrated willingness and ability to cut spending and limited use of its ample revenue-raising flexibility have preserved a strong and stable reserve cushion, leaving the city well positioned to address cyclical downturns.
MAINTENANCE OF FINANCIAL POSITION: The rating is sensitive to material change in the city's strong revenue-raising and expenditure flexibility and solid financial position, which Fitch expects it to maintain throughout economic cycles.
Carrollton's fiscal 2016 reflects continued expansion in the city's diverse taxable resource base, driven by a nearly 8% TAV gain from a variety of commercial, industrial and retail investments as well as tax base appreciation. Further tax base and economic growth appears likely in the near term given development projects underway, corporate relocations to Carrollton (Murata Electronics), and continued transit-oriented and attendant development around the city's three Dallas Area Rapid Transit (DART) light-rail stations.
The adopted $91.3 million fiscal 2016 general fund operating budget was structurally balanced. Revenues and expenditures are favorably performing better than budget year-to-date, with particularly strong (15.5%) sales tax gains above fiscal 2015's actuals that stem from the city's warehouses and business parks. This sales tax revenue generated in excess of the year's budgeted cap will be used for non-recurring, capital purposes in line with city policy, which Fitch views as a prudent and proactive budgeting strategy.
Property and sales taxes provide the bulk of general operating revenues. Downward recessionary volatility in sales taxes was relatively moderate; recent implementation of an operational funding cap limits cyclical risk related to this revenue source.
Management's continued focus on maintaining a competitive business environment has been a key factor in maintaining a flat to declining total tax rate over the last 10 fiscal years. Annual tax rate increases are also guided by the city's measured 60% (operating)/40% (debt service) policy to maintain proportionality with operating levy increases typically maintained below rollback. A portion of the operating tax rate funds key capital projects annually.
The city's total tax rate is statutorily limited to $2.50 per $100 TAV; the city is well below this threshold. Outside of this cap, there are no legal limits to management's ability to implement annual property tax increases, although an annual property tax levy increase in excess of 8% triggers the possibility of a voter-implemented, rollback election.
Public safety is the city's largest spending responsibility at roughly 50% of general fund expenditures and transfers out. Strong workforce flexibility and the lack of contractual obligations allow the city solid expenditure flexibility in relation to this high labor cost expenditure function.
Future spending growth on average over time should remain tempered and in line with annual revenue gains due to manageable expansion of spending in this mature yet vibrant city, as well as a history of moderate, steady investments in personnel and capital not projected to require significant catch-up.
Moderate carrying costs incorporate the city's self-determined, rapid pace of principal amortization, which is likely to increase modestly in the near term given management's plans to further shorten amortization.
Long-Term Liability Burden
The city's direct, tax-supported debt consists solely of voter-approved, limited tax GO bonds; capital needs include streets, traffic improvements, drainage, park/recreation and public safety facility improvements. The debt burden should remain manageable as the city is mature and benefits from a history of steady capital investment. The city also tempers its use of existing and future GO bond authority in conjunction with TAV performance so as to carefully control its tax rate.
The city participates in the Texas Municipal Retirement System (TMRS), an agent multi-employer plan, and has steadily reduced its pension liability with contributions moderately in excess of actuarial requirements. The plan presently assumes a 7% investment rate of return (IRR). Retiree liabilities are low, and the combined liability burden is expected to remain low even as the city's reported figures may rise modestly over the near-term with planned changes in the IRR and inflation assumptions.
OPEB liabilities (related to a closed retiree health program) are funded on an annual pay-go basis. Nonetheless, the unfunded actuarial accrued liability (UAAL) is modest and relatively stable at $4.8 million over two actuarial valuations.
The city's financial resilience comes from a combination of expenditure cutting and revenue-raising flexibility and maintaining a strong, stable reserve cushion. An unaddressed moderate economic decline scenario shows an operating reserve cushion that Fitch judges to be consistent with an 'aaa' financial resilience assessment. Moreover, Fitch expects that in the event of such an actual revenue decline, the city would maintain reserves at a significantly higher level through active expenditure management.
The city's budget management demonstrates a strong commitment to bolstering its financial position at times of economic recovery in preparation for the next downturn. In addition to maintenance of a solid reserve cushion, annual pension contributions are moderately higher than actuarial requirements, which have steadily reduced the pension liability. In support of budget stability, the city also recently began to limit its operational reliance on sales tax revenues in excess of budget, transferring out from general fund those funds for non-recurring, pay-go capital projects as of fiscal 2013.