Fitch Rates Austin, TX PIBs, COs, & PPFCOs 'AAA'; Outlook Stable
--\\$231.6 million public improvement and refunding bonds, series 2015;
--\\$61.34 million certificates of obligation (COs), series 2015;
--\\$14.31 million public property finance contractual obligations (PPFCOs), series 2015;
--\\$10 million public improvement bonds, taxable series 2015.
The obligations are scheduled for a negotiated sale on or about Sept. 9. Proceeds will finance various public improvements and refund a portion of the city's outstanding tax-supported debt for interest savings.
In addition, Fitch affirms the following ratings:
--\\$1.3 billion outstanding public improvement bonds, COs and PPFCOs at 'AAA';
--\\$8.9 million Mueller Local Government Corporation (Mueller LGC) contract revenue bonds, series 2006 at 'AA+'.
The Rating Outlook is Stable.
The public improvement bonds, COs, and PPFCOs are direct obligations of the city and are payable from an ad valorem tax limited to \\$2.50 per \\$100 assessed valuation, levied against all taxable property in the city.
The COs also feature a limited pledge (not to exceed \\$1,000) of surplus revenues of the city's solid waste disposal system.
The corporation contract revenue bonds are payable from a first lien on pledged revenues pursuant to a grant agreement with the City of Austin; payments are subject to annual appropriation. The pledged revenues are any of the city's available general fund monies, including sales tax revenues from retail activity within the designated Mueller project area.
KEY RATING DRIVERS
SOUND FINANCIAL PROFILE: The city maintains a balanced operating profile while using excess cash for non-recurring and capital initiatives. Continued gains in economically sensitive revenues have contributed to operating surpluses and expanding reserves and liquidity. Growing service needs from an expanding population likely absorb the majority of expected additional revenue increases.
VIBRANT, DYNAMIC ECONOMY: The city's economy is diverse and growing steadily, with government, higher education, healthcare and high technology the primary employment sectors. The city continues its strong post-recession performance, as
reflected in healthy job and population gains. Wealth levels are good, the labor force is highly-educated, unemployment is low, and taxable values are climbing at a healthy pace.
UNDER-FUNDED RETIREE LIABILITIES: City pension costs have been increasing primarily to address the under-funded position of the city's civilian and police pension programs. The city recently reached full annual required contribution (ARC) funding for the civilian program, and recent benefit adjustments are expected to stabilize this pension burden over the long term. The city has not addressed a sizable post-employment benefit (OPEB) liability.
MODERATE DEBT PROFILE: Austin's debt profile is moderate and capital needs appear manageable. The payout rate for outstanding tax-supported debt is above average with roughly 60% retired in 10 years.
MUELLER LGC BOND RATING: The rating of the Mueller LGC contract revenue bonds is one notch below the city's 'AAA' LTGO rating to reflect annual appropriation risk.
FOCUS ON RETIREE LIABILITIES: The city has demonstrated its willingness to address its under-funded civilian pension. Continued progress in improving pension funding levels and addressing the sustainability of OPEB obligations remain important credit considerations.
ECONOMY CONTINUES TO OUTPERFORM
Austin continues to be one of the top performing U.S. metro area economies. The city is the state capital and home to the University of Texas at Austin (University of Texas System; rated 'AAA' by Fitch), as well as six other colleges and universities. The large state government and higher education employment base historically has provided a stabilizing presence and economic buffer during downturns.
Technology manufacturing is another key area employment sector, led by Dell, IBM, Samsung and others. The city's highly-educated workforce and availability of major research facilities continues to attract and support expansion of technology firms. Tourism has also become a growing economic component. The city hosts several festivals and conferences for music and technology throughout the year, which continue to increase in visitor count.
More recently, the city added high-profile sporting events to its roster of events, including Formula One auto racing and the ESPN Summer X Games. Airport traffic continues to grow, with 2015 year-to-date passenger counts up 3% over 2014 and several expansion projects either recently completed or underway.
EMPLOYMENT AND TAX BASE GAINS CONTINUE
Annual employment totals have increased by more than 3% recently, although recent monthly totals suggest some moderation. The city's March 2015 unemployment rate declined to a low 2.9% from 3.8% last year, well below state (4.2%) and national (5.6%) averages for the month. The city's population, approaching 880,000 for 2015, has increased more than 25% since 2000.
Taxable values have resumed solid growth following a one-year decline in fiscal 2011. Increases the past four fiscal years have brought taxable assessed value (TAV) to \\$98.9 billion, with fiscal 2015 registering a more than 11% gain. Preliminary values for fiscal 2016 suggest further growth. Development data provided by the city indicate healthy permit activity and apartment and commercial occupancy rates. The city's market value per capita of \\$133,000 has been trending up recently and exceeds the median for 'AAA' peers.
Development continues at Mueller, a mixed-use project located at the city's old airport location. Increasing retail activity boosted sales tax receipts to more than \\$1 million in both fiscal 2013 and 2014, which exceeds annual debt service on the series 2006 contract revenue bonds. Other high profile projects currently underway are redevelopment of the city's Seaholm Power Plant and Green Water Treatment Plant, both located downtown and both slated for mixed use investment.
STRONG FINANCIAL PROFILE
The general fund produced operating surpluses (after transfers) in five of the last six fiscal years, as property tax and sales tax revenues (the two leading general fund revenue sources) continued impressive growth and allowed the city to keep up with growth-driven spending needs.
The city concluded fiscal 2014 with an operating surplus (after transfers) of approximately \\$36 million; this positive result was in line with earlier projections and reflected better than expected revenue performance and continued cost management. The unrestricted general fund balance climbed to \\$182.5 million or 22% of expenditures and transfers out, which is at the high end of recent year-end fund balance totals.
The city adheres to its fund balance reserve targets which, by policy, include within the unrestricted fund balance a \\$40 million emergency reserve, a 1% contingency reserve, and the balance comprising a budget stabilization reserve. Current policy permits the use of up to one-third of the budget stabilization reserve for one-time capital needs.
The proposed fiscal 2016 budget includes a revision to the policy whereby the contingency reserve would be collapsed into a new emergency reserve with a minimum 6% of spending target; the budget stabilization reserve would remain, and the combined reserve would have a minimum 12% of spending formal target.
DIVERSE OPERATING REVENUE SOURCES
Property taxes and sales taxes made up 40% and 22% of general fund revenues and transfers in, respectively, in fiscal 2014. Property tax revenues have averaged robust 10% annual growth since fiscal 2009, supported by the increasing TAV. Sales taxes have registered solid gains each of the last five fiscal years following a recessionary dip in fiscal 2009. Receipts surged 7.3% in fiscal 2013 and 7.5% in fiscal 2014 (to \\$189 million total), and management anticipates a nearly 8% gain for fiscal 2015.
Dividends from the city-owned electric utility and water and sewer system are also a significant revenue source, representing 21% of fiscal 2014 general fund revenues.
The transfers are formalized by city policy and equal 12% of the electric utility's nonfuel revenues (with a floor of \\$105 million) and 8.2% of the water utility's gross revenues. Fitch rates the city's combined utility systems (prior first lien) revenue bonds 'AA' and the combined utility systems (prior subordinate lien) revenue bonds 'AA-' with a Stable Outlook, the water and wastewater system revenue bonds 'AA-' with a Negative Outlook, and the electric utility system revenue bonds 'AA-' with a Stable Outlook.
FISCAL 2016 BUDGET REFLECTS GROWING SERVICE DEMANDS
Preliminary general fund estimates for fiscal 2015 indicate another healthy surplus approaching \\$20 million, driven largely by the continued revenue gains. The proposed fiscal 2016 general fund budget totals \\$907 million; both operating revenues and spending are budgeted for a 6% increase from the amended fiscal 2015 budget, and sales taxes are slated for a 5% gain. The proposed budget is structurally balanced.
Highlights include a 3% pay increase for non-uniformed employees, and increased contributions by both the city and workers to the employee health insurance program. The property tax is budgeted to remain essentially unchanged. General fund staffing is expected to increase by a sizable 252 new employees, reflecting increasing service demands from a growing population. Most of the staff additions are for public safety, library, and development services.
PENSION FUNDING LEVELS WEAK BUT STABILIZING
The city maintains three single employer pension programs for civilian, police, and fire retirees. Fitch considers the civilian and police plans to be under-funded. When adjusted to assume a more conservative 7% investment return, the funding levels for the civilian and police programs are below average at roughly 65% (civilian plan) and 60% (police). The fire pension program is stronger at 85% funded (adjusted).
The city's contributions to the civilian plan total 18% of payroll, up from 8% in fiscal 2005 as part of a city-initiated supplemental funding plan. Additionally, management extended the years of service requirement for new civilian employees hired after Jan. 1, 2012. These changes are expected to improve the plan's funding level over time. City contributions to the police and fire plans have also been increasing. The city has generally fully-funded the ARCs for these plans, and further contribution increases are likely given the weak funding level of the police plan.
The city's unfunded OPEB liability is sizable at \\$1.47 billion or 1.3% of full market value. To date the city has made limited progress in addressing the liability. However, the recent length of service changes for retirement benefits are expected to also lessen the OPEB liability over time. City contributions are made on a pay-go basis. The fiscal 2014 combined carrying costs (debt service, pension ARC and OPEB pay-go contribution) were moderately high at 22% of governmental spending.
MANAGEABLE DEBT BURDEN AND CAPITAL PLAN
The city's overall debt metrics remain moderate at 3.2% of market value and \\$4,267 per capita. Future borrowing plans, comprised of previously authorized but unissued tax supported debt from 2006, 2010, 2012 and 2013 elections, total roughly \\$210 million during the 2016-2019 period. Management reports that the next GO authorization election likely will occur in the 2017-2018 timeframe. Fitch does not foresee major changes to the city's debt profile under the current CIP.