Fitch Rates City of Dallas GOs 'AA+'; Outlook Stable
--$227 million general obligation refunding & improvement bonds, series 2015.
The refunding bonds are scheduled for a negotiated sale the week of Nov. 9, 2015. Proceeds will be used to refund outstanding commercial paper notes and to finance public improvements.
In addition, Fitch assigns an 'AA+' rating to $1.7 billion of the city's outstanding limited tax general obligation debt.
The Rating Outlook is Stable.
The general obligation bonds (GOs) are payable from the city's ad valorem tax levy, limited to $2.50 per $100 of taxable assessed valuation (TAV). Certificates of obligation (COs) are additionally payable from surplus revenues of the city's utility system.
KEY RATING DRIVERS
FINANCIAL RESILIENCE: Strong revenue growth and expenditure flexibility position the city to maintain strong financial capacity through economic downturns.
EXPANDING TAX BASE: The city has realized four consecutive years of tax base gains reflecting new development and a robust real estate market. Fitch anticipates further growth in the city's taxable assessed valuation (TAV) based on the current pace of economic development.
MANAGEABLE LONG-TERM LIABILITIES: The city's debt and pension plans place a moderate burden on the tax base. Fitch expects ongoing pension reforms to improve pension funding in the medium term. Near term debt plans are manageable.
BROAD ECONOMY; GROWTH PROSPECTS: Dallas is the third largest city in Texas with a diverse and stable economic base. The city headquarters a broad array of corporate entities, serving as a nationally recognized technology, trade, and health service center. Healthy development and real estate trends bode well for near- and medium-term growth.
Long-Term Liabilities: Pension reforms and improvement in the city's long-term liability burden could lead to positive rating action. Inability to improve the affordability and sustainability of pensions could pressure the current rating.
Dallas is located in north central Texas and ranks among the top ten cities nationwide by population. The city's population of 1.2 million has remained relatively stable over the past decade, although the metropolitan statistical area has grown by more than 30% since the 2000 census.
STRONG OPERATING PERFORMANCE
Dallas benefits from strong revenue growth and mature financial management practices that have allowed it to consistently maintain solid reserves. Strong gap-closing capability is evidenced by the city's demonstrated ability to cut costs when needed. Operating revenues are diverse, comprised of property taxes (42%), sales taxes (23%), service charges (17%), and franchise fees (13%).
The city completed fiscal 2014 with a net surplus of $23.7 million (2.2% of spending) and unrestricted reserves of $159.4 million (14.5% of spending). The city projects a modest addition to fiscal 2015 fund balance based on the strength of revenue growth and programmed expenditure savings.
The fiscal 2016 budget is operationally balanced, but includes a reserve draw of $7.1 million to fund working capital for the city's sanitation operations, transferred in the fiscal 2016 budget to a separate fund. Fitch anticipates the city will outperform the budget and maintain a sound financial cushion, consistent with its 30-day target for unassigned reserves.
LONG-TERM LIABILITIES FACE PENSION CHALLENGES
The city's debt burden is moderate at 4.4% of fiscal 2016 market value. Carrying costs (debt service, pension and other post-employment benefits (OPEB)) place a sizable 23.3% burden on fiscal 2014 governmental expenditures. However, affordability of the city's long-term liabilities may be strained based on the city's unfunded pension liabilities, particularly for the Dallas Police and Fire Pension System (DPFP).
Dallas participates in three single employer defined benefit plans. The Dallas Employees Retirement Fund's (ERF) estimated actuarially-based funded ratio is 72.9% as of Dec. 31, 2014 (adjusted by Fitch to reflect a 7% investment return assumption). Under GASB 67 and 68, the city reports a net pension liability (NPL) of $605 million, with fiduciary assets covering 84.7% of total pension liabilities at the plan's 8% investment return assumption.
DPFP and the Supplemental Police and Fire Pension Plan's (SPFP) actuarially-based funded ratios are 62.1% and 49.8% respectively as of Jan. 1, 2015 (adjusted by Fitch to reflect a 7% investment return assumption and prior GASB standards.) Under GASB 68, the city reports NPLs of $5 billion and $21.3 million respectively for DPFP and SPFP, with fiduciary assets covering only 38.2% and 50.1% of total pension liabilities. The significantly lower DPFP ratios under new GASB standards reflect use of a blended discount rate and the actuary's identification of a depletion date, projected in 2035. Positively, the two plans have begun pursuing reforms intended to ensure longer-term sustainability, although changes are likely to result in higher contributions over time. The current rating assumes the success of reform initiatives.
The current rating assumes the success of initiatives underway to provide structural changes sufficient to achieve affordable long-term sustainability of the plan. The NPL of the city's three pension plans represents 4.4% of fiscal 2016 market value. The city's fiscal 2014 OPEB unfunded accrued liability represents less than .5% of market value.
Series 2015 proceeds will refund outstanding commercial paper and fund public improvements, after which $437.3 million of authorization will remain from the city's 2006 and 2012 authorizations. Officials anticipate seeking additional authorization for up to $1 billion in November 2017. Fitch anticipates the city's debt burden will remain manageable based on a rapid debt amortization rate and strong long-term economic growth.
PROMINENT AND GROWING ECONOMY
Dallas is a center for technology, trade, finance and major medical centers; it also ranks as the top visitor and leisure destination in the state. The city serves as corporate headquarters for AT&T, Southwest Airlines, Texas Instruments, 7-Eleven, Inc., HollyFrontier Corp., Pizza Hut, Inc., and other large corporate concerns. Top employers in the education, government and health services sector lend stability to the city's employment base.
The city's role as a wholesale and retail trade center is enabled by a strong transportation network of airports, rail and interstate highways. The Dallas Area Rapid Transit (DART) provides the city with easy access to a highly skilled work force to support its growing technology, finance, business and medical service sectors. The city's August 2015 unemployment rate of 3.9% is below Texas (4.4%) and the U.S. average of 5.2% for the same period. Driven by professional service, construction, mining and trade sector growth, the city's employment base is in its sixth consecutive year of expansion; IHS Global Insights expects five-year average job growth of 2.1%.
Fiscal 2016 TAV of $100.3 billion is in its fourth year of growth following a moderate recessionary dip. Fitch anticipates maintenance of the growth trend in the near to mid-term based on residential and commercial projects underway and in the pipeline. Top taxpayers represent utility, air transportation, developers, real estate, manufacturing and retail industries. The tax base is without concentration.