Fitch Rates Hays County, TX Limited Tax Bonds 'AA'; Outlook Stable
OREANDA-NEWS. Fitch Ratings assigns an 'AA' rating to the following Hays County, Texas' (the county) bonds:
--$47.2 million limited tax (LT) refunding bonds, series 2016.
The bonds are scheduled to sell during the week of February 22 via negotiated sale. The bond proceeds will be used to refund outstanding debt for interest cost savings.
Fitch also affirms the 'AA' rating on the county's outstanding $193.9 million limited tax bonds and $119.7 million unlimited tax (ULT) bonds (pre-refunding).
The Rating Outlook is Stable.
The limited tax bonds are payable from a limited ad valorem tax pledge of up to $0.80 per $100 taxable assessed valuation (TAV) for operations and maintenance and debt service. The unlimited tax bonds are payable from an unlimited property tax levy.
KEY RATING DRIVERS
LARGE FINANCIAL CUSHION: The county's financial position is solid, aided by prudent financial management and conservative budgeting. High reserve levels and ample liquidity have enabled recent pay-go spending on capital improvements.
NOTABLE SALES TAX TRENDS: Sales tax revenues, one of the county's main revenue sources, have shown a solid growth trend since a recessionary dip in fiscal 2009.
HIGH DEBT LEVELS: The county's debt profile, characterized by high overall debt levels, is a credit concern. However, carrying costs remain moderate and principal amortization is average.
STRONG SERVICE AREA: The county benefits from its proximity to the Austin area's diverse economy and its position along a major transportation corridor. The availability of affordable land continues to fuel TAV growth, which stalled only moderately during the recession.
RATING PARITY: The LT bonds and notes are rated on par with the ULT bonds due to the significant rate-raising flexibility under the rate limitation supporting the LT bonds. The county currently levies a combined $0.423 operations and debt service tax rate, well below the $0.80 limit.
CONTINUED DEBT PRESSURES: Increasing debt beyond current expectations without continued tax base growth and stability could pressure the rating.
RAPID GROWTH TRANSFORMING TAX BASE
Situated between Austin and San Antonio, Hays County has been one of the fastest growing counties in the state and nation. With a current estimate of about 198,000, population has grown over 26% since 2010. The county encompasses roughly 678 square miles and includes the city of San Marcos, the county seat and a commercial center. A major highway, Interstate 35, cuts through the eastern portion of the county.
Wealth indicators are mixed but county unemployment indicators are positive, characterized by rapid growth in total employment and improvement in the December 2015 unemployment rate to 3.1%. The unemployment rate is consistently below the state and national averages.
The composition of the county tax base is being quickly transformed from rural to urban. Residential construction increased very rapidly before the downturn as housing pressures in Austin expanded development southward while growth in San Marcos pushed development northward. Commercial development promptly followed the population growth, particularly along the IH-35 corridor, with corporate investment in the community ranging from retail centers to health care.
San Marcos is home to a large and popular factory outlet mall and Texas State University (estimated enrollment of 35,000). The latter is expected to continue to grow rapidly in the next few years, facilitated somewhat by its recent transition to a Division 1 athletic program. TAV has ramped up steadily after declining by a modest 0.6% in fiscal 2011, posting a compound annual average growth rate of 5.2% through fiscal 2016. Over 76% of fiscal 2016's 6.4% TAV gain is due to new construction; TAV currently totals $14.1 billion.
STRONG FINANCIAL PROFILE
The county's financial position and conservative budgeting practices are key credit strengths. The county has consistently posted unreserved general fund balances well in excess of its stated 30% minimum policy goal, which allowed significant pay-go spending on capital improvements in recent years. The fiscal 2014 audit posted a $2.6 million operating surplus after transfers (equal to 4% of spending), aided by a large 9% gain in sales tax receipts. The resulting unrestricted fund balance grew to $37.5 million, equal to a high 59% of expenditures and transfers out.
Sales tax receipts have grown by a strong compound average annual rate of 8% since fiscal 2009. County officials attribute the rapid sales tax growth to similarly paced population trends and strong retail sales at the county's large outlet mall in San Marcos. The county conservatively budgets flat receipts or less for this revenue source despite recent surges, which Fitch views positively. Sales taxes account for the second largest revenue source at 22% of general fund revenues in fiscal 2014, exceeded only by property taxes (56%).
The county's liquidity position is also strong, with cash and investments at the end of fiscal 2014 totaling $39.5 million, sufficient to cover more than 7.5 months of operating costs. Officials budgeted a modest drawdown of fund balance in the fiscal 2015 budget based on a conservative 5% decline in sales tax receipts; however, aided by 8% sales tax revenue growth, unaudited results point to a $4.3 million (6% of spending) net surplus.
The fiscal 2016 budget includes the use of $1.4 million (2% of spending) of fund balance but is based on a conservative projection of a $1 million (6.8%) decline in sales tax receipts. Year-to-date sales tax revenues are up by 7.8%, leading management to expect balanced operations or better for fiscal 2016.
HIGH DEBT, MODERATE CARRYING COSTS
The county's large debt load represents a key credit concern. Overall debt levels have trended down modestly but remain at about $7,767 per capita and 8.9% of market value, which primarily reflects debt from overlapping school districts and the city of San Marcos. The county's plan to issue $28 million of ULT road bonds by fall 2016 will exhaust the $208 million authorization approved by voters in 2008. . A jail facilities study is also underway to help the county plan for increasing its reduced detention capacity.
Net of $3.7 million in Texas Department of Transportation (TX DoT) reimbursements for its pass-through toll revenue and LT bonds, fiscal 2014 debt service totaled $20 million or 15.4% of governmental spending. Fiscal 2015 reimbursements increased to $5 million as additional road projects are completed and deemed eligible for TX DoT funds. The county's goal is to maintain the currently modest debt service tax rate of $0.125 per $100 AV. The aggregate principal payout rate for LT and ULT bonds is about average with 56% of principal retired in 10 years.
The county contributes to the Texas County and District Retirement System (TCDRS) pension plan and provides retiree health coverage as a post-employment benefit (OPEB). The county typically makes 100% of its annual required contribution for its pension. As of Dec. 31, 2013, the fiduciary assets of the statewide TCDRS pension plan covered 84.6% of pension liabilities (approximately 76% based on a more conservative 7% investment rate assumption). Net of TX DoT pass-through toll reimbursements, combined debt service, pension and OPEB costs in fiscal 2014 totaled a moderate 19% of governmental spending.