Fitch Affirms Cleburne, TX's Ltd Tax Bonds & Downgrades Sales Tax Bonds on Criteria Change
Fitch Ratings has affirmed the following Cleburne, TX obligations at
'AA-':
--Issuer Default Rating (IDR);
--$32.4 million combination tax and revenue refunding bonds, series 2013;
--$8.1 million combination tax and revenue certificates of obligation
(COs), series 2013;
--$11 million general obligation (GO) refunding bonds, series 2008,
2010, and 2011;
--$24.9 million taxable GO bonds, series 2016.
In addition, Fitch has downgraded $13.4 million of outstanding Cleburne
4B Economic Development Corporation sales tax revenue bonds to 'A' from
'A+'.
The Rating Outlook is Stable.
SECURITY
The GOs, revenue bonds, and COs are payable from a property tax limited
to $2.50 per $100 of taxable value. The revenue bonds and COs are
additionally secured by a de minimis pledge of net utility system
revenues not to exceed $1,000.
The 4B corporation sales tax revenue bonds are secured by a first lien
on a 1/2 cent sales tax levied and collected city-wide for the purposes
of the corporation.
KEY RATING DRIVERS
The 'AA-' IDR, revenue bonds, COs, and GOs reflects the city's robust
financial cushion, moderate fixed-costs supporting solid expenditure
flexibility and manageable long-term liability burden.
The downgrade to 'A' on the sales tax revenue bonds reflects the
application of Fitch's revised criteria for U.S. state and local
governments, which was released on April 18, 2016, and a more focused
consideration of historical pledged revenue volatility and lenient
covenants.
Economic Resource Base
Cleburne is located 30 miles south of Fort Worth within the Barnett
Shale natural gas play. It is the seat of Johnson County ('AA+'/Outlook
Stable). The city's population growth has lagged the larger Dallas-Fort
Worth (DFW) metroplex, holding steady at roughly 30,000 for the last
decade.
Revenue Framework: 'aa' factor assessment
The city of Cleburne has realized strong revenue growth over the past 10
years, partly as a result of tax rate increases to offset declines in
value. The city still holds ample independent legal ability to raise
revenues. 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
moderate carrying costs. Fitch expects expenditures to grow in line with
revenues, but notes that debt service spending will increase materially
as the city begins to pay principal and interest on recently issued debt.
Long-Term Liability Burden: 'aa' factor assessment
The long-term liability burden remains moderate relative to the resource
base despite a recent issuance to fund the construction of a
minor-league baseball stadium. Fitch expects the burden to remain
moderate given modest tax-supported capital needs and a low net pension
liability.
Operating Performance: 'aaa' factor assessment
Fitch expects the city to demonstrate a high 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 capacity.
RATING SENSITIVITIES
Contingent Risks: The rating could be pressured if general fund revenues
are required to support the voter-approved baseball stadium in a manner
that dilutes its financial position or flexibility.
Sales Tax Leverage: Fitch does not expect the city to leverage pledged
revenues to the ABT based on use of residual revenues for operations of
capital projects. However, should revenues be leveraged to the ABT, the
bonds would likely be downgraded.
CREDIT PROFILE
The city lies over the Barnett Shale play, one of the largest natural
gas fields in the U.S. Weakness in valuations across the residential,
commercial, and industrial sectors has been the result of decreased
drilling activity due to depressed natural gas prices since 2009.
Taxpayer concentration remains elevated with the top 10 taxpayers making
up 21% of taxable assessed value (TAV) but has come down from a high 32%
in 2009 due to declining valuations of oil/gas firms. The top taxpayer
group is now diversified with construction, engineering, retail,
chemical and utility industry presence.
Potential for mid-term growth in the local economy is tied to the city's
proximity to the large DFW job market, as well as the effectiveness of
the economic development initiatives currently underway. Access to the
metroplex has been enhanced by the completion of a major arterial
highway that provides a direct link to Fort Worth. The DFW employment
base is extensive and the region is outperforming the nation in
post-recession job, income, and population growth.
Revenue Framework
Property taxes, charges for services, and sales and franchise taxes are
the predominant revenue sources for the general fund.
City officials have addressed declining revenue trends by raising the
tax rate, resulting in general fund revenue growth of a compound annual
growth rate (CAGR) of 4%, in excess of both U.S. economic performance
and CPI over the 10 years through 2014. Sales tax performance was
particularly weak post-recession, declining by a compound annual average
of 6% from 2008-2013. Fiscal 2014 collections were strong at 10% over
the prior year only to soften once again in the most recent results.
Management prudently assumes no growth in the sales tax revenue stream
for planning purposes given past volatility.
After a period of incremental increases, the city's ad valorem tax rate
will hold steady for the fourth consecutive year at $0.804 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.
Expenditure Framework
The city's largest spending area is public safety that makes up slightly
less than half of the general fund budget. Spending growth in that area
has trended in line with general fund expenditures, and Fitch believes
it will continue to do so.
Fitch does not anticipate pressure on service levels given the city's
stable population.
The city maintains adequate expenditure flexibility through strong
control of workforce costs and moderate carrying costs. Fiscal 2015
carrying costs were 18.2% but are expected to rise to over 20% when the
city begins paying debt service on recently issued debt.
Long-Term Liability Burden
The city's overall debt and net pension liability of $112.6 million
represents a moderately low 12% of personal income, primarily composed
of direct debt. Fitch does not anticipate a material change in the
city's long-term liability profile in the intermediate term; management
is in the process of finalizing a long-range infrastructure assessment
yet reports that additional tax-supported debt will likely be minimal
with the majority of general government needs addressed on a
pay-as-you-go basis.
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 $17.8 million, with fiduciary assets covering 79% 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 $10.2 million, with fiduciary assets covering 64%
of total pension liabilities using an adjusted 7% investment return
assumption. The Firemen's valuation date is Dec. 31, 2014. The combined
NPL of both plans represents 3% of personal income. Other
post-employment benefit (OPEB) requirements are modest and funded on a
pay-as-you-go basis.
The 2016 general obligation bonds (sold earlier this year) were issued
to fund a portion of the costs of construction of a baseball stadium.
The stadium represents the city's contribution to a $100 million
mixed-use project featuring retail and restaurants. The city has
executed formal agreements with respect to the construction and
operation of the stadium; the stadium is expected to be completed by
late spring 2017.
The land acquisition and stadium construction was approved by voters by
a wide margin in November 2015. Voters also approved an additional 1/2
cent sales tax levy that is allocated to the newly created Cleburne Type
A Economic Development Corporation. While the bonds were issued as
general obligations of the city, management plans to use the Type A 1/2
cent sales tax to pay principal and interest on the series 2016 bonds,
as well as for maintenance of the ballpark once completed. Using the
city's fiscal 2015 actual sales tax collections, the new 1/2 cent sales
tax would generate approximately $2.8 million or 1.3x (times) maximum
annual debt service (MADS) on the bonds.
Operating Performance
The city has maintained ample reserve levels and continued to do so
during their most recent economic slowdown. The last two years of
audited results included fund balance drawdowns 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 the operating
results for the fiscal year that ends Sept. 30 will be slightly better
than the $1.7 million budgeted deficit. Despite the drawdowns, reserves
are expected to provide a high level of fundamental financial
flexibility during an economic downturn.
Management has been proactive in light of the recent downturn by making
mid-year budget adjustments and deferring non-critical capital plans.
The fiscal 2017 proposed budget includes plan changes to lower the
city's TMRS contribution, equipment acquisition for street repair,
additional firefighting personnel, and no increase in water or
wastewater rates.
Sales and Use Tax Revenue Bonds
The sales tax revenue bonds are payable from a senior lien on the
Cleburne 4B Economic Development Corporation's 1/2 cent sales tax levied
on all transactions within the city. The 4B sales tax was approved by
voters in 2001 in perpetuity to fund projects and support operations
that exclusively benefit the city. Fitch believes that there are solid
growth prospects for this revenue stream, driven primarily by economic
development initiatives underway, but it will remain vulnerable to
fluctuations in natural gas prices.
Sales tax revenues have been volatile given exposure to the energy
sector by way of the Barnett Shale. The revenue stream has grown at a 5%
CAGR since collections began in March of 2002 but have stagnated or
declined since 2009 when natural gas prices began declining.
Debt service is mostly flat and MADS occurs in 2020. Current MADS
coverage is strong at 2.3x, but the city could further leverage the
revenue stream up to the lenient additional bonds test (ABT) of 1.25x
MADS. Given the volatility of the revenue stream and use of residual
revenues for operations of various economic development projects, Fitch
believes management will continue to use conservative growth assumptions
for capital planning and not leverage up to the ABT.
Fitch's stress analysis tests coverage levels using the largest actual
revenue decline in the review period, which was 26% from 2008-2013 in
Cleburne. Assuming issuance up to the ABT, pledged revenues would fall
below 1x coverage in the case of a 26% decline in collections. The
previous decline in sales tax revenues was exceptional in magnitude and
would not likely be repeated to equal extent given the waning influence
of energy prices on the local economy. In addition, Fitch expects the
city to maintain a debt service coverage cushion in excess of the 1.25x
ABT. If the city leverages to 1.25x MADS, the bonds would likely be
downgraded given the historical pledged revenue volatility.
Fitch does not view the pledged sales taxes as special revenues under
section 902(2)(B) of the bankruptcy code, which defines 'special excise
taxes imposed on particular activities or transactions' as special
revenues. Therefore, the rating would be capped by an Issuer Default
Rating (IDR) of the city per Fitch's rating criteria.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's
applicable criteria specified below, this action was informed by
information from Lumesis, the Municipal Advisory Council of Texas, and
InvestorTools.
Applicable Criteria
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
https://www.fitchratings.com/site/re/879478
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