Fitch Ratings has assigned a 'AAA' rating to the following city of
Arlington, Texas (Arlington) obligations:
--$32.5 million permanent improvement (PIB) bonds series 2016A;
--$14.5 million combination tax and revenue certificates of obligation
series 2016B;
--$14.2 million combination tax and revenue certificates of obligation
series 2016C.
Series 2016A bonds and 2016B certificates of obligation (COs) are
scheduled for a competitive sale on May 10. Series 2016C COs are
scheduled for a competitive sale on June 7. The Series 2016A permanent
improvement bonds will fund parks, public works, and transportation
projects. The series 2016B combination tax and revenue certificates of
obligation (COs) will fund city golf courses and a landfill project. The
taxable COs, series 2016C, will fund the city's self-insurance and risk
management program.
In addition, Fitch takes the following rating actions:
--Issuer Default Rating (IDR) affirmed at 'AAA';
--$321.6 million in outstanding GOs and COs affirmed at 'AAA';
--$175 million in outstanding special tax bonds, series 2008 and 2009
upgraded to 'AA+' from 'A+'.
The Rating Outlook is Stable.
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SECURITY
The bonds and COs are payable by an ad valorem tax levied on all taxable
property within the city, limited to $2.50 per $100 taxable assessed
valuation (TAV). COs are also secured by a pledge of limited surplus
revenues ($1,000) of the city's water and waste water system.
The special tax bonds are secured by a first lien on pledged special
taxes and pledged accounts. The pledged taxes consist of a citywide 0.5%
sales and use tax, a 5% tax on short-term motor vehicle rentals, and a
2% hotel occupancy tax. The bonds are additionally secured by amounts on
deposit in the pledged tax-exempt accounts.
KEY RATING DRIVERS
The 'AAA' Issuer Default and General Obligation ratings reflect Fitch's
expectation for the city of Arlington to maintain healthy financial
flexibility throughout economic cycles, consistent with a history of
strong operating performance and robust reserves. The city's strong
financial profile reflects a diverse and stable revenue base, modest
expenditure growth and a demonstrated ability to reduce expenditures
during economic downturns. Fitch expects long-term liabilities to remain
moderate based on manageable capital needs and rapid amortization.
Solid Coverage Cushion: The upgrade of the special tax bonds to 'AA+'
from 'A+' reflects application of Fitch's revised criteria for U.S.
state and local government credits, which was released on April 18.
Under the new criteria, Fitch considers debt service coverage in light
of the sensitivity of the dedicated revenue stream to downturns. Fitch
expects revenues pledged to the city of Arlington's series 2008 and 2009
special tax bonds to continue to grow at a solid pace and for the
coverage cushion to remain strong. The coverage provides ample cushion
to absorb a downturn in expected revenues in a moderate recession. The
'AA+' rating also reflects a closed lien.
Revenue Framework: 'aaa' factor assessment
Fitch expects Arlington to realize continued sound revenue growth based
on economic development currently underway and the city's participation
in the expanding regional economy. Revenue raising capacity is strong,
supported by ample tax rate capacity.
Expenditure Framework: 'aa' factor assessment
The city of Arlington is mature with a modest pace of spending. The
city's carrying costs are elevated, reflecting a rapid principal
amortization schedule. The city has demonstrated the flexibility and
willingness to cut salary and other costs during economic downturns.
Long-Term Liability Burden: 'aa' factor assessment
Fitch anticipates the city of Arlington's long-term liability burden to
remain moderate based on a manageable capital plan, rapid amortization,
and well-funded pensions. Arlington's debt and unfunded net liabilities
are 10.3% of personal income.
Operating Performance: 'aaa' factor assessment
The city of Arlington maintains bountiful reserves. Operations respond
well to stress, consistent with the city's history of balanced
operations and reserve adequacy throughout economic cycles.
RATING SENSITIVITIES
Financial Flexibility: The IDR and GO rating is sensitive to maintenance
of strong financial flexibility.
Ample Coverage: The special tax rating is sensitive to stable pledged
revenue trends and maintenance of an ample cushion for coverage.
CREDIT PROFILE
Arlington is located in the center of the DFW metroplex (about 20 miles
west of Dallas) with an estimated 2016 population of 384,460. The city
is mature with a diverse tax base. Low unemployment reflects historic
growth in the local and regional job market.
The diverse Arlington economy includes manufacturing, distribution, and
retail trade, and benefits from its proximity to the DFW International
Airport and well-developed highway transportation network. Tourism is a
significant component of the local economy. Arlington's tax base is
broad and TAV has realized five consecutive years of growth averaging
2.5% subsequent to a recessionary dip in fiscal 2011.
Higher education rounds out the economic base with the presence of The
University of Texas-Arlington (UTA), a growing 38,600 enrollment campus
that continues to invest in facility improvements. Other top employers
include the Arlington Independent School District, General Motors and GM
Financial, Texas Health Resources, Six Flags Over Texas, JP Morgan Chase
and the Texas Rangers Baseball Club. Notable near term development
includes the $1.4 billion GM plant expansion and DR Horton relocation.
Longer term, Fitch anticipates that the city's pivotal role in the
regional economy will continue to expand the city's employment and tax
base. Although city build-out is mature with respect to residential
property, Fitch anticipates significant ongoing commercial development.
Revenue Framework
Arlington's fiscal 2016 taxable assessed valuation (TAV) increased 3.4%,
above the 3.1% five-year CAGR. Property taxes make up 37% of Arlington's
general fund revenues, followed by sales tax revenues at 26%. Fiscal
2015 and 2016 year-to-date sales tax revenues are trending at growth
rates moderately above the five-year CAGR of 2.8%. Fitch expects
increases in the city's property and sales tax bases to mirror the
steadily expanding commercial, industrial and retail economic base in
the city. Fitch considers the city to realize ongoing buildout in these
sectors through the medium and long-term horizons.
The city of Arlington's fiscal 2016 tax rate, $0.648, provides ample tax
rate capacity below the statutory cap of $2.50 per $100 of TAV.
Expenditure Framework
Public safety accounts for 65% of general fund expenditures. The pace of
spending is likely to remain in line with or below revenue growth. Fitch
does not anticipate pressure on service levels given the relative
maturity of the city's residential tax base.
Expenditure flexibility is derived from management's strong control over
headcount and lack of collective bargaining, which help to mitigate the
constraints on flexibility of elevated carrying costs, 27.2% of fiscal
2015 governmental spending. Arlington's carrying costs reflect a 10-year
amortization rate of 76.3%.
Long-Term Liability Burden
Fitch anticipates Arlington's long term liabilities, currently 10.3% of
personal income to remain moderate given manageable capital needs and
well-funded pensions. Voters overwhelmingly approved $236 million in
general obligation (GO) bonds in November 2014. Authorization of $226
remains subsequent to this PIB issuance. Arlington's capital plan
includes $212 million of general governmental debt issuance over the
next four years, compared to amortization of $154.2 million in tax
supported debt during the same period.
The city of Arlington pensions are provided through the Texas Municipal
Retirement System, an agent multiple-employer defined benefit plan.
Under GASB Statement 68, the city reports a fiscal 2015 net pension
liability (NPL) of $104.6 million, with fiduciary assets covering 90% of
total pension liabilities at the plan's 7% investment return assumption.
The NPL of the plan represents a very small 0.4% of the city's fiscal
2015 market value. The city administers a single-employer retiree health
care plan with an unfunded liability representing less than 1/2 of 1% of
fiscal 2015 market value.
Operating Performance
The city is projected to maintain a solid financial position through an
economic downturn, aided by ample revenue and expenditure flexibility.
The city maintains a 15% minimum general fund balance policy. Included
therein are a one-month working capital reserve, an unallocated reserve
for emergencies, and a business continuity reserve that provides funding
for operational needs as needed.
In addition, the city maintains a community foundation dedicated to
cultural/quality of life projects and neighborhood revitalization. The
endowment is funded primarily from natural gas lease and royalty
payments and could be used for general purposes, if needed, with
supermajority approval of the city council. The endowment has grown
substantially since its incorporation in 2007 with a current balance of
$51.9 million subsequent to the expenditure of $50 million of the fund's
corpus during fiscal 2016 in a strategic partnership with the Texas
Rangers sports franchise to develop local hotel and event space. The
city anticipates rebuilding the reserve over 15 years.
Dedicated Revenue Stream Details
Arlington's series 2008 and 2009 special tax bond pledged revenues
consist primarily of a citywide .5% sales and use tax rate, as well as a
5% tax on motor vehicle rentals and 2% hotel occupancy tax. Sales tax
revenues and combined motor vehicle and hotel tax revenues contributed
88% and 9.3% respectively of the $31.9 million in fiscal 2015 pledged
revenues, net of naming rights and rents applicable to the recently
defeased series 2005C taxable bonds.
Revenue Stream Sensitivity
A fiscal 2006 through 2015 pledged revenue CAGR, net of naming rights
and rents, of 2.8% reflects sound economic activity. Pledged revenues
declined just once, 3.5%% in 2009, followed by a strong rebound. Growth
prospects remain strong given the central location of Arlington within
the DFW metroplex.
Fiscal 2015 pledged revenues, net of naming rights and rent, covered
debt service 1.72x and cover maximum annual debt service (2025) 1.40x.
Current coverage levels provide a strong cushion against revenue decline
due to changing economic conditions or other unanticipated events.
Pledged revenues would not be adversely affected by a 1% national GDP
decline. Ample coverage remains when considering the stress Fitch
applies using the largest single year of historical revenue decline
(3.5% in fiscal 2009).
The city continues to redeem the outstanding debt ahead of schedule
based on strong sales tax performance and anticipates final payoff in
August 2021, ahead of the current 2028 and original 2035 maturity dates.
No new money debt secured by the pledged revenues may be issued under
the indenture. The master ordinance limits the use of taxes to pay debt
service, replenish reserve funds, or redeem bonds since the project is
complete.
Issuing Entity Exposure
The special tax bond rating is limited by the city of Arlington's 'AAA'
IDR.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478
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Dodd-Frank Rating Information Disclosure Form
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1003326
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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