Fitch Ratings has assigned an 'AA-' rating to the following Cleburne,
Texas (the city) bonds:
--$24,915,000 general obligation (GO) bonds, taxable series 2016.
The bonds are scheduled for sale via negotiation the week of Jan. 11 to
acquire land and construct a minor league baseball stadium and
associated infrastructure.
Fitch has affirmed the 'AA-' rating on the following outstanding
obligations of the city:
--$34.9 million combination tax and revenue refunding bonds, series 2013;
--$8.3 million combination tax and revenue certificates of obligation
(COs), series 2013;
--$12.7 million GO refunding bonds, series 2008, 2010, and 2011.
The Rating Outlook is Stable.
SECURITY
The GO, 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.
KEY RATING DRIVERS
HEALTHY FINANCIAL PERFORMANCE: Financial management is sound, reflected
in a willingness to raise revenues, adjust spending, and budget
conservatively during periods of economic pressure to produce surpluses
and enhance the city's fund balance position.
WELL-LOCATED ECONOMY: The city is situated near the broad labor market
of the Dallas-Fort Worth (DFW) metropolitan statistical area (MSA),
access to which has been enhanced by a major highway project. Job growth
has somewhat stagnated recently, yet improvement is likely in the near-
to intermediate-term.
TAX BASE IMPROVEMENT: The city's tax base has returned to growth after a
period of contraction due to a decline in drilling activity in the
Barnett Shale, a large natural gas formation in the area. Formerly very
high industry concentration in the oil and gas sector has been tempered
as a result, and modest tax base growth is expected to continue given
residential and commercial development underway.
MANAGEABLE DEBT BURDEN: Debt levels are moderate and outstanding
tax-supported debt amortizes rapidly. Additional tax-supported debt over
the near-to-medium term is plausible given the prospects for continuing
population growth that would drive infrastructure investment.
RATING SENSITIVITIES
STRONG BUDGET PERFORMANCE: A continuing trend of strong financial
performance and maintenance of a sound fiscal cushion could lead to
positive rating momentum.
CONTINGENT RISKS: The rating could be pressured if general fund revenues
are used to support the voter-approved baseball stadium in a manner that
dilutes its financial position or flexibility.
CREDIT PROFILE
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 estimated 2014 population is approximately 30,000,
reflecting 1.2% average annual growth in the last decade.
SMALL BUT EXPANDING ECONOMY IN THE DFW MSA
Principal industries in the city include manufacturing, distribution,
and agribusiness. The city's industrial base is diversified across
building and construction materials, power generation, chemicals, oil
and gas equipment, transportation, and distribution services. Cleburne's
unemployment rate typically trends lower than national averages, yet
sluggish growth has recently tempered improvement in the city's rate,
which at 4.9% as of October 2015 is slightly above the state (4.5%) and
nation (4.8%).
Potential for near-term growth in the local economy is tied to the
city's proximity to the large DFW job market. Access 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.
TAV LOSSES SUBSIDE
The city lies over the Barnett Shale play, one of the largest natural
gas fields in the U.S. Recent weakness in valuations across the
residential, commercial, and industrial sectors was a result of
decreased drilling activity due to depressed natural gas prices. The
cumulative contraction in the tax base from 2011-2015 was a moderate
12%. The tax base returned to growth in fiscal 2016 marking a solid 4.3%
increase. 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.
RETURN TO REVENUE GROWTH
Property taxes, charges for services, and sales taxes are the
predominant revenue sources for the general fund. City officials
confronted the declining TAV trend by incrementally raising the tax
rate, and there remains ample room under the cap. Sales tax performance
was particularly weak post-recession, declining by a compound annual
average of 6% from 2008-2013. Fiscal 2014 saw a strong year of growth at
10% over the prior year, and unaudited fiscal 2015 results show a 1.9%
increase over the prior year. Management prudently assumes no growth in
the sales tax revenue stream for planning purposes given past
volatility, and Fitch expects flat to modest growth in the near to
mid-term.
Fiscal 2014 concluded with a general fund unrestricted fund balance of
$15.2 million or 43% of spending, after a $4.4 million transfer out
primarily for future road maintenance. The year ending Sept. 30, 2015
will likely report similar results, closing out the year with a $1
million draw on fund balance after a $3 million transfer for future road
maintenance. Management notes the positive operating results are due to
strong revenues and an underspending of the budget.
At the end of fiscal 2015 reserves are comfortably above the city's
formal policy that requires an unrestricted fund balance at or above 90
days (25%) of expenditures. The fiscal 2016 adopted budget remains
largely unchanged from prior years and management reports the likelihood
of using some set-aside fund balance for capital throughout the year.
MODERATE DEBT BURDEN THAT AMORTIZES SWIFTLY
The city's overall debt load increases with this issuance to a still
moderate $2,866 per capita and 3.9% of market value. Carrying charges
for debt service are affordable at 12% of governmental expenditures in
fiscal 2014. Amortization of debt is rapid with 76% of principal retired
within 10 years. 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.
BONDS ISSUED FOR ECONOMIC DEVELOPMENT PROJECT
The bonds proposed for issuance will fund the purchase of land for the
construction of a multi-use baseball stadium. The stadium represents the
city's contribution to a $100 million mixed-use project featuring retail
and restaurants. The city expects to execute formal agreements with
respect to the construction and operation of the stadium on Jan. 12th
and is in the process of forming a baseball team with an investor group
led by professional sports managers.
The land acquisition and stadium construction was approved by voters by
a wide margin in November 2015. Voters also approved a 1/2 cent sales
tax levy that will be allocated to the newly created Cleburne Type A
Economic Development Corporation (the corporation). The city plans to
use the 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 maximum
annual debt service (MADS) on the bonds. The corporation and the city
have a formal agreement in place that requires principal and interest
payments to occur before the 4A sales tax revenue can be used for any
other purpose.
The basis for the rating on the bonds is the city's general obligation
and levy of property taxes up to the $2.50 per $100 TAV cap to pay debt
service. The city's current tax rate of $0.804 provides considerable
cushion to offset potential declines in sales tax collections.
Additionally, management can raise up to 8% more in operating revenue
over the prior year without voter approval to subsidize stadium
operations, which represents about $1 million using 2014 audited figures.
PENSION FUNDING LEVELS IMPROVING
City employees participate in one of two pension programs: the Texas
Municipal Retirement System (TMRS), an agent multiple-employer plan
which serves the majority of city staff, or the city-sponsored Firemen's
Relief & Retirement plan. TMRS' funding levels have improved steadily
following a system-wide restructuring of actuarial assumptions and
internal fund accounting, reaching a 74% funded level as of Jan. 1, 2014
using the system's 7% investment return rate. The city's annual
contributions to TMRS reached full funding as of fiscal 2013.
The firefighter's plan funded position was at 54.4% using a 7%
investment return rate assumption, and its unfunded actuarial accrued
liability totaled $32.7 million or 1.6% of market value. Additionally,
the plan utilizes an open amortization period that could delay full
amortization and/or increase future contribution requirements. The
combined actuarial required contributions (ARCs) for both plans consumed
a manageable 9.6% of government spending in fiscal 2014.
Retirees and their dependents can purchase health coverage from a city
plan at the group rate, and receive city-paid coverage for up to five
years with 25 years of service. The city funds the costs of these
benefits on a pay-go basis. The plans' fiscal 2014 unfunded actuarial
accrued liability totaled $5.8 million or a nominal 0.2% of market
value. Combined fixed-costs for debt service, pension ARC, and other
post-employment benefit (OPEB) pay-go consumed a slightly elevated 22.2%
of fiscal 2014 governmental expenditures.
Additional information is available at 'www.fitchratings.com'.
Fitch recently published an exposure draft of state and local government
tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating
Criteria, dated Sept. 10, 2015). The draft includes a number of proposed
revisions to existing criteria. If applied in the proposed form, Fitch
estimates the revised criteria would result in changes to fewer than 10%
of existing tax-supported ratings. Fitch expects that final criteria
will be approved and published by Jan. 20, 2016. Once approved, the
criteria will be applied immediately to any new issue and surveillance
rating review. Fitch anticipates the criteria to be applied to all
ratings that fall under the criteria within a 12-month period from the
final approval date.
In addition to the sources of information identified in Fitch's
applicable criteria specified below, this action was informed by
information from CreditScope, IHS Global Insight, and Municipal Advisory
Council of Texas.
Applicable Criteria
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=997559
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=997559
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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