Fitch Ratings assigns its ''AA+'' rating to the City of Sugar Land, Texas'' (the city) $15.18 million general obligation (GO) refunding bonds, series 2009 and $17.81 million combination tax and revenue certificates of obligation (COs), series 2009.
Additionally, Fitch affirms its ''AA+'' rating on the city''s outstanding $78 million GO bonds and $35.5 million COs. The bonds and certificates are to be sold via negotiation as early as Oct. 22, 2009. The Rating Outlook is Stable.
The bonds and certificates are direct obligations of the city, payable from a limited ad valorem tax levied on all taxable property in the city. The certificates are secured further by a limited pledge of a subordinate lien on certain revenues of the water and wastewater system of the city. Proceeds of the bonds will be used to refund outstanding obligations for savings, and the CO proceeds will be used for various municipal improvements.
The ''AA+'' rating reflects the city''s solid tax base, consistently strong financial performance, heavy reliance on sales taxes, relatively high wealth levels, and overall high debt burden. The rating further reflects the limited tax nature of the pledge and the ample level of revenue raising capacity under the limitation. The city''s dependence on the economically sensitive sales tax is somewhat mitigated by its sizeable operating reserves and low property tax rate. Although the city''s most recent capital plan has grown beyond prior CIP levels, the city''s ongoing and anticipated tax base growth as well as its rapid amortization schedule mitigates concerns. The city''s recent tax base expansion and positive prospects for continued growth is fostered by a number of transportation improvements that facilitate access to Houston.
Located approximately 20 miles southwest of Houston in Fort Bend County, Sugar Land is a mixed residential and commercial community of nearly 81,000. Expansion of U.S. Highway 59, which is the direct route from Sugar Land to downtown Houston, along with other roadway improvements in and around the city, have spurred healthy commercial and residential development activity in the last two years. City officials report that transportation improvements over the past decade, including the U.S. 59 expansion, have approximated $500 million. The benefit is evidenced in building permit totals, which set records for both residential ($155 million) and commercial ($223 million) properties in fiscal 2007. Building permits have slowed since fiscal 2007, but continue to reflect healthy construction activity.
Sales taxes represent the largest share of general fund operating support, typically constituting between 55%-60% of general fund operating revenues. For fiscal 2008, sales tax revenue growth slowed to practically level collections compared to fiscal 2007 but are estimated to increase 4% in fiscal 2009. Fitch believes the city''s extensive financial planning efforts and conservative budgeting practices, as well as allocation of a portion of sales tax revenue to non-recurring expenses, mitigate much of the associated risk.
The general fund has recorded surpluses in each of the past five fiscal years, building up reserves in excess of the city''s three month reserve policy. Unaudited results for fiscal 2009 point to an estimated $3.5 million increase to fund balance closing the year, which will add to the $23.3 million unreserved general fund balance reported at fiscal 2008 year-end. The fiscal 2010 budget assumes flat sales tax receipts and includes about $3.5 million general fund balance drawdown for one time capital outlays. The ending general fund reserves are budgeted to remain well within the city''s financial policy of maintaining a minimum reserve of three months. Fitch views positively the city''s conservative budgeting practices, which usually generate actual results better than original projections. The fiscal 2010 total property tax rate is $0.30 per $100 of taxable assessed value (TAV). Sugar Land''s tax rate has declined over the past decade and remains low.
Sugar Land''s high overall debt levels are mitigated by a rapid amortization schedule and wealth levels that exceed state and national averages. Debt levels have increased with the annexation of several municipal utility districts (MUDs) and the assumption of their debt, but the city also has benefited from the increase in the tax base that accompanied these annexations.
The city''s population expanded more than 24% since the 2000 census, and TAV has climbed by an average of more than 9% annually over the past five fiscal years. Fitch anticipates ongoing developments like the recently opened Town Square (which includes a new city hall), Lake Pointe Town Center and Telfair will produce continued TAV growth over the near- and intermediate-term. Unemployment rates remain lower than regional, state and national averages.
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