Fitch Ratings has affirmed at 'AA' the following Victoria, TX's bonds:
--$28.4 million of outstanding general obligation bonds, series 2004, 2005, and 2010;
--$55.9 million of outstanding certificates of obligation (COs), series 2003, 2005, 2006, 2007, 2009A, and 2009B;
--$9.7 million of outstanding pass-through toll revenue and limited tax bonds, series 2011;
--$4.7 million of Victoria Sales Tax Development Corporation (STDC) sales tax revenue bonds, series 2007;
The Rating Outlook is Stable.
SECURITY
The GO bonds, COs, and pass-through toll revenue bonds are each secured by a limited ad valorem tax pledge levied against all taxable property in the city, limited to the constitutional tax rate of $2.50 per $100 of taxable assessed value (TAV).
The COs are additionally secured by a limited (nominal) pledge of surplus net revenues of the city's water and wastewater utility system.
The pass-through toll revenue bonds are additionally secured and primarily payable from payments received by the city pursuant to a pass-through toll agreement between the city and the Texas Department of Transportation (TXDoT). The payments are subject to appropriation by the Texas Legislature, but the bonds carry the city's LTGO backstop pledge and the rating is based on this pledge.
The Victoria Sales Tax Development Corporation (the corporation) sales tax revenue bonds are secured by a dedicated 0.5% sales tax collected within the boundaries of the city of Victoria, collected on behalf of the corporation.
KEY RATING DRIVERS
STABLE ECONOMY & TAX BASE: The city benefits from its position as an important regional service and supply center, as well as a fairly stable housing market with continuing development. TAV advanced 2.5% in fiscal 2012 and additional growth is expected in 2013.
GOOD FINANCIAL POSITION: The city maintains healthy operating reserves and ample liquidity supported by responsive financial management that has been willing to cut spending to largely maintain structural balance.
SURGING SALES TAX RECEIPTS: Sales tax revenues, one of the city's main revenue sources, exhibited very strong gains in fiscal 2011 after a period of contraction and are continuing to outperform prior-year receipts in the 2012 budget.
STRONG DEBT SERVICE COVERAGE: Debt service coverage of the Victoria Sales Tax Development Corporation bonds remains very strong at 6.9 times (x) maximum annual debt service (MADS) in fiscal 2011.
HIGH DEBT RATIOS: Overall debt levels are moderate to high and are expected to remain so as the city implements a sizeable but manageable capital plan. Annual debt service costs consume an above average portion of the budget, but this is in part due to rapid amortization.
AVERAGE SOCIOECONOMIC INDICES: Wealth indicators are slightly below average while the city's employment picture is positive.
CREDIT PROFILE
INLAND PORT CITY WITH MODEST BUT DIVERSE ECONOMY
Victoria is located 30 miles inland from the Gulf of Mexico and equidistant between the cities of Houston, San Antonio, and Corpus Christi. A barge canal connects the city to the gulf intra-coastal waterway, allowing access to ports on the Gulf and Atlantic coasts, as well as destinations on the Mississippi River. The city has emerged as a regional service and supply center for heavy industry, including petrochemical and plastics manufacturing. The development of the service, retail, and health care sectors has complemented the industrial base and added a measure of diversity and stability to the local economy.
The city serves as a regional center for trade. A recent uptick in sales activity, apparent by the sharp climb in sales tax receipts in 2011 and 2012, has been in part associated with increased economic activity from oil/gas drilling in the nearby Eagle Ford shale, a large natural gas formation spanning the southern portion of Texas and edging into Victoria County.
EXPANDING TAX BASE
The city's tax base expanded 2.5% in fiscal 2012 to $3.3 billion as a result of continuing commercial and residential development. In general, tax base growth has remained steady -- absent a marginal decline last year -- due to a stable housing market, fairly diverse economy, and continuing building activity. City officials anticipate similar TAV growth of at least 2% in fiscal 2013, which Fitch views as reasonable.
AVERAGE SOCIECONOMIC PROFILE
Total employment in the city grew 3.6% from 2009 - 2011, a rate of growth that mirrors the state and outpaces the nation. The most recent Apr. 2012 unemployment rate (not seasonally adjusted) improved to 5.1% from 6.3% on a year-over-year basis, which sits comfortably below the state (6.5%) and nation (7.7%), although much of the improvement was due to a 1% contraction in the labor force. Top employers are in government and manufacturing, and management expects the expansion of a Caterpillar plant and new hospital to add additional jobs over the next few years.
Income levels are slightly below the state and national averages, and the city's per capita market value, also a measure of wealth, is average at $60,000. Population growth has been generally flat in the past decade, with the most recent 2010 census count of 62,592 up 3% from the 2000 census.
STABLE FINANCIAL PROFILE; SALES TAX RECEIPTS STRENGTHENING
City finances have remained stable in recent years despite pressure from declining operating revenue, particularly sales taxes, which provide over 1/3 of operating revenues. Sales tax receipts fell by a cumulative 12% from fiscal years 2008 to 2010, prompting officials to reduce spending to maintain structural balance; budget measures during this period included a hiring and pay freeze, delaying certain pay-as-you-go capital projects, and a hold on certain maintenance and operational discretionary budgets.
Although the city incurred a modest $1.2 million operating deficit after transfers (3% of spending) in 2010, a 23% surge in sales tax receipts, together with continued budget controls, a marginal increase to the tax rate, and conservative assumptions, yielded a $2.1 million operating surplus after transfers in fiscal 2011. The unrestricted general fund balance (the sum of committed, assigned, and unassigned per GASB 54) improved to a robust 40% of spending ($15.9 million) at the end of the year. Liquidity in the general fund remained solid and in-line with prior years at 2.3x current liabilities.
SURPLUS EXPECTED AGAIN IN FISCAL 2012
The adopted fiscal 2012 general fund budget of $43.6 million is up 4.7% from the prior year budget. The original budget forecast a $1.2 million net operating deficit after transfers due to $2.3 million of non-recurring and capital expenditures and a 3% pay raise for all staff; however, with sales tax revenues again up considerably -- $2.4 million, or 26% above both the budget and the same period last year through May -- and year-to-date spending lower than projected, officials presently expect an increase of $2.8 million in available fund balance. The forecasted 2012 unrestricted fund balance is expected to nearly double the city's 20% policy minimum.
STRONG DEBT SERVICE COVERAGE OF SALES TAX BONDS
The sales tax revenue bonds are secured by the city's sales tax development corporation's 0.5% sales tax -- which is separate from the 1.0% sales tax accruing to the general fund -- and is dedicated to promote and provide for economic development within the city, mainly through the funding of infrastructure projects. The corporation is a nonprofit entity whose board of directors is appointed by the city council.
Pledged sales taxes declined in line with general fund sales tax receipts mentioned above, but debt service coverage has remained strong at 5.6x MADS in fiscal 2010 and improved to 6.8x MADS coverage in fiscal 2011 due to a 23% jump in pledged revenues. Year-to-date performance of fiscal 2012 pledged revenues suggests 7.1x debt service coverage. In addition to strong coverage, the bonds have a relatively short maturity (bonds retired in 2017), no further leveraging is planned, and annual debt service is level at about $1.1 million. Excess sales tax revenues, after payment of debt service, are used for capital projects.
MIXED DEBT PROFILE
Overall debt ratios are moderate to high at $3,872 per capita and 6.6% of full market value and the higher debt ratios largely reflect the debt of an overlapping school district. The city presently has no general obligation (GO) debt authorization, and has no plans to issue additional tax-supported debt for at least the next two years. Funding of the $135 million capital program through fiscal 2017 will largely come from net STDC sales tax revenues, utility system revenue bonds, and GO bond proceeds on hand.
The annual debt burden on the budget, inclusive of GO and sales tax bonds, was a high 18% of general fund and debt expenditures in fiscal 2011 but this is in part due to the rapid pace of amortization at 65% retired in 10 years. Beginning in fiscal 2014, a portion of the annual debt cost is expected to be offset by state transportation aid for the city's outstanding series of LTGO pass-through toll revenue bonds.
ADEQUATE PENSION & OPEB FUNDING
The city fully funds its annual required pension contribution and pay-go contribution for other-post employment benefits (OPEB), which when combined consumed an above average 12% of fiscal 2011 general fund expenditures. Pensions are provided through the Texas Municipal Retirement System (TMRS), an agent multiple-employer plan. Recent system-level structural and actuarial changes to TMRS' reporting of its internal fund balances produced a significant 19% drop in Victoria's unfunded actuarial accrued liability (UAAL) to $36.9 million, which equals a modest 1% of full MV; the city's funded ratio also improved to an adequate 74.2% as of the Dec. 2010 actuarial valuation.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842
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