Fitch Ratings assigns its 'AA' rating to the following Highland Village, Texas (the city) obligations:
--$5.235 million general obligation (GO) refunding bonds, series 2011.
In addition, Fitch affirms the ratings on $30.245 million GO debt outstanding at 'AA'.
The bonds are scheduled to sell via negotiation on April 25, 2011. Proceeds from the sale of the bonds will be used to refund a portion of the city's outstanding debt and to pay the costs associated with issuance.
The Rating Outlook is Stable.
RATING RATIONALE:
--Proactive and conservative fiscal management consistently reports strong financial results and solid general fund balances well above the city's own policy target levels.
--The city's expanded retail base, a result of the completion of several major transportation infrastructure projects, has enhanced sales tax revenue for the city, although receipts have been flat in recent years.
--The city expects only modest future capital needs due to near build-out status; mostly quality of life projects such as parks and trails.
--Direct debt is low with rapid amortization, but overall debt is well above average.
--Wealth levels are above county, state and national averages.
KEY RATING DRIVERS:
--Adherence to its formal financial policies and maintenance of sound financial reserves in light of current fiscal pressures and increased dependence on historically volatile sales tax revenues.
--Continued growth and maturity of the city's commercial base to offset the slowing residential growth given the city is near build out.
--Stabilization of the tax base, which declined recently after many years of rapid growth.
SECURITY:
The bonds are secured and payable from a property tax levied on all taxable property within the city limited to $2.50 per $100 taxable assessed value (TAV).
CREDIT SUMMARY:
With an estimated population of 16,500 for 2010, Highland Village is located in the south-eastern portion of Denton County, 20 miles north of Dallas, and 34 miles northeast of Fort Worth. Since 2000, the city's population has increased over 80% due to substantial residential development. Highland Village is an upscale, lakefront community with a top-ranked education system and which is nearing residential build-out. With the expansion of a major commercial thoroughfare along the city's southern boundary, retail development accelerated recently, helping to diversify the tax and revenue bases. Fitch expects that despite the recent decline in the tax base and property tax receipts associated with full residential build-out, as well as flattening of sales tax growth, the city will maintain its favorable financial position via its broadening commercial base as well as the continuation of conservative fiscal practices.
Approximately 82% of the city's tax base is residential, with only a modest number of lots available for housing construction. Commercial activity was spurred by the widening of Highway 407 and 2499, major thoroughfares along the southern and western boundaries of the city, respectively. Two major developers opened shopping centers in 2007, which have spurred sales tax growth and increased revenue base diversity. TAV grew by a compound average growth rate of 7.5% from fiscal 2006 to 2011. However, values declined modestly in fiscal 2011 as is common in this area of Texas, and the city expects flat to modest growth over the near term. General fund sales tax receipts increased dramatically from approximately $500,000 in 2005 to over $1.8 million in fiscal 2010 although they showed little change in fiscal 2009 and 2010. Year-to-date receipts are showing some improvement, with growth of 7% over the prior year.
Financial performance has been strong, with general fund reserve levels consistently above the city's stated goal of 15% of spending. For the close of fiscal 2010, the unreserved general fund balance stood at nearly $4.2 million, representing 34% of total spending. The fiscal 2011 budget was balanced, and the current projection is another modest increase to fund balance reserves. The city's operating and maintenance (O&M) tax rate is somewhat above that of neighboring cities, although the overall property tax rate remains competitive. Fitch believes that while growth in property tax revenues may slow as the city reaches build-out, the continuation of conservative fiscal management practices will enable the city to maintain its favorable financial position over the longer term.
Direct debt ratios are manageable, benefiting from significant utility fund support. Overall debt ratios climb to well above average levels due to substantial borrowing by Lewisville ISD (GO bonds rated 'AA+' by Fitch). Future debt financing plans are very limited, and debt amortization is rapid with 68% retired in 10 years. The current offering will refund a portion of the city's outstanding tax-supported debt for interest savings, and the debt service tax rate is projected to decline over time.
Additional information is available at 'www.fitchratings.com'.
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, and IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Oct. 16, 2010);
--'U.S. Local Government Tax-Supported Rating Criteria' (Oct. 8, 2010).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566
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