Fitch Ratings assigns an initial 'AA' rating to the following Hays County, Texas' (the county) bonds:
--$46.1 million pass-through toll revenue and unlimited tax bonds
(ULTs), series 2011;
--$40.5 million ULT road bonds, series 2011;
--$10.02
million limited tax bonds, series 2011.
The bonds are scheduled to sell on June 23 via negotiated sale.
In addition, Fitch assigns an 'AA' to the following outstanding debt of
the county:
--$50 million in ULTs;
--$102.3 million in limited
tax bonds;
--$49.5 million in pass-through toll revenue and limited
tax bonds.
The Rating Outlook is Stable.
RATING RATIONALE:
--The county's financial position is solid, aided
by prudent financial management and conservative budgeting. High reserve
levels and ample liquidity have enabled recent pay-go spending on
capital improvements.
--The county benefits from its proximity to
the Austin metropolitan statistical area's diverse economy and its
position along a major transportation corridor (IH-35). Spurred by the
availability of affordable land, tax base growth was solid before
contracting very slightly in fiscal 2011.
--The pass-through
program depends on timely completion of the project segments and
subsequent appropriation by the Texas Department of Transportation
(TXDoT). However, the county's cash-on-hand and ample taxing margin
mitigate these concerns to a degree and provide flexibility in the event
of a project delay or non-appropriation by the state.
--High
overall debt levels, which will remain elevated with planned new debt
issuance, represent a key credit concern. Amortization is below average
but may be accelerated by higher than budgeted TXDoT reimbursements.
--Sales
tax revenues, one of the county's main revenue sources, have continued
to rebound from some weakness in fiscal 2009.
KEY RATING DRIVERS:
--Maintenance of strong reserve levels to
preserve current levels of financial flexibility.
--Continued tax
base growth to support a sizeable but manageable capital plan.
SECURITY:
The series 2011 pass-through toll revenue and ULTs and
the series 2011 ULT road bonds are secured by an unlimited ad valorem
tax pledge levied against all taxable property within the county, with
the pass-through toll revenue and ULTs being further secured by payments
received by the county pursuant to a pass-through toll agreement between
the county and TXDoT. The series 2011 limited tax bonds are secured by a
limited ad valorem tax pledge of up to $0.80 per $100 taxable assessed
valuation (TAV).
CREDIT SUMMARY:
Situated between Austin and San Antonio, Hays
County has been one of the fastest growing counties in the state and
nation. With a current estimate of about 157,000, population has grown
over 60% since 2000. The county encompasses roughly 678 square miles and
includes the city of San Marcos, the county seat and a commercial
center. A major highway, Interstate Highway 35, cuts through the eastern
portion of the county. Wealth indicators are mixed but county
unemployment indicators are positive, characterized by growth in total
employment and improvement in the March 2011 unemployment rate to 6.8%,
which is below the state and national rate.
The composition of the county tax base is rapidly shifting from rural to urban. Residential construction increased very rapidly before the downturn as the housing pressures in Austin expanded development southward, while growth in San Marcos pushed development northward. Commercial development promptly followed the population growth, particularly along the IH-35 corridor, with corporate investment in the community spanning retail centers to health care. San Marcos is home to a large and popular factory outlet mall and Texas State University (estimated enrollment of 30,000), which is expected to continue to grow rapidly in the next few years. Comprised of about 2/3 residential properties, TAV grew by 7.5% compound annual growth since fiscal 2007. As a result of the general downturn in the housing market, TAV contracted by a modest 0.6% in fiscal 2011, but preliminary figures for fiscal 2012 indicate about a 1.5% gain to about $11.2 billion.
The county's financial position and conservative budgeting practices are key credit strengths. The county has consistently posted unreserved general fund balances well in excess of its stated 30% minimum policy goal, which has more recently allowed pay-go spending on capital improvements. For the close of fiscal 2010, following a $5.1 million capital outlay the county registered a $5.4 million net surplus in the general fund (9% of spending), which boosted unreserved fund balance to $29.6 million or over 51% of spending. The county's liquidity position was also strong, with cash and investments totaling $30.9 million which was sufficient to cover more than six months of operating costs. Officials budgeted a use of about $5.8 million of fund balance in fiscal 2011, primarily for capital spending on jail and other facility improvements; however, aided by sales tax receipts trending above budgeted and prior-year receipts, officials expect to close the fiscal year with a more modest $3.6 million draw on fund balance to maintain reserves at about $26 million or still solid 47% of budgeted spending.
In February 2008, the county and TXDoT executed a pass-through agreement, which calls for the county and TXDoT to manage individual project segments (seven total) to improve the county's highway system. TXDoT's pass-through program is an established financing vehicle which allows local governments and private entities to accelerate street and road improvement projects. In return, local governments are eligible to receive reimbursement from TXDoT for a significant portion of the project costs upon the project's substantial completion. TXDoT has pledged to pay to the county $0.14 per vehicle-mile traveled on the projects' roadways. Following substantial completion of each segment, TXDoT will make quarterly payments to the county. Upon completion of the entire project (expected in 2013), the county will receive an aggregate minimum reimbursement of $6.6 million and a maximum of $13.3 million annually, which will continue until the county has received a total reimbursement of $133 million. TXDoT's reimbursement reflects at least 87% of total estimated construction costs, with such costs funded from proceeds of the series 2009 pass-through bonds, the current offering, and a planned 2012 issuance. The payments by TXDoT are subject to appropriation by the Texas Legislature.
A delay in project completion poses the biggest risk for the county, along with the unlikely possibility of TXDoT's failure to appropriate reimbursements in a timely manner. These concerns are mitigated largely by the strength of the county's unlimited tax pledge and substantial fund balance. In the event of non-appropriation of funds by the state legislature, county officials expect a 10 cent increase to the tax rate would be sufficient to support annual debt service on the bonds, and comfortable taxing margin would remain. Risk is also mitigated by the incorporation of a one-year lag between TXDoT reimbursement and the debt service payment date.
The county's high debt load represents a key credit concern. While direct debt levels are moderate, overall debt levels are high at about $7,800 per capita and 9% of market value, which primarily reflects debt from overlapping school districts and the city of San Marcos. The anticipated debt service burden relative to spending is also high. Upon substantial completion of the pass-through projects, annual debt service will trend above 22% of spending from fiscal years 2014-2032 (above 28% of spending excluding the expected TXDoT reimbursements). However, offsetting this concern to a degree is the strong voter support for the debt authorization. Additionally, the below average pace of amortization is structured using conservative assumptions for annual TXDoT reimbursements, and county officials plan to accelerate debt service payments if reimbursements are higher than expected. The county plans to issue up to $46.5 million in parity pass-through road bonds in fiscal 2012, which would exhaust the balance of the $208 million authorization for road bonds approved by voters in 2008. However, aided by lower construction costs, officials presently anticipate the cost of all pass-through projects to come in under budget and may issue less debt than anticipated in fiscal 2012 to complete all road projects.
The county contributes to the Texas County and District Retirement System (TCDRS) pension plan and provides retiree health coverage as other post-employment benefit (OPEB). The county made 100% of its annual required contribution to TCDRS in the last three years but has not funded its OPEB liability, which totals $4.9 million or 0.04% of full market value. Combined pension and OPEB costs in fiscal 2010 totaled $5.9 million or a manageable 10% of general fund spending.
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, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, National Association of Realtors, Underwriter, Bond Counsel, Underwriter Counsel, Trustee, TX Municipal Advisory Council, and US Federal Government.
Applicable Criteria and Related Research:
--'Tax-Supported Rating
Criteria', dated Aug. 16, 2010;
--'U.S. Local Government
Tax-Supported Rating Criteria', dated Oct. 08, 2010.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
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
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
Contacts:
Fitch Ratings
Primary Analyst:
Blake Roberts, +1-512-215-3741
Analyst
Fitch
Inc.
111 Congress Ave., Suite 2010
Austin, TX 78701
or
Secondary
Analyst:
Steve Murray, +1-512-215-3729
Senior Director
or
Committee
Chairperson:
Kelly McGary, +1-813-224-0492
Senior Director
or
Media
Relations:
Cindy Stoller, +1-212-908-0526
cindy.stoller@fitchratings.com