Fitch Ratings affirms its 'AA' rating on the following Victoria County, Texas obligations:
--$11.6 million limited tax general obligation (LTGO) bonds;
Fitch also assigns an implied GO unlimited tax (ULT) rating of 'AA'.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by an annual property tax levy limited to $0.80 per $100 assessed valuation.
KEY RATING DRIVERS
OVERALL FINANCIAL FLEXIBILITY TEMPERS REVENUE VOLATILITY: After some recent thinning, the county's financial reserves are benefiting from a surge in sales tax receipts due to substantial oil and gas exploration in the nearby Eagle Ford Shale. The county's continued overall financial flexibility will hinge on management's conservative budgeting of rapidly expanding and volatile sales tax revenues. The successful management of these revenue trends and the maintenance of robust reserves are key rating drivers.
STABLE TAX-BASE TRENDS: Declines in the industrial tax base due to contested values during the recession were mitigated by steady home building and commercial development activity. The successful contests also reduced previous moderate taxpayer concentration in plastics manufacturing and petrochemical industries.
SHIFTING EMPLOYMENT TRENDS: Significant oil and gas drilling activity in the nearby Eagle Ford Shale continues to create diversification and has boosted employment within the county. The jobless rate remains below state and national averages and performed better than each during the recent recession. Additional job gains are expected from a major Caterpillar Inc. plant currently under construction.
FAVORABLE DEBT PROFILE: The county's debt profile is positive, characterized by low debt service carrying costs, moderately rapid principal amortization, manageable overall debt burden, and limited future debt plans.
CREDIT PROFILE
LARGE INDUSTRIAL BASE
Victoria County is located between Houston and Corpus Christi and posted a 2010 census population of 86,793. The city of Victoria is the county seat and is located 30 miles inland of the Gulf of Mexico. The city is a regional trade and retail center of the seven-county region known as the 'Golden Crescent'. The county has benefited from the city's emergence as a regional service and supply center for heavy industry, including plastics manufacturing and petrochemicals. Development of the service and retail sectors offers economic stability and diversification and complements the county's industrial base.
POSITIVE EMPLOYMENT TRENDS; AVERAGE INCOME INDICATORS
Due to surging oil and gas exploration and production in the adjacent Eagle Ford Shale formation, the county unemployment rate declined sharply to 5.7% in November 2011 compared to 7.1% the year prior, fuelled by a very rapid 6% increase in employment. As a result, the county unemployment rate declined well below the state (7.5%) and national averages (8.2%).
Notably, another 650 jobs are on tap for the $200 million Caterpillar Inc. plant currently under construction (scheduled for completion this summer). Numerous suppliers to the plant are expected to further benefit the county's employment base. The largest employers as of fiscal 2010 include Victoria ISD (2,178 employees), Formosa Plastics (1,610), The Interplast Group (1,400), and Citizens Medical Center (994).
Wealth levels are just below state levels and lower than national averages, but growing at a significantly faster pace than both measures. From 2005-2009, the county's median household income increased by an annual average of 6.4%, well above the state's rate (3.4%) and the national average (2.7%).
STABILIZED FINANCIAL PICTURE
Although reserves remained adequate, the county's unreserved fund balance had thinned somewhat in recent years from its previous high of 42% of spending in 2007 to 11.6% by 2009 due to planned one-time capital outlays, transfers to the self-insured health insurance fund and revenue shortfalls.
Sales tax revenues comprise about one-quarter of general fund revenues and, as inherently volatile, have largely contributed to fluctuations in the county's financial performance. Sales tax receipts declined by $1.6 million in 2009, equal to a large 15% drop from the year prior. A transfer to the county's health insurance fund ($1.2 million) and one-time capital outlays ($1 million) also contributed to a $4 million fund balance drawdown, equal to almost 13% of spending.
SURGING SALES TAX RECEIPTS
A strong 14% rebound in sales tax receipts in 2010 helped the county post a $1.5 million surplus, equal to 4.5% of spending. The resulting unreserved fund balance totaled a solid $5.4 million or 16.7% of spending. Liquidity also rebounded favorably, rising to over four months of operating expenses in 2010. In 2010, the county made one final transfer, totaling $1 million, to the health insurance fund which has benefited from numerous plan changes and is now self-sufficient.
A very large 32% increase in sales tax receipts in 2011, due primarily to oil and gas related economic activity, caused unaudited 2011 results to post a $3 million addition to fund balance, equal to about 10% of spending. Notably, 2011 sales tax receipts did not include any large audit collections. Fitch favorably views management's conservative budgeting of this revenue stream in the 2012 budget, choosing to budget sales taxes at a level only 7.5% above the pre-surge (2010) amount.
FITCH EXPECTS GROWTH IN RESERVES TO MEET COUNTY POLICY
Along with a level and low total tax rate, the county balanced its 2012 budget, adding no new staff but adding notably to public safety appropriations for transportation costs along with a 4% pay hike. Due to continued sales tax gains, Fitch expects the county to post better than balanced results in 2012 which should allow it to maintain reserves within its new unassigned fund balance target of 18%-25% of spending. Maintenance of robust reserves is a key rating driver to offset the risk associated with revenue volatility.
STABLE TAX BASE TRENDS
The county had historically modest but stable taxable assessed value (TAV) growth with a 7.7% CAGR between the years 2006 and 2010. Growth in TAV flattened in 2010 and 2011 due primarily to industrial value declines as a result of assessed value (AV) protests. Modest TAV growth returned in 2012, aided by multi-family building activity and small commercial development.
Due to AV protests in recent years, the county's top ten taxpayers' values fell from 14.5% of the total property tax base in fiscal 2010 to 10.3% in fiscal 2011. The top tax payers remain led by Invista (chemical manufacturer) at 5.4% of total AV.
FAVORABLE DEBT PROFILE
The county's overall debt levels are manageable at $3,682 per capita and 5.4% of market value. Amortization of debt is moderate with 60% of debt paid off in ten years. Debt service carrying costs are modest at less than 5% in 2012. Future debt plans are limited to $5 million for additional courtrooms.
County employees' pension benefits are provided through the state-wide Texas County and District Retirement System. The county consistently funds its annual required contribution, enabling an adequate Fitch-adjusted funded position of 77.2% as of Dec. 31, 2010. Since its adoption of a statutory basis of accounting in 2008, as allowed by state law, the county does not report any unfunded actuarially accrued liability of its modest OPEB benefits.
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 the Tax-Supported Rating Criteria, this action was informed by information from CreditScope, University Financial Associates, and IHS Global Insight.
Applicable Criteria and Related Research:
'Tax-Supported Rating Criteria', dated Aug. 15, 2011;
'U.S. Local Government Tax-Supported Rating Criteria', dated 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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