Fitch Ratings assigns a rating of ‘AAA’to the following obligations (general obligations [GOs], certificates of obligation [COs]) of the city of Southlake, Texas (the city or Southlake) and assigns a rating of ‘AA-‘ to the following sales tax revenue refunding bonds of Southlake Parks Development Corp (SPDC):
–$20.9 million GO refunding bonds, series 2014;
–$8.4 million tax and waterworks and sewer system (limited pledge) revenue COs, series 2014;
–$14.9 million sales tax revenue refunding bonds, series 2014.
The bonds are expected to price via competition the week of May 5, pending market conditions. Proceeds from the GOs and sales tax revenue bonds will be used to refund a portion of the city’s outstanding obligations for debt service savings. The COs will fund a variety of public works projects.
In addition, Fitch affirms the following ratings:
–$137.3 million in outstanding GOs and COs (pre-refunding) at ‘AAA’;
–$3.2 million in outstanding Southlake Parks Development Corp. sales tax bonds at ‘AA-‘.
The Rating Outlook is Stable.
The GOs and COs are secured by an ad valorem tax levied on all taxable property within the city, limited to $2.50 per $100 taxable assessed valuation (TAV). The COs are additionally secured by a nominal pledge of subordinate net revenues (limited in amount typically to $1,000) from the city’s waterworks and sewer system.
The sales tax bonds are secured by a priority lien on proceeds of a 0.5% sales and use tax levied within the city for the benefit of the Southlake Parks Development Corporation (the corporation).
KEY RATING DRIVERS
STRONG FINANCES: The city’s deliberate financial management has allowed it to maintain strong reserves, while cash funding capital and street improvements despite moderate exposure to economically sensitive sales tax revenues. Dedicated funding sources, including citizen-approved sales taxes, mitigate pressure on the budget and contribute to a moderately low ad valorem tax rate.
AFFLUENT DALLAS AREA COMMUNITY: The largely residential area is characterized by exceptionally high wealth. The city lies on the southern shore of Grapevine Lake and is strategically located within close proximity to Dallas, Fort Worth and the Dallas-Fort Worth (DFW) airport; unemployment is low.
RESUMED TAX BASE GROWTH: New development and a rise in home prices contributed to a pick-up in current TAV, following two years of uncharacteristically slow growth. Fitch anticipates new development and regional mobility improvements to spur additional near-term TAV growth.
HIGH DEBT; RAPID PAYOUT: High overall debt results largely from overlapping debt of local school districts. The city’s rapid amortization rate is reflected in a high debt burden on the budget. Pensions and other post-employment benefit (OPEB) obligations are well-funded.
STRONG COVERAGE: Debt service coverage on the sales tax bonds is strong and responds well to stress. Although the additional bonds test (ABT) is weak, Fitch anticipates coverage levels to remain solid based on the lack of new issuance plans.
SOLID CREDIT PROFILE: Sound reserves, rapid principal amortization, commitment to pay-go capital and superior wealth levels are key offsets to the city’s high overall debt. A change in these mitigating factors would place downward pressure on the rating.
Southlake is an affluent community with a population of about 27,500, located 15 miles northwest of Dallas and 10 miles northeast of Fort Worth.
WEALTHY DFW COMMUNITY; GROWTH PROSPECTS
Southlake’s per capita money income represents 243% of the U.S. average and its fiscal 2014 market value per capita remains very high at $217,977. The city’s tax base has a moderate 10.5% concentration among technology, real estate, telecommunications, leisure/hotel and distribution interests with the top two taxpayers accounting for 5% of fiscal 2014 TAV – Verizon Wireless at 3% and Town Square Ventures at 2%.
New development is underway, consistent with the city’s long-term plan for significant commercial and retail build-out within Southlake’s Town Square, an upscale regional retail center, and its three primary multi-use zoned corridors. Fitch considers the city’s expectation for further tax base growth reasonable based on a large number of residential and commercial projects nearing completion and others announced for near-term start-up.
STRONG FINANCIAL FLEXIBILITY
The city’s diverse general fund revenue stream is driven by property taxes (47% of total revenues) and sales taxes (27%). Additionally, numerous dedicated funding sources have mitigated operating and capital pressure on the general and debt service funds.
Robust planning and prudent cost management support maintenance of a strong financial position, evidenced by healthy reserves in excess of policy targets. The city’s fund balance policy targets a minimum 15% of general fund budgeted operating expenditures, with the stated optimum goal of 25% applicable to unassigned general fund reserves. Funds in excess of 25% are typically committed for strategic capital initiatives, helping to reduce growth in the city’s indebtedness.
A sizable fiscal 2013 unrestricted general fund balance of $20.5 million (52.8% of spending) was driven by the strength of sales tax revenues, up 11.6% from the year prior. A fiscal 2014 balanced budget includes conservative revenue growth and funding for a new public safety station and moderate pay increases. Management projects moderate improvement in fiscal 2014 reserves which appears reasonable based on strong sales tax and permit revenue performance and a history of prudent expenditure controls.
HIGH DEBT BURDEN; WELL-FUNDED PENSIONS
Southlake’s overall debt levels are high at approximately 6.0% of market value. At 17% of governmental spending, the debt service burden on the budget is also high, reflecting rapid amortization of 76% within 10 years.
The city’s fiscal 2014 five-year capital plan is affordable at about $79 million. Southlake typically funds a portion of its annual capital plan with general fund monies. In fiscal 2013 the city transferred 12.5% of total general fund revenues to the city’s strategic initiative fund in the amount of $4.7 million (representing balances in excess of 25% of budgeted expenditures), which served to reduce the city’s debt issuance, consistent with historical trends.
The city’s pension plan, as well as disability and death benefits, is through the Texas Municipal Retirement System and the city’s funded position remains strong at 86.6% as of Dec. 31, 2012. The city has made 100% of its annual required contribution for fiscal years 2008-2013. Carrying costs including debt service, pension and OPEB contributions represent a manageable 20.1% of governmental spending.
HEALTHY SALES TAX BOND COVERAGE; NO FORESEABLE ISSUANCE PLANS
The series 2014 sales revenue bonds refund the city’s senior (1997), subordinate (2006) and third lien bonds (2005) with a single parity issue. Pledged revenues show a strong compound annual growth rate of 9.8% since 1999, with very strong 11.7% growth in fiscal 2013.
Fiscal 2013 pledged revenues of $5.6 million cover maximum annual debt service (MADS) a strong 3.4x. A stress test reflected by a 10% decline in fiscal 2013 pledged revenues would still cover MADs by a solid 3.0x. Management reasonably anticipates fiscal 2014 sales tax revenues to reflect additional moderate gains based on strong fiscal year-to-date performance. The ABT is below average at 1.25x, but the city does not plan to further leverage the pledged sales tax revenues within its five-year planning horizon.
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, National Association of Realtors.
Applicable Criteria and Related Research:
–‘Tax-Supported Rating Criteria’ (Aug. 14, 2012);
–‘U.S. Local Government Tax-Supported Rating Criteria’ (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria