TEXT-Fitch rates Laredo, Texas limited tax obligations 'AA'
Sept 21 - Fitch Ratings assigns an 'AA' rating to the following Laredo, TX (the city) obligations: --$11.435 million combination tax and revenue certificates of obligation (COs), series 2012A; --$4.63 million combination tax and revenue COs, series 2012B; --$3.88 million public property finance contractual obligations (PPFCOs), series 2012. The COs and PPFCOs are scheduled to sell via negotiation the week of Oct. 1, 2012. CO proceeds will be used to finance solid waste improvements. PPFCO proceeds will be used to finance personal property purchases. In addition, Fitch affirms the following ratings: --$322.7 million outstanding limited tax bonds at 'AA'; --$40.2 million outstanding sports venue sales tax revenue bonds at 'AA-'. The Rating Outlook is Stable. SECURITY The COs and PPFCOs are secured by an annual property tax levy limited to $2.50 per $100 taxable assessed valuation (TAV). The COs are additionally secured by a pledge of limited net surplus revenues from the city's international toll bridge system. The sales tax bonds are secured by a first lien on the city's 1/4% sports venue sales tax. KEY RATING DRIVERS SOUND FINANCIAL PROFILE: The city's financial management is sound, aided by a diverse general fund revenue stream, a demonstrated ability to respond to changing economic conditions, and a solid fund balance policy which voters added to the city's charter. Healthy reserve levels result from eight consecutive years of general fund operating surpluses. STABLE ECONOMY: Transportation, warehousing, and distribution sectors have historically produced the city's core economic growth. More recently, Eagle Ford natural gas and oil drilling activity has bolstered employment and sales tax growth, which the city expects to continue and Fitch considers reasonable based on recent trends (notwithstanding inherent environmental and regulatory risks). MODERATE DEBT BURDEN: The overall debt burden is manageable as growth induced capital pressures have been matched by solid TAV gains and the city's various enterprise funds. Management prudently monitors five-year capital requirements and does not anticipate issuing new general obligation debt within the next 12 months. UNDERFUNDED PENSION: The city's pension system remains under-funded, but a recent change in actuarial methodology by the state retirement system administrator has modestly improved the pension's funded position. SATISFACTORY DEBT SERVICE COVERAGE: The sports venue sales tax, reauthorized by a high percentage of voters, provides adequate debt service coverage for all parity debt. CREDIT PROFILE Laredo continues to grow rapidly, with a population of 237,800, 35% higher than the 2000 census. The population of its nearby sister-city in Mexico, Nuevo Laredo, is estimated to add another 300,000 to the combined metropolitan center referred to as 'Los Dos Laredos'. STABLE ECONOMY As the nation's largest inland port, Laredo's international trade activity has historically fueled strong growth in its property tax base, which increased by a compound annual average of 9% over the five years ending in fiscal 2010. While TAV remained flat in fiscal years 2011 and 2012, the city anticipates modest growth in the next several years, which Fitch considers reasonable based on recent economic trends. The city's unemployment rate of 7.5% as of June 2012 compares favorably to state and national averages. Due to surging oil and gas exploration and production within the expansive Eagle Ford Shale formation, the city's employment and labor force growth rates have totaled 4%-5% in 2012. Wealth levels are low but are growing faster than state or national averages; additionally, the city's lower cost of living mitigates the low wealth levels as a credit concern. STRONG FINANCIAL PROFILE The city finances benefit from a diverse revenue stream comprised of property taxes (equal to 39% of fiscal 2011 general fund revenues), charges for services (22%), and sales taxes (19%). The large majority of charges for services are comprised of international bridge toll revenues which by city ordinance must equal 50% of bridge toll receipts. The city consistently outperforms budget expectations, recording a general fund operating surplus in each of the last eight fiscal years. In fiscal 2011, the city posted a modest $574,000 net operating surplus, resulting in a large unrestricted general fund balance of $34.7 million (equal to 23% of spending), exceeding the 15% fund balance requirement per the city charter. Continued positive results are projected for fiscal 2012. Aided by the continued strong rebound of sales tax receipts, which is projected to grow by 12.9% based on 11 months of actual receipts, the general fund is projected to add $1.6 million to fund balance in fiscal 2012. The proposed fiscal 2013 budget is balanced and based on a 5.5% increase in sales tax revenues which Fitch considers reasonable given recent trends. MANAGEABLE DEBT The CO offerings will fund solid waste system improvements and solid waste fee revenue will be the actual source of repayment for the COs. Proposed large solid waste fee increases in the fiscal 2013 budget will fully support the CO offerings. The city's overall tax-supported debt is moderate at $2,371 per capita and 5.1% of market value, after adjusting local school district debt for substantial state support. Including the current offerings, the principal payout rate of limited tax debt is moderate with 61% of principal scheduled for retirement within 10 years. The $670 million five-year capital plan is manageable and includes continued development of the transportation and water / wastewater utility systems. The city does not anticipate any additional general obligation debt within the next 12 months. Maximum annual debt service coverage of the city's sports venue sales tax bonds totals an adequate 1.7x based on fiscal 2011 revenues. Fitch notes debt service is level through 2024. The sales tax bonds additional bonds test requires coverage of at least 1.4x based on historic revenues. The bonds' debt service reserve fund equals average annual debt service; the reserve is funded with cash, although the city has an option to substitute a surety bond. UNDERFUNDED PENSION OBLIGATIONS The city provides retirement benefits for all of its employees (except firefighters) through the Texas Municipal Retirement System (TMRS). The city historically fully funds its annual required contribution (ARC) but its funded position remains well below average at 62.5% as of Dec. 31, 2010. A recent change in TMRS' actuarial methodology improved the city's funded position from 54.6%. To improve its funded position, the city has been phasing in larger contribution rates over the last four years and plans to achieve a 75% funded ratio in three years. The city provides retirement benefits to firefighters through a single employer defined benefit pension plan, also funded at a below average position of 60.2% as of March 31, 2010. Carrying costs for debt service and pensions are high at 29% of fiscal 2011 expenditures and likely to increase given likely future additional borrowings and the pension funding ratios. The city funds OPEB on a pay-go basis.
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