July 16 - Fitch Ratings has assigned an ‘AA’ rating to the following Huntsville, Texas (the city) bonds: --$8.32 million general obligation refunding bonds, series 2012. The bonds are expected to price via negotiation during the week of July 23, 2012. Proceeds from the sale of the bonds will be used to refund a portion of the city’s outstanding obligations for debt service savings and to pay issuance costs. In addition, Fitch affirms the ‘AA’ rating to the city’s outstanding debt (pre-refunding) as follows: --$17.7 million in limited tax general obligation (LTGO) bonds and combination tax and revenue certificates of obligation (COs). The Rating Outlook is Stable. SECURITY The LTGOs and COs are secured by an ad valorem tax pledge limited to $2.50 per $100 taxable assessed valuation (TAV) levied on all taxable property within the city. The COs are further secured by a limited pledge of $1,000 of the city’s water and wastewater system net revenues. KEY RATING DRIVERS STRONG FINANCIAL PROFILE: The city’s tenured management team has maintained consistently positive operating margins, strong fund balances, and ample liquidity, which mitigates some dependence on inherently volatile sales tax revenues for general fund operations. RELIANCE ON SALES TAX RECEIPTS: Sales tax receipts comprised nearly 40% of total revenues in the general fund for fiscal 2011. After slipping in fiscal 2010 due to recessionary pressure, sales tax revenues climbed measurably in fiscal 2011 with the addition of new retail stores in the city. FAVORABLE DEBT PROFILE: The city’s low to moderate debt levels have been aided by management’s practice of significant, annual pay-as-you-go capital spending. Amortization of principal is rapid and new tax-supported debt plans are limited. LIMITED BUT STABLE ECONOMY: The local economy is limited but anchored by a notable government presence that includes a state prison system headquarters and a large state university. TAX BASE GROWTH: The city’s taxable assessed value (TAV) resumed growth for fiscal 2012 after stagnating in fiscal 2011. Overall, the tax base has experienced roughly 5% compound annual growth over the last five years. LOW WEALTH LEVELS: Area wealth indicators are low but skewed somewhat by the inclusion of a large prison inmate and student population in the census count. CREDIT PROFILE LIMITED ECONOMY ANCHORED BY STATE GOVERNMENT Located on Interstate 45, about 70 miles north of Houston and 170 miles south of Dallas, this small city serves as the county seat for Walker County. A large state government presence, led by the Texas prison system headquarters and Sam Houston State University (SHSU), anchors the local economy. Seven state prisons in the Huntsville area employ over 6,000 workers and house over 13,000 inmates. SHSU employs nearly 3,300 to operate its campus, which has a current enrollment of roughly 17,300. State budget cuts trimmed several hundred area jobs at the prison system. However, unemployment for May 2012 of 6.7% was slightly better than the state (6.9%) and well below the U.S. (7.9%). Governmental entities provide over 40% of jobs in the county. The city’s TAV has remained firm during the economic downturn, but growth has since slowed from the nearly 8% average annual growth registered from fiscal years 2006-2010. TAV flattened in fiscal 2011 and then resumed growth in fiscal 2012 with the completion of new apartment complexes around the SHSU campus and the addition of new retail stores in the Ravenwood commercial development. COMMENDABLE FINANCIAL PERFORMANCE The city has consistently posted positive results in each of the last five fiscal years despite the economic downturn, leading to strong financial reserves in excess of its formal minimum fund balance policy of two months (16.7%) of budgeted expenditures. Reserves in excess of 25% of expenditures are made available for transfers to the capital projects fund for pay-as-you-go capital outlays. At the close of fiscal 2011, the city reported unrestricted general fund balance (committed, assigned, and unassigned, per GASB 54) at a solid $9 million, or 54.4% of spending. Liquidity was also robust at $9.1 million or over 6 months of operating costs. The city relies heavily (39% of general fund revenues in fiscal 2011) on the economically sensitive sales tax revenue source, but this concentration is largely offset by large fund balances and ample liquidity. After declining about 7% in fiscal 2010, sales tax receipts rebounded to 8% growth in fiscal 2011 due to additional new retail stores in the city. For fiscal 2012, management conservatively budgeted a modest decline in sales tax receipts, although actual results through May 2012 indicate a decline of less than 1%. Overall, the fiscal 2012 operating budget is balanced but does forecast a $2.2 million drawdown of reserves for capital projects, which is in line with the city’s fund balance policy. Fitch notes that even with the planned drawdown, the city retains a high degree of financial flexibility. AFFORDABLE LONG-TERM LIABILITIES Fitch views the city’s overall debt ratios as low to moderate at $1,166 per capita and 3.2% of market value (net of state support for the overlapping local school district debt). While fiscal 2012 debt services is an above average 12% of budgeted expenditures, the rapid pace of principal amortization (85% retired in 10 years) offsets this concern. General government capital needs are manageable and will be met primarily through continued pay-as-you go spending, but management may seek GO authorization in the next few years for about $3 million towards street improvements. Pension benefits are provided through the Texas Municipal Retirement System (TMRS), an agent multiple-employer plan. Recent accounting changes to TMRS coupled with city management’s reduction to the annual cost-of-living adjustment (COLA) facilitated marked improvement in the city’s funded ratio to 84.9% as of the Dec. 31, 2010 actuarial valuation, a level Fitch considers adequate. The actuarial annual required contribution (ARC) comprised a moderately high 13% of fiscal 2011 spending, but was also reduced to 8% of spending for fiscal 2012. The city historically paid other post-employment befits (OPEB) on a pay-as-you-go basis, but contributed an additional $1.5 million in fiscal 2011 to begin funding a trust, an action that Fitch views positively. Management budgeted an additional $300,000 payment to the trust for fiscal 2012. The OPEB unfunded liability totaled $18.9 million or 1.3% of market value as of Sept. 2011.