Fitch Rates Lubbock, TX's GOs and COs 'AA'; Outlook Stable
Source: Business Wire
--$6.3 million general obligation (GO) bonds, series 2010A;
--$17.8 million GO bonds, taxable series 2010B (Build America Bonds-Direct Payment);
--$39.6 million tax and waterworks system surplus revenue certificates of obligation (COs), series 2010A;
--$107.8 million tax and waterworks system surplus revenue COs, taxable series 2010B (Build America Bonds-Direct Payment).
The bonds are expected to sell via negotiation on or about Jan. 13, 2010.
In addition, Fitch affirms the following ratings:
--$720.2 million in outstanding Lubbock, TX limited tax bonds at 'AA'.
The Rating Outlook is Stable.
RATING RATIONALE:
--The city's financial management is strong as evidenced by the prompt restoration of general fund reserves which were depleted in 2003 due to financial stress in its electric utility.
--Although the city has experienced economic contraction in the past 12 months, the local economy remains healthy, given the city's position as a regional business, education, and medical center.
--Aided by significant self-supporting debt, the city's direct tax-supported debt burden remains moderate but continues to grow as it implements a large capital improvement plan (CIP) over the next several years.
--The city has begun to impose significant water, sewer, and storm water rate increases to support their large respective capital plans.
--The pace of principal debt retirement remains average but may slow given the city's plans to issue significant additional debt, primarily for its utilities' capital needs.
--The financial position of the city's utility, Lubbock Power & Light (LP&L), has improved, minimizing its potential impact on the city's general fund.
KEY RATING DRIVERS:
--Maintenance of solid financial reserves given city's reliance on economically sensitive sales tax revenues as largest source for general operations;
--Ability of city's utility funds to fully support very large capital improvement plans.
SECURITY:
The GOs are payable from a direct annual ad valorem tax levied, limited to $2.50 per $100 assessed valuation, against all taxable property within the city. The COs are payable from the same source as the GOs and are additionally payable from a pledge of surplus net revenues of the city's waterworks system
CREDIT SUMMARY:
The city's solid financial position remains stable, aided by management's continued attention to cost control and conservative budgeting during this economic slowdown. Financial stability has also been aided by the resumption of payments in lieu of taxes (PILOT) from LP&L, enabled by the utility's operating surpluses and improved cash balances in fiscal years 2004-2008. Transfers from LP&L resumed in fiscal 2008, albeit modestly, and for fiscal 2009, the city received almost $4 million in transfers to the general fund. For fiscal 2008, general fund operations contributed a modest $837,000 to the fund balance. As a result, the city's unreserved, undesignated fund balance grew to almost $20 million, just under the city's fund balance goal of 20% of operating revenues. As a percentage of expenditures and transfers out, fiscal 2008 posted a solid 15.2% fund balance. Unaudited fiscal 2009 results point to nearly balanced results; notably, fiscal 2009 sales tax receipts, which comprise a large 43% of general fund revenues, remained flat as budgeted. The fiscal 2010 budget is balanced, based on flat sales tax growth, level LP&L transfers, and the elimination of a modest amount of positions.
Two of Lubbock's major economic indicators, its unemployment rate and taxable assessed valuation (TAV), are performing well. The latest projected unemployment rate was a modest 5.3% for October 2009, well below the Texas (8.1%) and national (9.5 %) averages for the same month. TAV gains have been good at an annual average of over 8% over the past five fiscal years. The city's TAV for fiscal 2010, which grew modestly, surpassed $12 billion, and prospects for continued growth remain favorable. More than 60 residential and commercial developments are under way in the city, a portion of which is expected to add as much as $3 billion in new TAV over the next 10-15 years. However, not insulated from the economic slowdown, the city's residential and non-residential building permit issues have declined notably.
The GO bonds in the current offerings are the first installment of a $51 million authorization approved by voters in November 2009. Concurrently, another $10.2 million authorization for parks and soccer fields was rejected by voters. The city's direct debt burden is moderate at $1,310 per capita and 2.4% of TAV. When debt from overlapping municipal entities is included, the debt burden rises to a still moderate $2,849 per capita and 5.2% of TAV after adjusting for state support for overlapping local school district debt. Amortization is slightly above average with 56% of principal retired in ten years. The fiscal 2010 capital improvement plan (CIP) totals over $1 billion through fiscal 2015, a notable $200 million increase from the fiscal 2009 CIP. The large CIP increase is driven by the improved definition of project costs for the development of additional water supplies and rehabilitation of the city's wastewater facilities. Storm water projects also contributed to the CIP hike, offsetting the elimination of most projects associated with street improvements in a designated area known as Gateway. Debt issued to fund these projects, including the current offering, will be issued as tax-supported debt, but, per the city's practice, the debt for the respective utilities will be self-supporting.
To support the water and wastewater CIP, the city has recently implemented significant rate increases, including a 41% rate increase in fiscal 2009 for high volume water users. Future projected rate increases through fiscal 2015 range from 10%-12% for water and 15% for wastewater. Storm water rate increases are also significant, ranging from 22%-50% in annual hikes in FYs 2010-2012, stemming from the reallocation of street maintenance debt service from the interest and sinking fund to the storm water fund.
Considerations for Taxable/Build America Bonds Investors
The following sector credit profile is provided as background for investors new to the municipal market.
Local Government General Obligation Bonds:
The unlimited taxing power of most local government general obligation pledges is the broadest security a U.S. local government can provide to the repayment of its long-term borrowing, and therefore is the best indicator of its overall credit quality. The average local government general obligation rating is 'AA-' with approximately 56% rated at or above 'AA-' and 7% rated 'BBB+' or below. The relatively high ratings reflect local governments' inherent strengths: the authority to levy property taxes, nonpayment of which can result in property foreclosures; additional taxing power that can include sales, utility, and income taxes; and essentiality of and lack of competition for services provided by local governments. Those with low investment-grade or below-investment-grade ratings generally have a combination of a limited or highly volatile economic base, high levels of long-term liabilities including debt and post-employment benefits, and/or unusually limited financial flexibility.
These rating actions reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com' and specifically include the following reports:
--'Tax-Supported Rating Criteria', dated Dec. 21, 2009;
--'U.S. Local Tax-Supported Rating Criteria', dated Dec. 21, 2009.
Additional information is available at 'www.fitchratings.com'.
Contact:
Fitch Ratings
Jose Acosta, +1-512-215-3726 (Austin)
Gabriela Gutierrez, +1-512-215-3731 (Austin)
Cindy Stoller, +1-212-908-0526 (Media Relations, New York)
cindy.stoller@fitchratings.com
