TEXT-Fitch affirms San Antonio, Texas ratings
Oct 3 - Fitch Ratings assigns an 'AA' rating to the following San Antonio, Texas bonds: --$519.5 million Public Facilities Corporation (PFC) improvement and refunding lease revenue bonds, series 2012 (Convention Center Refinancing and Expansion Project). The bonds are scheduled to sell via negotiation during the week of Oct. 8, 2012. Bond proceeds will be used to refund all outstanding hotel occupancy tax (HOT) bonds and finance the expansion costs of the convention center. In addition, Fitch affirms the following ratings: --$1.018 billion limited tax bonds at 'AAA'; --$334.6 million combination tax and revenue certificates of obligation (COs) at 'AAA'; --$32 million tax notes at 'AAA'; --$21.3 million (Starbright Industrial Development Corp.) contract revenue bonds, series 2003 at 'AA+'; --$35.8 million municipal facilities corporation (MFC) lease revenue bonds affirmed at 'AA+'; The Rating Outlook is Stable. SECURITY The PFC lease revenue bonds are secured by annually appropriated lease payments made by the city to the PFC. The limited tax bonds, COs, and tax notes are secured by an annual property tax levy, limited to $2.50 per $100 taxable assessed valuation (TAV). The COs are additionally payable from a limited pledge of net revenues of the city's municipal parks system. The MFC lease revenue bonds are secured by annually appropriated lease payments made by the city to the MFC. The contract revenue bonds are special obligations of the San Antonio Starbright Industrial Development Corporation and are payable from pledged contract payments from the city containing payments from its electric and gas utility, Central Public Service (CPS). KEY RATING DRIVERS STRONG FINANCIAL RESERVES: San Antonio's favorable financial performance has been aided by management's focus on increasing efficiency and conservative budgeting, enabling the city to preserve its progress in implementing enhanced financial reserve policies during the economic slowdown. Fitch favorably views the city's two-year budget strategy, which has expanded its planning horizon. LARGE CAPITAL PLANS: The city's debt profile is mixed, characterized by its above-average overall debt burden, balanced against rapid limited tax bond amortization and ample debt service capacity within the current tax rate. The city's capital plan is aggressive but will allow the city to address its sizeable deferred capital needs. CONVENTION CENTER NOT ESSENTIAL TO CORE OPERATIONS: Although important to the city's economy, the leased asset (convention center) is not considered essential to the city's core governmental operations according to Fitch published rating criteria, leading to a two-notch distinction between the PFC lease revenue bonds and the city's limited tax bonds. However, Fitch does note the statutory requirement that convention center expansion costs are the sole eligible use of 2% expansion HOT receipts, which provide an incentive to the city to make full and timely annual appropriations. CONVENTION CENTER DEBT: HOTs, the planned source of repayment for the PFC convention center project lease revenue bonds, are subject to economic volatility but benefit from the city's large convention and visitor industry which markets to both regional and national audiences. The inventory of hotel rooms grew by a notable 26% from 2007-2011 and additional hotels are under construction (although the city's conservative forecast points to modest future growth, which Fitch views favorably). HIGH STARBRIGHT DEBT SERVICE COVERAGE: Electric and gas utility payments to the city provide very high debt service coverage for the Starbright Industrial Development Corporation's contract revenue bonds. Additionally, the bonds' contract terms and legal covenants are sound and no additional leveraging is planned. MILITARY REMAINS KEY SECTOR: Although the local economy has diversified notably, the military remains a major economic factor. This is evidenced by very large ongoing investments and planned additions to troop strength resulting from base realignment and closure decisions that have benefited the city. STABLE ECONOMY: The recessionary contraction of the local economy has begun to reverse course, enabling the city's unemployment rate to remain well below state and national averages. The city's population growth remains rapid, aided by affordable home prices and ample developable land. CREDIT PROFILE Large Financial Reserves The city's financial profile remains solid as evidenced by the maintenance of unreserved fund balances in excess of 20% of spending since fiscal 2006, well above its 9% fund balance policy level. Additions to fund balance had been enabled by previously strong sales tax growth and positive CPS (electric and gas utility rated 'AA+' by Fitch) payment trends, along with management's aggressive cost controls mainly in the form of annual personnel reductions. Two-Year Budget Strategy The city's two-year budget strategy, in which a portion of reserves in excess of its fund balance policy are internally designated for next year's spending, has expanded its planning horizon. A sizeable $83.4 million of such reserves was budgeted for use in fiscal 2011, although greater than projected sales tax receipts and CPS transfers precluded the need for using any of the reserve and led to a modest increase in the fund balance. Sales tax receipts grew by 6.1% in fiscal 2011, exceeding the budget's modest 1% growth estimate, and CPS payments increased moderately due to a very hot summer and a rate hike. As a result, the unrestricted fund balance totaled a strong $226.6 million or 25.1% of operating expenditures and transfers out. A portion of this fund balance, $83.4 million, is designated as the city's 9% reserve. Current Year's Progress and Fiscal 2013 Budget Due to conservative revenue projections and continued cost controls, projected fiscal 2012 results are also favorable. Despite a projected $26.8 million operating deficit (equal to 2.8% of spending), the planned drawdown is well below the $76.9 million two-year budget reserve allocated to close the fiscal 2012 budget gap. As a result, the two-year budget reserve will remain mostly intact for fiscal 2013 at $66.4 million. The resulting projected unrestricted fund balance for fiscal 2012 equals a still strong $200 million or 21.2% of spending, notably better than the budgeted level of 15.9%. The proposed fiscal 2013 budget, aided by the appropriation of $66.4 million of the two-year budget reserve (equal to 6.8% of appropriations), is balanced at a level property tax rate and assumes a reasonable sales tax growth projection of 3%. The budget also allocates a more modest $6.6 million of reserves for fiscal 2014, reducing the projected budget gap to $36 million, equal to a modest 3.6% of planned fiscal 2014 expenditures. Large Capital Needs This summer, the city issued the first installment of the $596 million general obligation bond authorization approved by voters in May 2012. As the largest bond authorization in the city's history, it is intended to address the city's substantial deferred capital needs. According to the management, all future debt will be sized and timed to maintain the city's current debt service tax rate assuming modest tax base growth. Manageable Debt Profile The impact of the 2012 bond program on the city's direct debt profile should be manageable given its low current levels, favorable pay-out rate, and expansive tax base. The rapid pay-out rate, at 65% of limited tax bond principal in ten years, is reflected in sizable annual debt payments, which in fiscal 2011 were above average at 18.5% of general government spending. Including the current offering, the city's overall debt burden is above average at $3,251 per capita and 5.3% of market value after adjusting for substantial state support of local school district debt. Convention Center Expansion Project The current offering will finance the expansion of its convention center and refund all of the city's outstanding HOT debt issued to finance previous improvements to the facility. Although secured by an annual appropriation of all legally available funds, the city plans to fund lease payments primarily with HOT receipts. Fitch notes that the refunding represents a substantial restructuring of HOT debt in which the final maturity is extended by eight years, principal payments are deferred for the first four years, and principal payments are heavily back-loaded. As a result, principal amortization is negligible in the first 10 years at only 2.6%, which Fitch views negatively. The structure allows debt service carrying costs to rise to manageable levels during the first 10 years, providing ample time for HOT receipts to grow in the interim. In the absence of a debt service reserve fund, the city council approved the funding of two contingency funds as part of its HOT financial policy. The funds consist of a $47 million lease payment contingency fund and a $15 million operating contingency fund for the convention center, both considered important features by Fitch. Appropriation Risk Affected by Nature of Leased Asset The leased asset, the convention center, is not considered essential to core governmental operations by Fitch and serves as the basis for the two-notch distinction from the city's 'AAA' rating on its limited tax bonds. Also, the bonds' somewhat weak legal provisions do not include a mortgage interest for the trustee in the event of non-appropriation. The non-appropriation of base rental payments requires the city to vacate the leased asset by the end of the last fiscal year for which lease payments were funded. Fitch notes that the principal planned repayment source, the 2% expansion HOT, can only be used for convention center expansion costs by state statute, minimizing the incentive for the city to withhold any annual appropriation. HOT Growth Projection Reasonable In addition to the 2% expansion HOT, the plan of finance also relies on a portion of the annual growth in the city's 7% general HOT. The city's 30-year projection of HOT receipts forecasts long-term annual HOT growth of 3.37% based on modest annual increases in new hotel room additions, available room nights, and daily room rates. The 7% general HOT revenues fund the city's community and visitor's facility fund, which includes the operations of the convention center facilities, the convention and visitor's bureau, the Alamodome, international affairs, cultural affairs, outside arts agencies, and other convention/tourist-related activities. Aided by the two HOT contingency funds, Fitch notes that the two HOT sources are sufficient to withstand considerable economic impact, including another deep recession in the early years followed by a slower economic recovery. Military Still Key Within Broad Economy San Antonio is the second largest city in the state and seventh largest in the U.S., with an estimated population of 1.3 million for 2012. Prominent sectors in the local economy are military and government employment, domestic and international trade, convention and tourism, medical and health care, financial services, and telecommunications. Aided by considerable growth in energy sector jobs, the city's unemployment rate declined to 7.3% in July 2012, down from the 8.1% level recorded in July 2011. The city's unemployment rate compares favorably to state and national averages of 7.5% and 8.6%, respectively, for the same period. The city's construction sector has benefited from several large projects, including the recent completion of the $3.2 billion San Antonio Military Medical Center, which was accompanied by approximately 12,500 additional military personnel to the city. After posting strong annual gains through fiscal 2009, the city's taxable values have flattened through fiscal 2013 as new improvement values have been offset by reappraisal losses in existing values.