TEXT - Fitch rates Plano, Texas GOs 'AAA'
Feb 21 - Fitch Ratings assigns an 'AAA' rating to the following Plano, Texas (the city) general obligation (GO) bonds: --$63 million limited tax general obligation (LTGO) refunding and improvement bonds, series 2013. The bonds are scheduled to sell via negotiation on March 5. Proceeds will be used for street, parks, library, and public safety improvements, and to refund certain outstanding bonds for level interest cost savings from 2013-2026. In addition, Fitch affirms its 'AAA' rating on the following outstanding debt of the city: --$299.4 million in LTGOs; --$11.5 million in certificates of obligation (COs); --$13.7 million in tax notes. The Rating Outlook is Stable. SECURITY The bonds and outstanding LTGOs, COs, and tax notes are secured by a limited ad valorem tax pledge of $2.50 per $100 of taxable assessed valuation (TAV), levied against all taxable property within the city. The COs are further secured by a de minimus limited pledge (not to exceed $1,000) of surplus net revenues of the city's waterworks and sewer system. KEY RATING DRIVERS DIVERSE, AFFLUENT RESOURCE BASE: The city benefits from a diverse corporate base, proactive economic development program, and prominence in the broad and resilient Dallas-Fort Worth (DFW) economy. Residents are affluent and well-educated. WELL-MANAGED FINANCES: Sound management practices and policies have sustained the city's strong financial profile and proactive approach to funding operational, economic development, and capital needs. AMPLE RESERVES AND FLEXIBILITY: Operating reserves and liquidity provide good fiscal cushion. Additional flexibility is provided by the presence of sizable capital reserves and a portion of the tax rate earmarked for discretionary economic development. MODERATE DEBT BURDEN: The city's debt burden is manageable with high per-capita debt offset by the high-income levels. Future debt issuance plans should be easily managed given the currently rapid pace of debt retirement. RATING SENSITIVITIES: The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely. CREDIT PROFILE Plano is a wealthy and mature suburb located 20 miles north of Dallas with a population of approximately 260,000. STRONG LOCAL ECONOMY WITH EXCELLENT DEMOGRAPHICS Plano is one of the premier commercial centers and residential suburbs of the extensive Dallas-Fort Worth economy. The city's economy is diverse and serves as corporate and/or regional headquarters for a number of companies, including HP Enterprise Services, JCPenney, PepsiCo's Frito-Lay North American division, Alcatel-Lucent, Capital One Auto Finance, and Dr. Pepper Snapple Group. The city actively engages in economic development efforts to attract new businesses and the highly-educated population helps strengthen the city's employment profile. The percentage of residents with an advanced degree is nearly twice the national average. Wealth levels are also very high, with per capita personal income at 147% of the national average. The city, like the region, continues to outpace the nation in job growth. Plano's December 2012 unemployment rate improved to 5.3% from 6% as employment gains outpaced labor-force gains, which compares favorably to the state (6%) and national averages (7.6%), respectively. JCPenney, the city's second largest taxpayer (0.7% of TAV) and fourth largest employer, has made recent layoffs and continues to adjust its business strategy to combat poor margins. The near-term outlook for this retailer remains uncertain but Fitch believes the impact of further layoffs and down-sizing would not have significant credit implications given the diversity of Plano's economy and taxing base. HEALTHY HOUSING MARKET/COMMERCIAL DEVELOPMENT SUPPORT TAV GAINS TAV climbed 2.5% in fiscal 2013, which marks the second consecutive year of tax base gains since slight contraction resulting from lower commercial and residential valuations. Per-capita market value remains high at $120,000 and the housing market is stable. Zillow home prices show only a 5% peak-to-trough decline from 2007-2009 and current home prices have climbed to 98.5% of the pre-recession peak. Commercial development is also continuing and existing companies (Capital One and Ericsson) are expanding their corporate campuses. Fitch believes prospects for continued tax base growth are positive. STRONG FINANCIAL MANAGEMENT PRACTICES AND RESULTS Conservative budgeting, interim reporting, and forecasting practices are a hallmark of the city's financial management, and this approach has led to results that consistently outperform budget projections. Significant budget flexibility is apparent through the annually large operating transfers to a capital reserve fund (5% of spending since fiscal 2008), which could be reduced, deferred, or eliminated if necessary. In addition, 4% of the tax rate is earmarked for economic development purposes and could be re-directed by the city council to general operations. Management successfully navigated slight revenue pressures in fiscal years 2008-2010 with spending reductions while prudently continuing the transfers to the capital reserve fund. Fund balance during this period declined slightly by 7%. However, strong growth in property taxes and sales taxes, the two leading sources of operating revenues, as well as continued conservative budgeting yielded positive margins in fiscal years 2011 and 2012 totaling 1.7% and 3.9% of spending, respectively. Fiscal 2012 results were aided by a one-time catch-up sales tax payment of $3.2 million and conservative expenditure budget. The unrestricted general fund balance climbed to $52.7 million or 25% of spending and year-end liquidity improved to cover current liabilities 6.3x. The fiscal 2013 $230.7 million general fund budget increases spending 6.3% from the 2012 budget, restoring some city services, adding a net 26 positions to the budget, and providing recurring pay raise to civil service and non-civil service personnel. Commensurate with past budgets, the city appropriated fund balance above its policy floor of 30-days of expenditures for capital and other non-recurring items. The budget conservatively estimates sales taxes at 88% of fiscal 2012 actual collections (net of the one-time payment in fiscal 2012). Given the positive year-to-date trends and prior-year performance, Fitch expects the city will again significantly outperform the forecast draw-down. The presence of $44.7 million of unrestricted funds in the capital reserve fund further enhances the city's strong fiscal profile. MODERATE DEBT BURDEN AND WELL-FUNDED PENSIONS The city's overall debt ratios are moderate to high at 4.6% of market value and $5,463 per capita. The high per-capita debt burden is largely due to overlapping school district debt, and this concern is mitigated by residents' high income levels. Amortization of tax-supported debt is rapid at 74% of principal retired in 10 years and all repaid in 20 years. The city actively maintains a comprehensive capital improvement program. After this issuance, officials plan to issue $87 million of remaining GO authorization over the next four years and seek additional GO authorization for $98.3 million in a May 2013 bond election. The estimated tax rate impact from this additional debt would be a nominal 1.3% increase due the rapid retirement of existing debt. Debt issuance will also be supplemented by continued pay-go capital spending. Employee pension benefits are substantially provided through the city's participation in the Texas Municipal Retirement System (TMRS), an agent-multiple employer plan. The city also maintains a single-employer Retirement Security Plan (RSP) for employees in lieu of participation in federal social security. The annual required contributions (ARC) for both plans are consistently funded and together consumed 9.3% of fiscal 2012 governmental fund spending. Fitch considers both pension plans well-funded, with TMRS at 83.4% and RSP at 97.2% as of fiscal 2012 year-end using an adjusted 7% investment return. Unfunded liabilities for other post-employment benefits (OPEB) are a nominal 0.1% of market value and the city pro-actively established an OPEB trust in fiscal 2008. Combined fixed costs for debt service and pension/OPEB ARCs totaled a slightly elevated 27.5% of governmental fund spending but this is mostly a result of the higher annual debt cost from rapid amortization.
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