December 4, 2012 / 8:31 PM / 5 years ago

TEXT-Fitch rates Victoria, Texas LT refunding GOs 'AA'

Dec 4 - Fitch Ratings has assigned an 'AA' to the following Victoria, TX's
limited tax general obligation (LTGO) bonds:

--$8.6 million LTGO refunding bonds, series 2013A;
--$17.2 million LTGO refunding bonds (taxable), series 2013B.

The bonds are expected to price the week of Dec. 10. The bonds will be used to
refund certain outstanding bonds for interest cost savings.

Fitch also affirms its 'AA' rating on the city's outstanding limited tax bonds
and the Victoria Sales Tax Development Corporation (STDC) sales tax revenue

The Rating Outlook is Stable.


The bonds and outstanding limited tax bonds are secured by a limited ad valorem
tax pledge levied against all taxable property in the city, limited to the
constitutional tax rate of $2.50 per $100 of taxable assessed value (TAV). The
city's home rule charter further limits the tax rate for all city purposes to
$2.00 per $100 of TAV.


STABLE ECONOMY & TAX BASE: The city benefits from its position as an important
regional service and supply center, as well as continuing development across key
taxable sectors and a fairly stable housing market.

GOOD FINANCIAL POSITION: The city maintains healthy operating reserves and ample
liquidity supported by responsive financial management that has been willing to
cut spending to maintain structural budget balance.

PRUDENT BUDGETING OF DOMINANT SALES TAX: Sales tax revenues, one of the city's
main revenue sources, exhibited very strong gains in fiscal years 2011 and 2012
after a period of contraction. City officials continue to prudently appropriate
sales tax receipts in excess of the budget for non-recurring expenditures.

MIXED DEBT PROFILE: Overall debt levels are moderate to high. Annual debt
service costs consume an above average portion of the budget, but this is in
part due to rapid amortization.

AVERAGE SOCIOECONOMIC INDICES: Wealth indicators are slightly below average
while the city's employment picture is positive.


Victoria, Texas is located 30 miles inland from the Gulf of Mexico and
equidistant between the cities of Houston, San Antonio, and Corpus Christi. The
2010 census count of 62,592 reflects modest 3% population growth in the past


A barge canal connects the city and the Port of Victoria to the gulf
intra-coastal waterway, allowing access to ports on the Gulf and Atlantic
coasts, as well as destinations on the Mississippi River. The city is a regional
center for trade as well as service and supply center for heavy industry,
including petrochemical and plastics manufacturing. The development of the
service, retail, and health care sectors has complemented the industrial base
and added a measure of diversity and stability to the local economy.

A recent uptick in sales activity, apparent by the sharp climb in sales tax
receipts in 2011 and 2012, has been in part associated with increased economic
activity from oil/gas drilling in the nearby Eagle Ford shale, a large natural
gas formation spanning the southern portion of Texas and edging into Victoria


TAV surged 7% in fiscal 2013 to $3.5 billion as a result upward revaluation of
existing commercial, industrial, and residential properties, as well as
concurrent development. Absent marginal contraction in fiscal 2010, the city's
TAV has steadily appreciated over the past decade. City officials anticipate
moderate TAV growth to continue over the near term, a projection which Fitch
views as reasonable based on review of local economic data and the development


Total employment in the city grew 3.6% from 2009 - 2011, a rate of growth that
mirrors the state and outpaces the nation, though employment was essentially
flat during the 12-month period ending September 2012. The most recent September
unemployment rate dropped to 4.5% from 6.1% on a year-over-year basis, which
sits comfortably below the state (6.3%) and nation (7.6%), but the improvement
was due to 1.6% contraction in the labor force. Top employers are in government
and manufacturing, and the expansion of a Caterpillar plant and new hospital is
expected to add jobs over the next few years.

Income levels are slightly below the state and national averages, and the city's
per capita market value, also a measure of wealth, is average at $63,000.


Finances are a credit positive, with available general fund balance exceeding
25% of spending in the past five fiscal years despite pressure from declining
operating revenue, particularly sales taxes, which provide over 1/3 of operating
revenues. Sales tax receipts fell by a cumulative 12% from fiscal years 2008 to
2010, prompting officials to reduce spending to maintain structural balance;
budget reductions included a hiring and pay freeze, delaying certain
pay-as-you-go capital projects, and a hold on certain maintenance and
operational discretionary budgets.

Sales tax revenues have since rebounded; fiscal 2011 receipts climbed 23.5%, or
$2.8 million, from 2010. When combined with continued budget controls, a
marginal increase to the tax rate, and conservative budgeting, the city realized
a $2.1 million operating surplus after transfers in fiscal 2011 and improved the
unrestricted general fund balance (the sum of committed, assigned, and
unassigned per GASB 54) to a robust 40% of spending ($15.9 million). Liquidity
in the general fund remained solid and in-line with prior years at 4.9x current


Officials have added an estimated $5.6 million to available fiscal 2012 fund
balance on a budget basis (Sept. 30 fiscal year), which stands in contrast to
the $1.2 million draw-down originally budgeted. The positive results are
attributable to a 20% gain in sales tax revenues and under-spending of the
budget due to position vacancies, delays to capital expenditures, and
maintenance efficiencies.

The fiscal 2013 $51.6 million general fund budget is structurally balanced while
appropriating most of the prior-year surplus ($5.5 million) for non-recurring
expenditures, primarily street overlay projects associated with downtown utility
improvements. Sales taxes are forecast to increase 3% from fiscal 2012 actual
revenues and comprise a high 40% of budgeted revenues. The expenditure side
includes a recurring pay increase for city employees and additional salary
adjustments based on a compensation study. Despite the draw-down, budgeted
operating reserves would remain above the city's minimum fund balance target,
which by policy is 22.5% of the budget.

Fitch views positively management's actions to temper the risk associated with
the increasing budget reliance on inherently volatile sales tax revenues.
Officials increased the city's minimum fund balance policy to 22.5% from 20% in
fiscal 2012 and 15% in fiscal 2009. In addition, while not a formal policy,
management routinely budgets sales tax revenues in excess of the budget for
non-recurring expenditures.


The city fully funds its annual required contribution for pension benefits,
which are provided through the Texas Municipal Retirement System (TMRS), an
agent multiple-employer plan. Recent system-level structural and actuarial
changes to TMRS' reporting of its internal fund balances produced a significant
20% drop in Victoria's unfunded actuarial accrued liability (UAAL) to $36.7
million, which equals a modest 1% of full MV; the city's funded ratio also
improved to an adequate 75.3% as of the December 2011 actuarial valuation using
a 7% investment return. Other post-employment benefits for retiree health-care
are funded on a pay-go basis.


Overall debt ratios are moderate to high at $3,727 per capita and 5.9% of full
market value and the higher debt ratio largely reflects the debt of an
overlapping school district. The city presently has no general obligation (GO)
debt authorization, and has no plans to issue additional tax-supported debt
until fiscal 2015. Funding of the remaining $60.1 million capital program
through fiscal 2017 will largely come from net STDC sales tax revenues, utility
system revenue bonds, available general fund resources and GO bond proceeds on

The city maintains $3.9 million in outstanding sales tax bonds (rated 'AA' by
Fitch). The sales tax revenue bonds are secured by the city's sales tax
development corporation's 0.5% sales tax -- which is separate from the 1% sales
tax accruing to the general fund. Debt service coverage is strong at 6.9x MADS
in fiscal 2011 and even stronger 8.2x MADS coverage in fiscal 2012 (unaudited).
In addition, the bonds have a relatively short maturity (bonds retired in 2017),
no further leveraging is planned, and annual debt service is level at about $1.1
million. Excess sales tax revenues, after payment of debt service, are used for
capital projects.

The annual debt burden on the fiscal 2013 budget, inclusive of GO and sales tax
bonds, consumes a high 18% of recurring general fund and debt expenditures but
this is in part due to the rapid pace of amortization at 70% retired in 10
years. Fitch considers the combined fixed cost burden for debt, pension ARC, and
OPEB pay-go above average at 27% of general fund and debt expenditures.
Beginning in fiscal 2014, a portion of the annual debt cost is expected to be
offset by state transportation aid for the city's outstanding series of LTGO
pass-through toll revenue bonds, though Fitch does not yet consider these
reimbursements as self-supporting debt.

Additional information is available at ''. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Tax-Supported
Rating Criteria, this action was additionally informed by information from
Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index,
IHS Global Insight,, and National Association of Realtors.

Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
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