Fitch Rates Grand Prairie (TX)'s Ser 2016 GO Rfdg, COs & Sales Tax Rev Bonds 'AA+'; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'AA+' rating to the following Grand Prairie, Texas (the city) bonds:

-- $36.6 million general obligation (GO) refunding bonds series 2016;

-- $31.7 million combination tax and revenue certificates of obligation (COs) series 2016

-- $6.5 million sales tax revenue bonds series 2016.

Fitch has also upgraded the following outstanding debt:

-- $8.5 million sales tax revenue refunding bonds (Parks & Recreation Venue project) series 2013 to 'AA+' from 'AA';

-- $74.8 million taxable sales tax revenue bonds (Central Park Venue project) series 2015 to 'AA' from 'AA-'.

In addition, Fitch has affirmed the city's Issuer Default Rating (IDR) at 'AA+' and approximately $244 million (pre-refunding) in outstanding GO and CO bonds at 'AA+'.

The Rating Outlook is Stable.

The series 2016 GO, CO and sales tax revenue bonds are scheduled to sell on November 10 via negotiation.

SECURITY

The COs and GOs are payable by a pledge of ad valorem taxes, limited to $2.50 per $100 taxable assessed valuation (TAV). The series 2016 COs are further secured by a limited, de minimus pledge ($2,500) of the net revenues of the city's water and wastewater system.

The series 2016 sales tax revenue bonds (Parks & Recreation Venue project) and outstanding parity debt are payable from a senior lien on the 1/4-cent sales and use tax, authorized in perpetuity for the city's parks and recreation system. The bonds have a springing debt service reserve that will only be funded in the event maximum annual debt service (MADS) coverage of the parity bonds falls below 1.50x.

The outstanding Central Park Venue project sales tax revenue bonds are payable from a separate, 1/4 -cent sales and use tax, authorized by voters through Jan. 1, 2040 for sports and community venue projects.

KEY RATING DRIVERS

Underpinning the city's 'AA+' IDR and limited tax ratings is its superior inherent budget flexibility that has resulted in a high level of operating financial resilience. Fitch believes general fund revenue growth prospects are strong with limited expected volatility; the revenue framework is augmented by the city's ample revenue-raising capacity. Continued population and economic expansion appears likely, which should keep the liability burden moderate. Fitch expects the city's carrying costs will remain manageable given a low net pension liability (NPL) and rapidly amortizing debt burden.

The upgrade of the outstanding Park & Recreation Venue project fund bonds to 'AA+' and of the outstanding Central Park Venue project bonds to 'AA', reflects application of Fitch's revised criteria for U.S., state, and local governments, which was released on April 18, 2016. The bonds benefit from the solid growth prospects of the pledged revenues, ample resilience to revenue loss under scenario declines and worst historical performance, and limited plans for additional leveraging. The sales tax bonds ratings are capped at the city's IDR as Fitch does not view the pledged sales taxes as special revenues.

Economic Resource Base

The city of Grand Prairie is located in the center of the diverse and robust Dallas-Fort Worth (DFW) metropolitan statistical area (MSA) economy, just south of the DFW International Airport. Unlike many other Dallas inner-ring cities, rapid population growth since 2000 characterizes the city's profile. Residents presently total about 185,000.

Revenue Framework: 'aaa' factor assessment

Revenue growth has historically kept pace with the U.S economy, due in large part to fairly consistent sales tax growth. Fitch expects this pace will be sustained given the likelihood of further population gains and ongoing development underway or planned. The city retains significant ability to raise its property tax rate to generate additional revenue.

Expenditure Framework: 'aa' factor assessment

Solid expenditure flexibility is derived from management's prudent budgeting practices and ability to adjust its labor costs if needed, offset by moderately high carrying costs. Fitch expects growth-related spending demands to be matched by revenue gains, keeping their trajectories aligned over time.

Long-Term Liability Burden: 'aa' factor assessment

The long-term liability burden is moderate at approximately 14% of personal income. Fitch believes continued economic and population growth should keep the burden in line with the 'aa' assessment.

Operating Performance: 'aaa' factor assessment

The city's ample revenue-raising ability, sound expenditure control, and availability of its strong reserve cushion should enable the maintenance of a high level of financial flexibility during cyclical downturns.

RATING SENSITIVITIES

Financial Flexibility: The rating is sensitive to material deterioration of the city's operating flexibility and property tax revenue-raising ability. These credit strengths provide important counter-balance to the possibility of future slowdowns or declines in the performance of sales taxes used for operations.

Reduced Coverage: Large and sustained declines in pledged revenues or significant additional leveraging, while not anticipated by Fitch, could lead to negative rating pressure if debt service coverage is substantially reduced.

CREDIT PROFILE

Defense, manufacturing, aerospace, and distribution are major components of Grand Prairie's economy, complemented by an expanding retail and entertainment presence. The city's economy is buoyed by easy access to major air and ground transportation routes. Unemployment remained low and stable year-over-year at 4.1% in August 2016, slightly below state and national averages.

The city typically realizes moderate annual TAV growth (about 3% on average over fiscals 2008-2017) given its central location in a strong regional economy. About half of the city's tax base is residential with minimal taxpayer concentration. Commercial/industrial development (such as distribution and warehousing) continues to expand along recently completed highway connections, and has been a key driver of strengthened TAV performance. Appreciating values also contributed to the very strong 11% TAV gain in fiscal 2017.

Fitch believes continuing economic development and tax base growth is likely, which should result in further population, job, and income gains. Spurring this trend is the location of the second IKEA store planned for the Dallas-Fort Worth MSA in Grand Prairie and a large indoor/outdoor waterpark ("EPIC Waters") in the city's central park, both of which are scheduled to open in 2017.

Revenue Framework

Property and sales taxes (from a 1% sales tax levy) are the leading sources of general fund revenue at 44% and 23%, respectively, in fiscal 2015.

Fitch believes strong historical revenue performance will be sustained given the likelihood of further population and economic expansion that is a result of the city's integral position in the DFW metroplex and its own economic development efforts.

At a total tax rate of $0.67 in fiscal 2017, ample taxing margin remains under the $2.50 per $100 AV cap for operations and limited tax debt service. Outside of this statutory cap, there are no legal limits to management's ability to implement annual property tax increases. If a proposed tax rate results in an 8% year-over-year levy increase (based on the prior year's values), the rate increase may be subject to election if petitioned by voters.

Expenditure Framework

Most of the city's operating resources are spent on public safety, which totaled 70% of fiscal 2015 general fund spending. Fitch expects the pace of spending will remain in line with or marginally above strong revenue gains, tempered by a history of moderate, steady investments in personnel and capital not projected to require significant catch-up.

Expenditure flexibility is aided by the city's lack of contracts with any of its personnel. Management maintains strong legal control of labor costs and headcount. Sluggish, recession-related revenue performance demonstrated the city's ability to control key expenditure items. Spending adjustments included a combination of salary and position reductions/freezes in addition to deferral of annual pay-go capital spending.

The city's fixed cost burden is moderately high. Carrying costs (debt service, actuarial pension payments, and pay-go OPEB costs,) totaled approximately 25% of fiscal 2015 governmental spending, which incorporates the city's policy-determined, rapid pace of principal amortization (about 70% retired in 10 years).

Long-Term Liability Burden

The long-term liability burden, including overall debt and unfunded pension liabilities, is moderate at about 14% of personal income. Overall debt is comprised mostly of overlapping debt. Continued overlapping debt issuances that stem from population-driven capital needs should be accompanied with steady gains in personal income. This leads Fitch to expect the city's long-term liability burden will remain in line with the 'aa' assessment, inclusive of future debt plans in the city's own multi-year capital improvement plan.

City employees participate in the Texas Municipal Retirement System (TMRS), a state-wide, joint contributory, hybrid defined benefit pension plan. Under GASB 68, the city reports its share of the TMRS net pension liability (NPL) at $50.7 million, with fiduciary assets covering about 89% of total pension liabilities at the plan's 7% investment rate of return assumption. The city made its full actuarially determined pension contribution of $12.6 million in fiscal 2015.

Operating Performance

Fitch believes the city maintains an exceptionally strong capacity to manage challenges associated with a moderate economic downturn. The city's high level of fundamental financial flexibility is a result of the various budgetary tools at its disposal, which include revenue-raising authority, the ability to use its historically strong reserve cushion in excess of Fitch's calculated reserve safety margin, and solid expenditure flexibility. The city's superior financial resilience is also underpinned by historically low general fund revenue volatility (inclusive of sales tax performance).

Modest fund-balance declines in recent fiscal years reflect continued general fund transfers for capital and other non-recurring expenditures. Management considers unassigned fund balance in excess of the city's formal policy floor of 50-60 days of expenditures (15%) as available for non-recurring budget items. A $3 million net operating surplus strengthened unrestricted reserves in fiscal 2015, which totaled $27.3 million or 24.4% of spending at year-end.

Projected fiscal 2016 results anticipate further, modest use of reserves (about $3 million or 2.5% of the year's budgeted spending) for one-time spending priorities, slightly lower than budgeted with residual fund balance remaining in compliance with the city's fund balance policy. Structurally balanced operations and similarly-sized use of reserves for pay-go capital spending once again characterize the approximately $122 million fiscal 2017 general operating budget. Fitch believes it is likely the city will improve upon initially budgeted projections as the fiscal year progresses given prior years' fiscal performance.

Sales & Use Tax Revenue Bonds

The sales tax revenue bonds are payable from separate, voter-approved dedicated -- of 1% (0.25%) sales tax levies for parks/recreation and the city's Central Park projects. The Parks & Recreation Venue project sales tax levy is authorized in perpetuity for the city's parks and recreation system while the Central Park Venue project sales tax levy is authorized by voters through Jan. 1, 2040 for sports and community venue projects.

Legal requirements for the series 2016 sales tax bonds and outstanding parity debt (Parks & Recreation Venue project) include an additional bonds tests of 1.25x maximum annual debt service (MADS), although no additional leveraging is presently planned on either the senior or subordinate liens. The outstanding Central Park Venue project bonds do not carry an ABT, as voters formally approved a debt cap of $75 million for the dedicated 0.25% sales tax revenues, which has been reached. Management does not expect to re-approach voters for further leverage capacity.

Legal provisions for the series 2016 bonds and outstanding parity debt (Parks & Recreation Venue project) require a springing debt service reserve that will only be funded in the event maximum annual debt service (MADS) coverage of senior lien debt falls below 1.50x. A reserve fund is no longer required if the 1.50x threshold has been exceeded in the last two calculation periods (roughly two years). City policy states the associated debt service fund for the Parks & Recreation Venue project fund will be maintained at no less than the level of MADS. The outstanding Central Park Venue project sales tax bonds do not have a reserve fund requirement.

Both dedicated sales tax revenue streams are levied on the diverse and growing base of taxable sales activity city-wide. Additional revenue gains appear likely given a growing population base, increased visitor traffic to the city's future indoor/outdoor waterpark, and a growing retail/commercial base.

The 0.25% sales tax revenue stream has realized solid average annual growth (4.1%) over the 15-year time period of fiscal 1999-2014. To evaluate the sensitivity of the dedicated revenue stream to cyclical decline, Fitch considers both the revenue sensitivity results (using the same 1% decline in national GDP scenario that supports assessments in the IDR framework) and the largest decline in revenues over the period covered by the revenue sensitivity analysis. Based on a 15-year history of the city's 0.25% sales tax levy, FAST results generates a 1% scenario decline in pledged sales tax revenues. The largest actual cumulative decline in historical revenues is a 6.4% decline in fiscal 2010.

Park & Recreation Venue Project Bonds

The rating for the Parks & Recreation Venue project sales tax bonds is based on Fitch's expectation that the pledged revenues will be maintained at no less than 1.5 times all-in MADS, in line with the city's established internal financial policy. Projected all-in MADS coverage of the Park & Recreation Venue project bonds with this issuance remains ample. Fiscal 2015 pledged revenues of $6.7 million grew by about 6% year-over-year and covers projected senior lien MADS by 3.5x.

Residual revenues after payment of debt service can fund general purpose park/recreation needs at the end of the flow of funds; park venue operations are distinct from the general fund. Fitch estimates that the structure could tolerate a sizeable 33% drop in sales tax revenues before reaching the policy level of 1.5x MADS coverage. This revenue cushion comfortably exceeds Fitch's 'aaa' resilience assessment threshold.

Central Park Venue Project Bonds

Residual sales tax revenues after payment of debt service for the city's Central Park bonds remain in a closed loop to fund its associated operational and capital needs. Pledged fiscal 2015 sales tax revenues cover Central Park Venue project bonds MADS by a slimmer 1.24 times (x). Fitch estimates the structure could withstand a 17% drop in sales tax revenues before reaching the current MADS coverage. This revenue cushion is in line with Fitch's 'aa' resilience assessment threshold.

Issuing Entity Exposure

The ratings on the sales tax bonds are capped at the city's IDR. Fitch does not view the pledged sales taxes as special revenues under section 902(2) of the bankruptcy code, which defines "special excise taxes imposed on particular activities or transactions" as special revenues.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)https://www.fitchratings.com/site/re/879478

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