Fitch Rates Arlington, TX's IDR 'AAA'; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'AAA' rating to the following city of Arlington, Texas (Arlington) obligations:

--$32.5 million permanent improvement (PIB) bonds series 2016A;

--$14.5 million combination tax and revenue certificates of obligation series 2016B;

--$14.2 million combination tax and revenue certificates of obligation series 2016C.

Series 2016A bonds and 2016B certificates of obligation (COs) are scheduled for a competitive sale on May 10. Series 2016C COs are scheduled for a competitive sale on June 7. The Series 2016A permanent improvement bonds will fund parks, public works, and transportation projects. The series 2016B combination tax and revenue certificates of obligation (COs) will fund city golf courses and a landfill project. The taxable COs, series 2016C, will fund the city's self-insurance and risk management program.

In addition, Fitch takes the following rating actions:

--Issuer Default Rating (IDR) affirmed at 'AAA';

--$321.6 million in outstanding GOs and COs affirmed at 'AAA';

--$175 million in outstanding special tax bonds, series 2008 and 2009 upgraded to 'AA+' from 'A+'.

The Rating Outlook is Stable.

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SECURITY

The bonds and COs are payable by an ad valorem tax levied on all taxable property within the city, limited to $2.50 per $100 taxable assessed valuation (TAV). COs are also secured by a pledge of limited surplus revenues ($1,000) of the city's water and waste water system.

The special tax bonds are secured by a first lien on pledged special taxes and pledged accounts. The pledged taxes consist of a citywide 0.5% sales and use tax, a 5% tax on short-term motor vehicle rentals, and a 2% hotel occupancy tax. The bonds are additionally secured by amounts on deposit in the pledged tax-exempt accounts.

KEY RATING DRIVERS

The 'AAA' Issuer Default and General Obligation ratings reflect Fitch's expectation for the city of Arlington to maintain healthy financial flexibility throughout economic cycles, consistent with a history of strong operating performance and robust reserves. The city's strong financial profile reflects a diverse and stable revenue base, modest expenditure growth and a demonstrated ability to reduce expenditures during economic downturns. Fitch expects long-term liabilities to remain moderate based on manageable capital needs and rapid amortization.

Solid Coverage Cushion: The upgrade of the special tax bonds to 'AA+' from 'A+' reflects application of Fitch's revised criteria for U.S. state and local government credits, which was released on April 18. Under the new criteria, Fitch considers debt service coverage in light of the sensitivity of the dedicated revenue stream to downturns. Fitch expects revenues pledged to the city of Arlington's series 2008 and 2009 special tax bonds to continue to grow at a solid pace and for the coverage cushion to remain strong. The coverage provides ample cushion to absorb a downturn in expected revenues in a moderate recession. The 'AA+' rating also reflects a closed lien.

Revenue Framework: 'aaa' factor assessment

Fitch expects Arlington to realize continued sound revenue growth based on economic development currently underway and the city's participation in the expanding regional economy. Revenue raising capacity is strong, supported by ample tax rate capacity.

Expenditure Framework: 'aa' factor assessment

The city of Arlington is mature with a modest pace of spending. The city's carrying costs are elevated, reflecting a rapid principal amortization schedule. The city has demonstrated the flexibility and willingness to cut salary and other costs during economic downturns.

Long-Term Liability Burden: 'aa' factor assessment

Fitch anticipates the city of Arlington's long-term liability burden to remain moderate based on a manageable capital plan, rapid amortization, and well-funded pensions. Arlington's debt and unfunded net liabilities are 10.3% of personal income.

Operating Performance: 'aaa' factor assessment

The city of Arlington maintains bountiful reserves. Operations respond well to stress, consistent with the city's history of balanced operations and reserve adequacy throughout economic cycles.

RATING SENSITIVITIES

Financial Flexibility: The IDR and GO rating is sensitive to maintenance of strong financial flexibility.

Ample Coverage: The special tax rating is sensitive to stable pledged revenue trends and maintenance of an ample cushion for coverage.

CREDIT PROFILE

Arlington is located in the center of the DFW metroplex (about 20 miles west of Dallas) with an estimated 2016 population of 384,460. The city is mature with a diverse tax base. Low unemployment reflects historic growth in the local and regional job market.

The diverse Arlington economy includes manufacturing, distribution, and retail trade, and benefits from its proximity to the DFW International Airport and well-developed highway transportation network. Tourism is a significant component of the local economy. Arlington's tax base is broad and TAV has realized five consecutive years of growth averaging 2.5% subsequent to a recessionary dip in fiscal 2011.

Higher education rounds out the economic base with the presence of The University of Texas-Arlington (UTA), a growing 38,600 enrollment campus that continues to invest in facility improvements. Other top employers include the Arlington Independent School District, General Motors and GM Financial, Texas Health Resources, Six Flags Over Texas, JP Morgan Chase and the Texas Rangers Baseball Club. Notable near term development includes the $1.4 billion GM plant expansion and DR Horton relocation. Longer term, Fitch anticipates that the city's pivotal role in the regional economy will continue to expand the city's employment and tax base. Although city build-out is mature with respect to residential property, Fitch anticipates significant ongoing commercial development.

Revenue Framework

Arlington's fiscal 2016 taxable assessed valuation (TAV) increased 3.4%, above the 3.1% five-year CAGR. Property taxes make up 37% of Arlington's general fund revenues, followed by sales tax revenues at 26%. Fiscal 2015 and 2016 year-to-date sales tax revenues are trending at growth rates moderately above the five-year CAGR of 2.8%. Fitch expects increases in the city's property and sales tax bases to mirror the steadily expanding commercial, industrial and retail economic base in the city. Fitch considers the city to realize ongoing buildout in these sectors through the medium and long-term horizons.

The city of Arlington's fiscal 2016 tax rate, $0.648, provides ample tax rate capacity below the statutory cap of $2.50 per $100 of TAV.

Expenditure Framework

Public safety accounts for 65% of general fund expenditures. The pace of spending is likely to remain in line with or below revenue growth. Fitch does not anticipate pressure on service levels given the relative maturity of the city's residential tax base.

Expenditure flexibility is derived from management's strong control over headcount and lack of collective bargaining, which help to mitigate the constraints on flexibility of elevated carrying costs, 27.2% of fiscal 2015 governmental spending. Arlington's carrying costs reflect a 10-year amortization rate of 76.3%.

Long-Term Liability Burden

Fitch anticipates Arlington's long term liabilities, currently 10.3% of personal income to remain moderate given manageable capital needs and well-funded pensions. Voters overwhelmingly approved $236 million in general obligation (GO) bonds in November 2014. Authorization of $226 remains subsequent to this PIB issuance. Arlington's capital plan includes $212 million of general governmental debt issuance over the next four years, compared to amortization of $154.2 million in tax supported debt during the same period.

The city of Arlington pensions are provided through the Texas Municipal Retirement System, an agent multiple-employer defined benefit plan. Under GASB Statement 68, the city reports a fiscal 2015 net pension liability (NPL) of $104.6 million, with fiduciary assets covering 90% of total pension liabilities at the plan's 7% investment return assumption. The NPL of the plan represents a very small 0.4% of the city's fiscal 2015 market value. The city administers a single-employer retiree health care plan with an unfunded liability representing less than 1/2 of 1% of fiscal 2015 market value.

Operating Performance

The city is projected to maintain a solid financial position through an economic downturn, aided by ample revenue and expenditure flexibility.

The city maintains a 15% minimum general fund balance policy. Included therein are a one-month working capital reserve, an unallocated reserve for emergencies, and a business continuity reserve that provides funding for operational needs as needed.

In addition, the city maintains a community foundation dedicated to cultural/quality of life projects and neighborhood revitalization. The endowment is funded primarily from natural gas lease and royalty payments and could be used for general purposes, if needed, with supermajority approval of the city council. The endowment has grown substantially since its incorporation in 2007 with a current balance of $51.9 million subsequent to the expenditure of $50 million of the fund's corpus during fiscal 2016 in a strategic partnership with the Texas Rangers sports franchise to develop local hotel and event space. The city anticipates rebuilding the reserve over 15 years.

Dedicated Revenue Stream Details

Arlington's series 2008 and 2009 special tax bond pledged revenues consist primarily of a citywide .5% sales and use tax rate, as well as a 5% tax on motor vehicle rentals and 2% hotel occupancy tax. Sales tax revenues and combined motor vehicle and hotel tax revenues contributed 88% and 9.3% respectively of the $31.9 million in fiscal 2015 pledged revenues, net of naming rights and rents applicable to the recently defeased series 2005C taxable bonds.

Revenue Stream Sensitivity

A fiscal 2006 through 2015 pledged revenue CAGR, net of naming rights and rents, of 2.8% reflects sound economic activity. Pledged revenues declined just once, 3.5%% in 2009, followed by a strong rebound. Growth prospects remain strong given the central location of Arlington within the DFW metroplex.

Fiscal 2015 pledged revenues, net of naming rights and rent, covered debt service 1.72x and cover maximum annual debt service (2025) 1.40x. Current coverage levels provide a strong cushion against revenue decline due to changing economic conditions or other unanticipated events. Pledged revenues would not be adversely affected by a 1% national GDP decline. Ample coverage remains when considering the stress Fitch applies using the largest single year of historical revenue decline (3.5% in fiscal 2009).

The city continues to redeem the outstanding debt ahead of schedule based on strong sales tax performance and anticipates final payoff in August 2021, ahead of the current 2028 and original 2035 maturity dates. No new money debt secured by the pledged revenues may be issued under the indenture. The master ordinance limits the use of taxes to pay debt service, replenish reserve funds, or redeem bonds since the project is complete.

Issuing Entity Exposure

The special tax bond rating is limited by the city of Arlington's 'AAA' IDR.

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

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478

Additional Disclosures

Dodd-Frank Rating Information Disclosure Formhttps://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1003326

Solicitation Statushttps://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1003326

Endorsement Policyhttps://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings
Primary Analyst:
Rebecca Meyer, +1-512-215-3733
Director
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst:
Teri Wenck, +1-512-215-3742
Director
or
Committee Chairperson:
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
[email protected]

Source: Fitch Ratings

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